The Student Loan Crisis: The Government Did NOT Fail Us
Disclosures
I encourage you to keep an open mind while I walk you through—what I believe to be—my unique take on this relatively controversial subject. Let’s start by making a few important disclosures:
This blog entry is for informational purposes and should not be construed as legal advice.
I have student loans, from undergrad and law school, and am still paying them back.
I had a wonderful undergrad and law school experience. I did not skimp on life experiences such as living away from home, studying abroad, going to spring break, etc.
I did not (and still do not) have a trust fund. I am first generation; both of my parents immigrated here with nothing and relied primarily on student loans to put me through undergrad. I paid for law school with student loans and scholarships.
This is not some sort of pontification post where I tell you to “pull yourself up by your bootstraps,” or, in my Kim Kardashian voice, tell you to “get up and work!”
If the government ever forgives student loans, in all or in part, I will gladly take it, in the same way that I will cash a class action settlement check I receive in the mail.
I am not some bot who works for the government who believes the government does nothing but great things for society.
I want you to look at the original dilemma that the government was faced with, the solutions they have implemented, and where we stand today.
Accountability (Part 1: The Student)
When it comes to student loans, there are two parties that need to be held accountable: the students and the institutions. The media tends to paint the government, and the lenders, as the bad guys. The media will talk about how much people have to borrow to attend school, how high the interest rates are, and how high peoples’ payments are. Most people buy into this perspective and pile on the bad guy. Before I go any further, let’s stipulate a few facts:
Life isn’t fair, some people are born into wealth and some are born into poverty.
One path for an individual to jump social classes is through education. This may change but, historically, this was true.
Education costs money.
Due to inherent inequality, the government had to create a path for people who do not have the financial means to be able to attend the same institutions that the rich were able to attend. The government worked with lenders to sponsor loans which prospective students could apply for to help pay for tuition, books, and living expenses. As a result, a student from a poor family is able to focus on school without having to worry about tuition, rent, food, or other financial distractions.
Myth: An 18-year-old can just take out thousands of dollars in loans saddling them with debt for life.
People use this line of reasoning all of the time to criticize the current system. In order to fill out a Free Application for Student Aid (FAFSA) without a co-signer (usually a parent), the student must be older than at least 24 years old, married, a graduate or professional student, a veteran, a member of the armed forces, an orphan, a ward of the court, someone with legal dependents other than a spouse, an emancipated minor, or someone who is homeless or at risk of becoming homeless. The government is actually in lock step with you. They created separate criteria to define someone as an “adult” rather than using the legal definition, which is 18 years of age. Therefore, the government is not preying on someone who just turned 18 and lending them money. I wish the media would disclose this fact when addressing the student loan crisis.
If you want to fact-check this statement, click the link below:
https://studentaid.gov/help-center/answers/article/independent-student
Complaint: I have six-figures in student loans and only make a tiny salary.
I wish more guidance counselors and parents adopted this philosophy: a student loan is an investment. And, by that logic, you should be encouraged by these same guiding forces to ask yourself: what is your expected return on investment? To put it more simply, are you trying to “beat the odds” by finding a well-paying job in the field you studied in school? For example, if I want to be a sports broadcaster, and I major in broadcasting, what is the likelihood that I will land a six-figure job following graduation? The odds are miniscule. There are few openings for these positions and they’re often given to former athletes or someone whose father was famous, you know the Joe Bucks of the world. Statistically, I will either have to work in a different field than I studied for, or I will have to work for little pay (or even for free, in some cases), in hopes of beating the odds and landing an adequately paying gig.
I am not saying you shouldn’t follow your dream. What I am saying is that you need to recognize that you are trying to “beat the odds” and it is highly likely that your leap of faith will not pay off. The government should be thanked for giving you the opportunity to take a shot at the endzone, not scolded because you majored in underwater pencil sharpening and couldn’t land a paying job as a professional underwater pencil sharpener.
Complaint: The Government shouldn’t just let anyone go to any school and major in anything.
This would only hurt those without the financial means to pay for college. The spirit behind student loans is that a poor student can have the same opportunities that a rich person has. I get it, that when a rich person fails, mommy and daddy pick up the tab, so refer to the first stipulated fact above: “life isn’t fair”. There are two more counterarguments. Although we can usually predict which ventures will fail, we can’t always do so. If Will Ferrell told me he was going to USC and majoring in “Sports Information” I would have denied his application. However, in the end, it worked out for him, despite never finding success in sports journalism, broadcasting, or in any sports-related realm, really (unless, of course, you consider Jackie Moon a success). The second counterargument is that the student may wish to learn about philosophy in undergrad but end up going to law school. The student may major in art but work in business after graduation. The student may be aware that they will likely not work in the field they studied, but be okay with it. Many jobs or grad school programs (JD/MBA) don’t require a specific degree, they just require a bachelor’s degree. The government shouldn’t be charged with telling people what to study and where. The student and their parents should be the ones doing the cost-benefit analysis of where to go to school and what to major in.
