Students graduating from college face bigger issues than tweaking their resumes, finding a job and jumping into the workforce. In most cases, they’re starring down massive student-loan debt, which often offsets the financial benefit of obtaining a degree.
The numbers are simply staggering
According to the Federal Reserve, Americans hit an all-time high of student loans in the first quarter of last year: a whopping $1.52 trillion in federal student loan debt, exceeding both auto loan and credit card debt.
Forbes magazine reports that of the 44.2 million U.S. borrowers who hold student-loan debt, 10.7 percent are 90+ days delinquent. In the State of Florida, according to the magazine, 2.3 million borrowers owe a total of $78.9 billion.
There are no easy solution to the student-loan crisis, although some governmental debt-relief initiatives measures have been tried.
One such measure is the Public Service Loan Forgiveness Program for borrowers employed in public service. A second initiative is the Borrower Defense to Loan Repayment for those who attended schools that misled them or violated certain laws.
Both programs have been dreadful failures because neither program was funded adequately to process applications and manage backend functions. As a result, the majority of applications have been summarily denied or not processed at all. The effect of these initiatives on student-loan debt has been negligible at best.
Borrowers who file bankruptcy also have had minimal success in discharging their student-loan debt. The bankruptcy code (through case law) sets an excruciatingly high bar for student-debt discharge, requiring borrowers to navigate through an extremely expensive and in most cases ineffective process.
There’s an easy fix, however, that could make Chapter 13 bankruptcy a viable option for those buried in student-loan debt. It would require a simple, 15-word addition to the bankruptcy code.
Currently, bankruptcy stipulates that student loans are nondischargeable. The exception is if the debtor can show “undue hardship,” which is practically impossible for most debtors.
To lift the difficulty of discharging student-loan debt through Chapter 13, a simple phrase should be added after the “undue hardship” exception clause, as follows: unless excepting such debt … would impose an undue hardship on the debtor and the debtor’s dependents or the debtor has completed a seven-year Chapter 13 plan and received a discharge.
This additional clause would enable the borrower to file Chapter 13 bankruptcy, submit a seven-year repayment plan based on income, and after the payment plan is complete, to have any remaining student-loan debt forgiven. Currently, Chapter 13 Debtors are locked into a three to five-year repayment plan. Adding a seven-year plan that provides a “super” discharge of student loans would balance creditors fears that the bankruptcy process would be abused, with debtors need for a reasoned solution to get out of overwhelming debt.
Unlike the tried-and-failed previous programs, this adjustment to the Chapter 13 code comes with a firmly established, soundly functioning infrastructure already in place. No additional resources would be needed since the exact system needed is already up and running. It’s a perfect solution.
This solution also includes built-in deterrent: it is sufficiently punitive to appeal to only those who are in desperate need. Those in a better position to pay off all their student loans would continue to do so to avoid the negative short-term effects of bankruptcy.
The benefits of this easy fix are multi-tiered. Individuals who find their way out of overwhelming student-loan debt will experience less stress and live more peaceful prosperous lives. They’ll be more likely to purchase homes since reports say homeownership rates have lagged because of student-loan debt. The economy also would benefit in a big way.
According to a report published by the Levy Economics Institute of Bard College, if all student debt was wiped out, the country would see a boost in GDP by an average of $86 to $108 billion. In addition, even the federal government would benefit by being relieved of the time and expense of processing and maintaining bad debt.
The bottom line is that while many Americans are able to pay off their student loans, many cannot. It only makes sense that we offer these individuals the same path out of debt as those who find themselves buried by credit cards, medical bills, or unexpected life changes. It’s time to alter the bankruptcy code to offer a lifeline to those burdened with overwhelming student-loan debt.
Chad Van Horn, Esq., founder and managing partner of Van Horn Law Group, has helped hundreds of individuals get out from under student loan debt. If you are in need of student-loan debt relief, please call (954) 765-3166 or visit www.VanHornLawGroup.com