Justin R. La Mort*
President Obama was able to pay off his student loans only after authoring two bestselling books and becoming a prominent figure on the national political scene. This is not a strategy that can easily be replicated. As our tax dollars are being spent to bail out AIG and GM, the government continues to ignore those who are drowning in student debt. We can either rearrange the deck chairs as the band plays on, or we can seize this unique opportunity in time to provide a life preserver to some of our country’s best and brightest.
The American dream is that that, through education and hard work, one can accomplish anything. Sadly, my generation will be less educated and in greater debt than the generation of my parents.[1] Never before has a college degree meant so much in competing in the global marketplace, yet never before has the financial barriers been so great to earning that degree. This paradox must be resolved if our students and our country are to reach their full potential. The present system restricts innovation among the entrepreneurs, inventors, and artists who can no longer risk taking a chance when facing five to six figures of debt. Our society loses the talent of those unable to afford a career in public service. These effects are especially true for the middle and working class who we most want to break from the cycle of poverty but whose best route is to enter modern-day indentured servitude. We must change the way we pay for higher education if the United States is to uphold its promise.
This article will detail the pervasive effects of the student loan problem in America and will examine pragmatic solutions such as ending the Federal Family Education Loans (FFEL) program, removing unwarranted bankruptcy protection of student loans, and enacting loan forgiveness programs to reverse the receding economic tides. The effects of these policies would stimulate the economy, create an environment conducive to innovation, and move our society closer to its meritocratic ideals.
I. The Debt Disaster
Our nation’s financial aid system is failing. From 1982 to 2006 the average family income in America increased 147%.[2] While there has been much uproar over the skyrocketing costs of the healthcare system (251% increase from 1982 to 2006), that number pales in comparison to the 439% rise in the cost of a college education.[3] As the gap between income and cost grows, the burden falls upon students to make up the difference. In 1983 a student could work full-time during the summer and pay two-thirds of his or her annual college costs. In today’s climate, however, it would take a year working minimum wage if the student didn’t incur any other expenses.[4] Students are left with little choice but to take a loan or forgo college. Education, though often seen as a silver bullet for future success, is in fact a double edged sword.[5]
This increased cost has led to increased debt for graduates. Nationwide, the average debt for graduating seniors with loans rose from $18,650 in 2004 to $23,200 in 2008.[6] The burden is much greater for those who pursue graduate degrees. For example, a Masters of Social Work graduate ends up with $49,017 in debt. Future attorneys start $92,937 in the red while poor M.D.s are on average $127,272 in the hole.[7] These numbers do not include other debt such as the 92% of graduate students who use a credit card carrying an average balance debt of $8,612.[8]
It is easy to get lost in the dehumanized dollars and percents, but these are profound changes within a single generation. The debt causes a brain drain away from public service and towards careers that pay more but provide less of a benefit to society.[9] Our current system incentivizes doctors to neglect inner-city and rural communities where they are most needed.[10] One can hardly blame medical students facing six-figured obligations for choosing to become specialists in affluent areas over general practitioners in underserved areas when the latter pays half as much.[11]
These problems were not created in a vacuum. Servicing students is a big business; billions of dollars are at stake. To protect this lucrative but failing system the industry has become adept at influencing Congress. President Obama has said that “the banks and the lenders who have reaped a windfall . . . have mobilized an army of lobbyists to try to keep things the way they are.”[12] The top twenty loan providers have spent $14 million lobbying the federal government from January 2008 through June 2009.[13] These companies, because they employ thousands of people in different states, are able to leverage their national constituency to influence Congress. Reform efforts, in order to succeed, must be able to surpass opposition from a powerful education-industrial complex.
Unfortunately, we cannot afford to wait any longer. The effects of the status quo are already rippling through the economy. Patrick M. Callan, President of the National Center for Public Policy and Higher Education, states, “the educational gap between our work force and the rest of the world will make it very hard to be competitive. Already, we’re one of the few countries where 25 to 34-year-olds are less educated than older workers.”[14] The problem will only become more pronounced as baby boomers reach retirement, putting the country at a distinct economic disadvantage. If current college graduate production rates continue, the U.S. will face a 16 million person shortage in college-educated adults by 2025.[15] The longer Congress remains inactive, the harder it will be to pass meaningful legislation. This article both provides support for the federal government’s recent elimination of the wasteful FFEL program and advocates further reforms.