Complaint: The interest rates are “Too Damn High!”
I’d like to address a few things when I hear people complain about the high interest rates. The first is that the media generally omits that the government often gives grants (example: Pell Grant) which often helps defray costs. The second is that money, even money you will pay back, is not free. When someone lends you money, their return will be diminished by inflation and they are losing out on an opportunity to invest those same funds elsewhere. These two factors, coupled with the risk of default to the lender, are major reasons why we pay interest. How much interest we pay is a sliding scale often depending on risk to the lender. Our student loan interest rate is often higher than our mortgage payment in large part because we are not putting up any collateral to secure the loan. In the case of student loans, we are also not even presenting a business plan establishing how we will eventually pay the lender back. Despite the risk involved, the government has created Stafford loans which allow you to borrow up to $20,500 per year and have variable interest rates capped at 8.25%. Depending on your financial situation, a portion or all of the $20,500 will be subsidized by the government while you are in school. This means interest will not accrue on your subsidized loan during school.
Myth: The Broke College Student.
Not all college experiences are the same so this is not a blanket statement. However, if you look back to the college experience your parents had versus what it was like 20 years ago, 10 years, ago, and today, you will see that the quality of life has drastically improved for the college student. Years ago, college dorm rooms were cramped, overgrown closets. Dorm food was fish sticks and tater tots. The amenities around campus have been enhanced immensely, but quality of life demands from students have also increased. The reality is that a full-time college student only needs a place to sleep, food to eat, and a place to study. Their purpose is to learn a subject and earn a degree. Everything above these minimum standards while you are in school should be considered a luxury. I’m not saying you shouldn’t have any of these luxuries, or that I didn’t have anything I would deem a luxury; what I am saying is that luxury comes at a cost. If a college student has an iPhone, a nicer living space, nicer clothing, a car, takes trips, eats out, studies abroad, goes to bars, these are all expenses getting tacked onto your tab. The government is not at fault for your choice to live above a monk lifestyle to earn a degree.
Accountability (Part 2: The School)
Education, much like religious institutions, are treated as sacred. Most people believe they exist to perform a noble service and their non-profit status leads most to believe that they are giving their all and still losing money. For this reason, we often don’t challenge their spending, nor do we question their prices. The education industry is far more complex than the operational model we envision. Due to this, institutions of higher learning have run up the meter during the last four decades. According to a 2021 article published by the Visual Capitalist college tuition and fees are up 1,200%, while the Consumer Price Index (CPI) for all items has risen by only 236%. The price of college textbooks has risen 1,041% since 1977.
Charted: The Rising Average Cost of College in the U.S. (visualcapitalist.com)
I propose a challenge for you. Find me a major university that does not have construction going on somewhere on their campus. Look up the endowment for your alma mater. The general theme at almost all schools is tuition, books, fees, services, facilities, construction, endowments, and Administrator’s salaries have increased (Professor salaries have remained stable). What these universities have done is exploited the value we hold for education, knowing that students and parents will continue to pay. They have also managed to shift the blame to the “big bad government” and the “big bad banks.” The truth is, billions of dollars flow into universities just like they do for major publicly traded corporations. The key difference is the lack of transparency and accountability provided to their students, who should be treated more like shareholders and not like suckers.
So, what should universities do?
There is a lot they can do to keep tuition and costs down. I like what Purdue University is doing. Mitch Daniels, the president of Purdue University, appeared on a 2019 podcast episode of “Freakonomics” and I highly recommend listening to it. Mitch Daniels caused disruption within the education industry by threatening to blow up the economic orthodoxies of college education. He started by freezing tuition hikes and reduced the costs of room and board. The 2021 overall costs to attend Purdue were below 2012 levels. He was able to accomplish this through cost-cutting, and without sacrificing faculty salaries and talent.
Purdue has also implemented a novel concept in the education realm known as an “income share agreement.” This program allows students to defer tuition payment in favor of repaying Purdue later from a percentage of their paycheck. For example, a Chemical Engineer would pay about 2.5% of their income for 6-7 years. A Psychology major would pay 4-5% of their income (due to projected salary expectations). There is also a cap on the amount paid to the university. Not only is this a fair deal to the student, Purdue is encouraging students to declare majors that don’t require them to “beat the odds” in the professional world. Some other schools have adopted similar approaches, but it appears this trend has not become the norm.
What did the government do right?
People often ask, can I file bankruptcy on my student loans? The legal answer to this question is “no,” unless you qualify for some of the narrow exceptions provided in the code. I argue, however, that thanks to programs created by the government, we are able to file the functional equivalent of bankruptcy. We are also able to do so without some of the negative connotations than can accompany a bankruptcy filing.
Bankruptcy and student loans?
