United States: Abandonment of student debt: the ABA takes a stand
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The American Bar Association’s House of Delegates recently passed Resolution 512 urging Congress to amend the Bankruptcy Code to allow student loans to be discharged in bankruptcy without proving “undue hardship” as is currently required. The resolution was co-sponsored by the Young Lawyers Division, the Law Students Division and the Paralegal Standing Committee. The Young Lawyers Division submitted a report in support of the resolution (the “YLD Report“) which dealt with the history of student loans and the ability of borrowers to free them from bankruptcy.
There is no doubt that the discharge of student debt in bankruptcy is a hot political topic that deserves the attention of the ABA. The Biden administration has written off over $ 9 billion in student debt, and many congressional leaders are calling for full student debt cancellation. Since March 27, 2020, in accordance with the Coronavirus Aid, Relief and Economic Security Act, federal loan repayments have been frozen. The freeze has been extended several times and will not expire until at least January 31, 2022. We also wrote about the recent Second Circuit ruling—Homaidan v. Sallie Mae, Inc.—Which will make it easier for borrowers to pay off certain student debts in the event of bankruptcy, even under current law. The YLD report explains how young lawyers are particularly affected: The average debt of law school graduates is around $ 145,000 (although the default rate for law school graduates is traditionally better than the 11% figure. before the freeze for all student loan borrowers).
There have been limits to the ability to service student debt since the Education Amendments Act of 1976, when the average cost (adjusted for inflation) of tuition fees for a year of higher education was about $ 2,500. Over the next 45 years, tuition fees and, subsequently, average debt exploded. As an example, the tuition and inflation-adjusted fees for a year at Harvard Law School in 1973 were about $ 13,000. By 1993 it had grown over 100% to about $ 28,000 in today’s dollars. Now, Harvard law students can expect tuition and fees alone to be around $ 70,000 a year, not to mention accommodation and board: they will likely exceed 25,000. $ per year.
Originally, the exception to the release of student debt was limited in time. In the Education Amendments Act of 1976, discharge from student debt was prohibited during the first five years of loan repayment, unless the debtor could establish undue hardship. Tighter restrictions on release increased over time as access to student loans increased. The Student Loan Default Prevention Initiative Act 1990 extended the student debt relief exception to seven years, and the Higher Education Amendments Act 1998 amended the Code of Education. bankruptcy so that all federally guaranteed student loans are permanently exempt without undue hardship. The discharge exception was extended to almost all student loans, including those without federal collateral, by the Bankruptcy Abuse Prevention and Consumer Protection Act 2005. For some bankrupt debtors, student loans are the main concern. The YLD report notes a study of over a thousand bankruptcy cases in which nearly a third involved student loan debt. For tax filers with student debt, their student loans averaged 49% of total debt. Even though student debt is such a large portion of overall debt, due to the standard of undue burden, it is hardly ever discharged. But instead of seeking a return to a time-limited discharge ban that existed from 1976 to 1998, Resolution 512 urges Congress to remove the undue hardship requirement altogether.
As Herbert Stein once pointed out: if something cannot last forever, it will stop. Total student debt cannot exceed inflation at the same rate as over the past 50 years without radical changes in the higher education market. But ABA must be careful not to support solutions that make relief too easy. For most recent graduate (or just dropped out) student borrowers, the bankruptcy incentives are all aligned in favor of filing for bankruptcy: their student loan principal will never be higher, they have nothing to liquidate, entry income is (usually) at a career low, and they may wait until their credit report is cleared to re-enter the credit markets, usually for a mortgage (median age of d ‘a first buyer in 2019 was 34 years old). There are many ways to approach the perceived problem of student debt without considering the economic reality. Changing the Bankruptcy Code is just one option, and one that does nothing to deal with the uncontrollable costs of higher education. The ABA certainly responds to the concerns of many of its members; Hopefully, whatever solution ultimately presents itself will balance the education concerns of debt market players.
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