II. Eliminate the Middle Man in Providing Federal Loans
President Obama’s signing of the Health Care and Education Reconciliation Act ended four decades of corporate welfare known as the Federal Family Education Loans (“FFEL”) program. Schools previously could offer federal loans through either the FFEL or direct loans. The majority of loans were part of the FFEL program where the government paid a subsidy to lenders to distribute money to borrowers. The government also reimbursed companies up to 97% of the cost of any loan that was not paid back. In 1993 the government created the direct loan program as an alternative. The crucial difference between the two programs is that with a direct loan the middle man is excluded. The Office of Management and Budget estimates that a $3,000 FFEL cost the State $157 compared to $23 for a direct loan.[16] The Congressional Budget Office estimates elimination of the FFEL will save $61 billion dollars over the next ten years.
The money saved by eliminating this program will be diverted to increasing Pell Grants and Perkins Loans. There are a few arguments against such action. First, there is a claim that this is nothing more than a government takeover that will ultimately harm the free market. This simply is not true. The private sector will still be able to provide loans to students, but they will have to do so through the free market. The FFEL is not and never was a part of the free market. Lenders take money from the government and then pass it along to borrowers with virtually no risk.[17] The only parts “free” in the old system were the profits generated by the big banks. Taxpayer money would be better spent providing access to education.
The more persuasive argument against such reform is that ending the FFEL program will eliminate jobs. The student loan industry claims eliminating FFEL will cost upwards of 35,000 jobs. This number, however, is seriously inflated.[18] The companies will still be allowed to offer private loans. They will continue to service the FFEL loans they already handle. They will still offer consultation services. The government will still use the companies to service the direct loans. The U.S. Department of Education has already bought $6.5 billion worth of student loans and the loan industry survived without massive firings.[19] What will be eliminated are the windfall profits that were made by the companies when all the risk was borne by American taxpayers.[20] Ultimately, increasing the efficiency of the federal student loan program will create jobs.[21]
Ending the wasteful FFEL program is not a question of big government—it is a question of good governance. Spending billions on banks instead of needy students is not in the long-term interests of our economy and is a perversion of the purpose of federal student loans. The elimination of FFEL will add billions of dollars to efforts to provide affordable education through grants and lower interest rates without costing taxpayers a dime more than they pay now. For those who take out new loans after July 1, 2014, they will have to devote only 10 percent of their income to payments, down from the current 15 percent. Those who keep up their payments will have their loans forgiven after 20 years, reduced from the current 25. Those in qualifying public service jobs could be debt free in as little as 10 years. This law is a step in the right direction. Still, much more needs to be done.
III. Remove Unwarranted Bankruptcy Protection
Nearly every form of unsecured debt can be discharged through a rigorous bankruptcy process. Student loan debt, however, is given special treatment. Starting in 1976, federal student loans were no longer allowed to be discharged through bankruptcy except in narrow circumstances. The rationale was that unlike traditional property, the knowledge gained in college is innate to the individual. Since this is an investment of public money, the government decided to protect its investment. The government also mitigated the harshness of this policy by allowing income-contingent repayment. This allows for a monthly payment to be adjusted depending on income and family size. Such flexibility permits borrowers to take lower paying public service jobs or to survive through economic downturns. The problem with the bankruptcy protection is that while it logically made sense, it solved a problem that didn’t actually exist. Research has shown that the feared abuses were not present then and are unlikely to occur now.[22] What did happen was that people who were suffering from undue hardship were left with little recourse.