When people think of “bankruptcy” most of them are thinking of “Chapter 7 Bankruptcy.” For those who qualify, a debtor filing for Chapter 7 Bankruptcy will be able to liquidate their qualified unsecured debt. If the debtor owns any valuable possessions that exceed the exemptions provided within the code, the court can liquidate them in order to pay their creditors. There are actually six chapters of bankruptcy in the United States. Chapter 11 is for reorganization, usually utilized by businesses. Chapter 12 is for farmers and fisherman, and Chapter 13 is for debt adjustment and repayment. No, we cannot file for Chapter 7 or follow a similar procedure where our student loans will be wiped clean. However, through the government’s income-based repayment plan (IBR) it is almost as if the government has created a secret bankruptcy chapter that operates similar conceptually to a Chapter 13 bankruptcy.
What is the IBR?
The Income-based repayment (IBR) plan is an alternative to paying back federal student loans, which allows the borrowers to pay back loans based on how much they make, and not based how much money is actually owed. IBR plans generally cap loan payments at 10 percent of the student borrower's income. Deferred interest accrues, and the balance owed grows; however, after a certain number of years, the balance of the loan is forgiven. This period is 10 years if the student borrower works in the public sector (government or a nonprofit) and 25 years if the student works at a for-profit.
How is the IBR like a Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy plan lasts 3-5 years so the duration is much longer for the IBR than it is for a bankruptcy, however, the concept is the same. When a debtor files for Chapter 13 Bankruptcy, they may possess some assets, and they have regular income, but they are unable to satisfy all their debts and they are in need of an adjustment and repayment plan to get back on course. The debtor notifies their creditors, discloses their income and assets, and then agrees to a repayment plan with their creditors. The plan usually eliminates some of their unsecured debt so, in the aggregate, the debtor is paying less to their creditors than what they would have had they not filed bankruptcy. Once the debtor fulfills all their requirements, their debt will be discharged.
The IBR procedure is the same conceptually. A student at their current income is unable to pay the lender the amount they agreed to under the standard 10-year repayment plan. The student discloses their income, and then makes monthly payments that are small percentage of their discretionary income (usually 15%). The student certifies their income annually and their payments are adjusted accordingly. At the end of the payment period, the remaining balance is forgiven. There are two major commonalities: 1) the monthly payment should not be crippling during the repayment period; and 2) the borrower will often pay less than owed had they not entered the program.
Finally, the IBR is your safety net against a bad investment in the same way that bankruptcy is a safety net when you have encountered bad financial luck or made bad financial decisions. It sounds harsh but if you are unable to repay a loan that you contracted to, through the terms you agreed to, then you made a bad financial decision. If you took out the loan fully aware of what tuition and fees cost, read the interest rates, and signed the required documents, you are betting on yourself to be in a financial position post-graduation to gladly repay the loan that got you to the cap and gown. This is the beauty of the IBR. In the land of the opportunity, we get to believe in ourselves with Eminem or Kanye-like confidence, and if we do not succeed immediately, we have the comfort of paying a fraction of our discretionary income while we focus getting to where we want to be professionally and financially.
How is IBR better than Bankruptcy?
There is a perceived negative connotation associated with “bankruptcy.” Bankruptcy attorneys have been working vigorously since the enactment of the code to dispel this, but the word strikes a chord that cannot be unsung with many people. With IBR, there is no “b-word” that you ever have to mention, even though you are in the same financial boat as many bankruptcy filers. There is no bankruptcy on your credit report and your loans reflect in “repayment status.” The fact that you cannot afford the original student loan terms you agreed to will not prevent you from buying a home. As you can see, functionally, this is really a chapter created from the secret menu of the bankruptcy code. Think of it as “Chapter 13, Animal Style.”
What else has the government done?
Within the Federal Student Loan program, the government has created a number of safeguards to assist borrowers. These are safeguards that are often not available for other types of loans. This includes forbearance, where you can pretty easily, without proving you need it, ask the government to pause your obligation to repay your loan. The government has also stepped in during hard times. Since March 2020, due to the COVID-19 pandemic, the government has put a “pause” on student loan obligations. The government has hooked up ALL student loan borrowers. If you cannot afford to pay your student loans, you do not have to. If you want to pay your student loans, you will able to make a larger dent in the principal because interest has been halted. If you can afford to pay your student loans but think you are some “business genius” you can use the additional discretionary income as an interest free loan and invest it, then resume payments once the government hits “unpause.”
Cancellation of Debt
On August 24, 2022, President Biden announced a plan to cancel up to $10,000 in student loan debt for Americans making less than $125,000, and up to $20,000 for Pell Grant recipients. He is also continued the repayment pause through the end of 2022. As you can see the government continues to take actions that benefit student loan borrowers. I hope that after learning some information that you may not have been made aware of that you can view this issue in a different light.
Thank you for reading.
This post should not be construed as legal advice.
Mark Kachhi, is licensed to practice law in Pennsylvania. His office is located in the Newbold neighborhood of South Philadelphia. Mark Kachhi offers a free consultation for people in financial trouble who are considering filing for bankruptcy in Pennsylvania. Please contact The Mark Kachhi Law Firm, PLLC at 215-439-7899.
