Defusing the student loan debt time bombPublished 10:31am Tuesday, February 25, 2014
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Student loan debt in America has become a ticking bomb waiting to explode on the economy. It is debt that Suze Orman describes as, “Even if you were to fall into extreme financial hardship and file for bankruptcy, you need to understand your student loan debt will not be discharged in bankruptcy. It is the Velcro of all debts.”
Make no mistake that no one enters into student loan debt without giving much consideration to this fact. Economically challenged and solid middle class students sign loans everyday across this country and in our state knowing they are betting their degree against a failing economy.
They diligently study and pursue that degree with everything they have in them. They make do with substandard diets, miss sleep routinely to work and study, they buy textbooks that depreciate faster than a used car and hope their efforts are enough to land that dream job and repay the enormous debt load they are incurring for the privilege of an education. Much like gambling at a casino, some will get that dream job but most will not.
The Student Loan Justice Organization is a grassroots organization dedicated to making sure students with loans across all generational lines are treated fairly in regards to their debt. Their website has hundreds of personal accounts of the nightmare that the student loan industry has become. The stories of individuals whose lives have been ruined and students that have committed suicide over their loans abound on this website.
Currently, there exists no statue of limitations for students, no usury laws, and no fair trade practices that all other loans enjoy. USC 523 (a)(8) made sure of that. Student loan holders, unlike other loan types, can have their Social Security garnished even if they are disabled and can no longer work. The students have no legal remedy to ensure their loan is handled properly or that they are treated with basic human dignity when being contacted about their loan.
Students who find themselves in default can have their professional licenses taken, clearances denied, tax refunds taken and be turned down for jobs based on misrepresented credit details on their credit scores.
Congresswoman Fredrica Wilson from Florida recently introduced a House Resolution. This bill, HR 3892 The Student Loan Borrowers Bill of Rights Act of 2013 seeks to undo the USC 523 (a)(8) that stripped students of basic consumer rights.
This bill, if passed, has many ramifications. It would help alleviate the defaulting of student loans by giving students the bargaining rights other loan holders enjoy to keep their loans current. Just by virtue of bankruptcy being an option, the loan servicing companies would have an incentive to work with student loan holders instead of against them.
It is a matter of record that lenders actually defaulted student loans without even attempting to collect on the debt. In 2000, Sallie Mae paid $3.4 million in fines as a result of the U.S. attorney’s office discovering that the company was invoicing for defaulted loans where the borrower was never contacted. Rather, records were fabricated to indicate that the borrower had been contacted. While it is unclear how common this type of behavior is across the industry, we do know that other lenders have been found to be making similar false claims. That it happened at all demonstrates perverted fiscal motivations.
The argument for repeal of 523(a)(8) – the bankruptcy exclusion for student loans – gets much stronger in view of this. Reorienting the fiscal motivations to their proper alignments is urgently needed.
Returning, at a minimum, the bankruptcy protections that should never have been removed is the obvious first action that would achieve this, in all likelihood. In so doing, the federal government will, once again, have a financial interest that student loans not default, and will be compelled to use its considerable influence to encourage the universities – in a serious and meaningful way – to both provide a quality education that gives the student the best chance for success, and also to do this at a reasonable cost to them now and in the future as they pay off their loans.