This bankruptcy problem became worse in 2005, when private student loans were given the same bankruptcy protections as federal loans “without any rationale express or claimed” or any flexibility such as income-contingent repayment.[23] Private loans have become important as the rise in tuition exceeded income and federal government expenditures. In 2007–2008, lenders provided about $17 billion in private loans, a 592% increase from a decade earlier.[24] Over the same period total federal aid only increased by 84%.[25] This change has led Sen. Dick Durbin to describe the present system in this way: “sky-high interest rates on private loans combined with questionable practices by lenders and the exponential growth of the private student loan market over the past decade have resulted in mountains of debt that can follow students from graduation to the grave.”[26]
Using private student loans is essentially no different than deciding to pay for college with a credit card except that the loan receives nearly the same protection from bankruptcy that is given to child support payments.[27] While the other categories make for sound public policy, this protection did little to increase credit access to poor students or any other recognizable social good. Instead they have provided a cash cow to financial institutions.
The student loan industry uses this power forcefully to the detriment of students. Elizabeth Warren, Chair of the Congressional Oversight Panel and Harvard Law Professor, quipped that “student-loan debt collectors have power that would make a mobster envious.”[28] The problem has reached a point where comparing 21st century education financing to 17th century indentured servitude cannot be dismissed out of hand.[29] Both persist from the lower and middle classes’ aspirations for a better life and have the effect of controlling their future labor through unsecured personal contracts that are bound to the person with limited recourse besides payment or death.[30]
Indentured servitude is neither sustainable as an economic policy nor acceptable to a moral society. To qualify for bankruptcy the debtor must file a lawsuit against repeat players like banks who have more resources and familiarity with the system. This is difficult for people who are already in a precarious financial position. Student debtors then must meet an undefined “undue hardship” standard haphazardly used by the courts.[31] The system is difficult to maneuver and often arbitrary in its outcome. We should try to add certainty to the law and allow people to get a fresh start by removing the bankruptcy protections from student loans.
Fears that people will cheat the system are misplaced. The Bankruptcy Code already has provisions against using the system for abuse, and empirical studies show that the fears of fraud in discharging student loans are an unsubstantiated myth.[32] Furthermore, in 2005, Congress added a means test and counseling requirements that make it hard for consumers to qualify for bankruptcy. The serious consequences of bankruptcy, from devastating a credit score to preventing employment, have empirically provided substantial disincentives to bankruptcy filings.[33]
It is time to end the financial system’s schizophrenic use of a “public-oriented approach to student-loan origination but a business-oriented approach to student-loan collection.”[34] The need to reconcile our student loan policy with our educational aspirations was best described in the House Report to the Bankruptcy Reform Act of 1978, which stated:
If the loans are granted too freely and that is what causing the increase in bankruptcies, then the problem is a general problem, not a bankruptcy problem. The loan program should be tightened, or collection efforts should be increased. If neither of those alternatives is acceptable, then the loan programs should be viewed as general social legislation that has an associated cost. It is inappropriate to view the program as social legislation when granting the loans, but strictly as business when attempting to collect. Such inconsistency does not square with general bankruptcy policy.[35]
Removing bankruptcy protection is even more important with loans from private lenders. While protecting federal loans at least had a rational justification, the protection afforded to private loans seems like little more than a gift to big banks. Unlike the government, private loan providers do not limit their interest rates or the amount of the loans, do not regularly provide relief such as cancellation or income-contingent repayment, and are far less regulated. There is no principled reason to allow consumers to be forever burdened by this debt when nearly every other form of unsecured debt is dischargeable in bankruptcy.[36]
IV. Loan Forgiveness
Instead of tax rebates or corporate welfare, the federal government should invest in some of our best and brightest. Loan forgiveness would stimulate the economy, lessen the barriers to accepting employment in public service, reduce the risk to innovators and entrepreneurs in pursuing new possibilities, and move our country closer to allowing equality of opportunity in higher education.
Enacting loan forgiveness would have the immediate effect of acting as a stimulus package. While most rebates are used to pay off debt, those liberated from the indentured servitude would be much more likely to use their newfound income in increased purchasing power to buy consumer goods, cars and homes. This in turn would help create jobs at a time we need them the most.
Most importantly, loan forgiveness would spur entrepreneurship. For the U.S. to remain competitive we need innovation, but the further into debt that potential entrepreneurs go, the less likely they are to go into business for themselves. Removing this monthly burden would be a major push in giving people the option to go forth and create. State and federal governments already have targeted loan forgiveness programs, but by expanding them to a larger scale, the impact to society would be far greater. Results would be visible in a relatively short period of time.
Some have argued that loan forgiveness would be unfair to those who have already paid their student loans. Though true, such “unfairness” is common in government programs. Those without children have property taxes directed toward schools; tax rebates have been given only to those who paid taxes in the given years regardless of whether they would have qualified in the past. The reason such policies are enacted is that the effects, whether stimulating the economy or preparing the future workforce, benefit everyone. Forgiving student loans would provide banks immediate money, which in turn should promote investment and help all sectors of the economy.
Others argue that a loan forgiveness program would create a moral hazard. However, irresponsible borrowing is unlikely, and parameters can be set to lessen the risk. The government currently limits how much a student can borrow from public loans, so the level of reasonableness has already been established. The forgiveness program can be tied to factors such as limiting the number of semesters per degree, capping total awards per person, or setting maximum amounts forgiven per degree. These are just a few of many examples that legislators could use to design a system that would diminish the potential moral hazard and keeps the costs of the program down.
Time is of the essence. As the deficit becomes bigger, the likelihood of wholesale loan forgiveness diminishes. The time to invest was ripe at the beginning of the credit crunch when banks needed the money and Congress was best in the position to spread the benefits of the bailout to also serve as a life preserver to those with student loans. As that window comes to a close, the government can still expand upon preexisting programs. Even small steps can promote job growth and keep careers in public service as a viable option to those with the skills and desire to serve.
Conclusion
Our country cannot afford to let our students and workforce fall further behind the world because of the well financed lobbying efforts of the education-industrial complex. Reforming the way we pay to learn is the first step in reimagining higher education. The current form of indentured servitude that lasts from graduation to the grave is not a sustainable economic policy and does not reflect the meritocratic principles fundamental to the American dream. If we truly believe people should be able to pull themselves up by their bootstraps, we must first ensure we have given them boots and not cement blocks. Enacting these policies would promote innovation and create an educated workforce to better compete in the global marketplace. It would permit greater flexibility in career choice and allow for more of our country’s best and brightest to give back to their communities. Most importantly, student loan reform would empower Americans to make a better life for themselves and their families.
* J.D. Candidate, Benjamin N. Cardozo School of Law, 2010; B.A., University of Kansas, 2006.
[1] Falling Behind, Inside Higher Ed, Oct. 9, 2008, http://www.insidehighered.com/news/2008/10/09/minority.
[2] The Nat’l Ctr. for Pub. Policy and Higher Educ., Measure Up 2008: The National Report Card on Higher Education 8 (2008), available at http://measuringup2008.highereducation.org/print/NCPPHEMUNational Rpt.pdf.
[3] Id.
[4] Sandra Block, Students Suffocate Under Tens of Thousands in Loans, USA Today, Feb. 22, 2006, http://www .usatoday.com/money/perfi/general/2006-02-22-student-loans-usat_x.htm.
[5] Paul Krugman, The Uneducated American, N.Y. Times, Oct. 9, 2009, at A31, available at http://www.nytimes .com/2 009/10/09/opinion/09krugman.html.
[6] FinAid, Student Loans, http://www.finaid.org/loans/ (last visited Jan. 19, 2010).
[7] Id.
[8] Nellie Mae, Graduate Students and Credit Cards 2 (August 2007), http://www.nelliemae.org/pdf/ccstu dy_2006.pdf.
[9] See e.g., Jesse Rothstein & Cecilia Elena Rouse, Constrained After College: Student Loans and Early Career Occupational Choices (Nat’l Bureau for Econ. Research, Working Paper No. 13117, May 4, 2007); Erica Field,Educational Debt Burden and Career Choice: Evidence from a Financial Aid Experiment at NYU Law School, (Nat’l Bureau for Econ. Research, Working Paper No. 12282, June 2006).
[10] Philip Rucker, The Only Doctor in Town, Wash. Post, Dec. 5, 2009, http://www.washingtonpost.com/w p-dyn/content/article/2009/12/04/AR2009120404624.html.
[11] Robert Pear, Shortage of Doctors an Obstacle to Obama Goals, N.Y. Times, Apr. 27, 2009, at A1, available athttp://www.nytimes.com/2009/04/27/health/policy/27care.html.
[12] David Stout, Obama Urges Colleges to Curb Rising Tuition, N.Y. Times, Apr. 24, 2009, http://thechoice.blog s.nytimes.com/2009/04/24/obama-urges-colleges-to-curb-rising-tuition/.
[13] Kelly Field, Student Lenders, Fighting to Survive, Spend Millions to Lobby Congress, Chron. of Higher Educ., Sept. 28, 2009, http://chronicle.com/article/Student-Loan-Companies-Spend/48609/.
[14] Tamar Lewin, College May Become Unaffordable for Most in the U.S., The N.Y. Times, Dec. 3, 2008, at A19,available at http://www.nytimes.com/2008/12/03/education/03college.html.
[15] Lumina Found. for Educ., A Stronger Nation Through Higher Education 2 (Feb. 2009).
[16] Cole Robertson, The Student Loan Bailout, The Nation, Jan. 2, 2009, http://www.thenation.com/doc/2009 0112/robertson.
[17] David M. Herszenhorn, Plan to Change Student Lending Sets Up a Fight, N.Y. Times, Apr. 13, 2009, at A1,available at http://www.nytimes.com/2009/04/13/us/politics/13student.html.
[18] Pedro de la Torre III, Are Student Loan Companies Playing Politics With People’s Jobs?, The Nation, Dec. 9, 2009, http://www.thenation.com/doc/20091221/de_la_torre.
[19] Robertson, supra note 16.
[20] Pedro de la Torre III, The Best Government Takeover Ever, Campus Progress, Nov. 30, 2009, http://www.campusprogress.org/cribsheets/4873/best-government-takeover-ever.
[21] Id.
[22] Rafael I. Pardo & Michelle R. Lacey, Undue Hardship in the Bankruptcy Courts: An Empirical Assessment of the Discharge of Educational Debt, 74 U. Cin. L. Rev. 405, 419-28 (2005).
[23] An Undue Hardship? Discharging Educational Debt in Bankruptcy: H. Subcomm. on Commercial and Administrative Law, 111th Cong. 2 (Sept. 23, 2009) (statement of Rep. Steve Cohen, Chairman, H. Subcomm. on Commercial and Administrative Law).
[24] The College Board, Trends in Student Aid 6 (Oct. 28, 2008), available at http://professionals.college board.c om/profdownload/trends- in-student-aid-2008.pdf.
[25] Id.
[26] Christine Dugas, Graduates Saddled with Debt, Student Loans Can’t Easily Turn to Bankruptcy, USA Today, May 15, 2009, http://www.usatoday.com/money/perfi/2009-05-12-studentloans13_N.htm.
[27] 11 U.S.C. § 523 (2010).
[28] John Hechinger, U.S. Gets Tough on Failure to Repay Student Loans, Wall St. J., Jan. 6, 2004.
[29] Jeffrey J. Williams, Student Debt and the Spirit of Indenture, Dissent, Fall 2008, available at http://www.d issentmagazine.org/article/?article=1303.
[30] Id.
[31] Pardo, supra note 22, at 520.
[32] Pardo, supra note 22, at 432.
[33] U.S. Gov’t Accountability Office, Report to the Chairman, Subcommittee on Higher Education, Lifelong Learning and Competiveness, Committee on Education and Labor, House of Representatives, Proprietary Schools – Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid 28 (Aug. 2009).
[34] Rafael I. Pardo & Michelle R. Lacey, The Real Student-Loan Scandal: Undue Hardship Discharge Litigation 83 Am. Bankr. L.J. 179, 235 (2009).
[35] See H.R. Rep. No. 95-595, at 134 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6095.
[36] Deanne Loonin, Nat’l Consumer Law Ctr., Paying the Price: The High Cost of Student Loans and the Dangers for Student Borrowers, at 5 (Mar. 2008) available at http://www.studentloanborrow erassistance.org/uploads/sites/20/File/Report_PrivateLoans.pdf.