Students need bankruptcy protection from crushing loans
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When President Trump was running for office, he decried the profiteering of the federal government on the student loan program.  

In an interview with The Hill, he remarked, “That’s probably one of the only things the government shouldn’t make money off — I think it’s terrible that one of the only profit centers we have is student loans.”

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In his inaugural speech, the President lamented that our schools were “flush with cash”.

 

Trump is right about student loans generating federal revenue. The Department of Education is sitting on well over $1 trillion in loans, and is booking some $50 billion in profit per year on the program.  

Trump probably doesn’t know that, in the absence of bankruptcy protections, statutes of limitations, and other bedrock consumer protections, the federal government is actually making a profit on defaulted student loans — something no other lender for any other type of loan can claim.  

This is why the department fights tooth-and-nail behind the scenes to keep bankruptcy protections away from student loan programs.

Trump definitely doesn’t know the department has no desire or intention to forgive anyone’s loans.

Already, a whopping 57 percent of the people in Income Based Repayment (IBR) programs have been expelled for failing to verify their income — an annual, onerous process that the department could easily do on it’s own through the IRS, but doesn’t. 

This is just one of the many ways the department can kick people out of these programs. By my best estimate, fewer than 15 percent of the people who try for these forgiveness programs will actually make it through.

The vast majority will be kicked out, owing far more than what they owed when they entered.

This is the success rate that credit card companies see for similar earned-benefit teasers that they dangle in front of their customers.

In the absence of bankruptcy protections, no forgiveness program, including Trump’s, will work.

Trump is also right about colleges being flush with cash.

Not only have administrative salaries and capital improvements exploded across the nation, their cash reserves (separate from their endowments) have ballooned over the past decade.  

Since the financial crisis of 2008, colleges have managed to build up reserves (or slush funds) that could possibly be greater than the combined value of all college endowments!

If Trump and the Republicans want to actually fix this problem, they will do what they should have done a long time ago — return standard bankruptcy protections by repealing 11 USC 523(a)(8).  

This will force the Department of Education to crack the whip on colleges to lower their prices, tighten the federal lending limits and administer the lending system in a fair manner.

At this point, the student loan “swamp” will scream that this will be expensive. This is nonsense.  

Dr. Bob Lawless, a leading bankruptcy scholar, estimates that returning bankruptcy to student loans will result in about $3 billion in discharged debt per year.

This is a pittance compared the the $50 billion that the government profits on the program every year and a small fraction of the nation’s current student debt tab of about $1.5 trillion.  

If bankruptcy discharges turned out to be higher than Lawless predicts, then this would be a signal to Congress to even further restrict lending and reduce college prices.  

Ultimately, I would suggest that the colleges could and should be forced to bear some of this burden, even if it means appropriating some of the vast hoards of cash they have built up over the years.

President Trump knows the reasons for the bankruptcy system in this country. He knows that bankruptcy is a critical mechanism for ensuring fair lending, rational pricing, and good faith in a lending relationship.  

That the Founding Founders demanded a uniform system of bankruptcies ahead of the power to raise an army, establishing a currency, and even declare war when they wrote the U.S. Constitution demonstrates the importance of having bankruptcy rights.

The student loan counter example proves their wisdom in spades. 

Trump and the Republicans in Congress should turn away from the swamp and listen to the growing chorus of conservatives, like Jeb Bush, David Brooks and the Cato Institute, calling for the return of bankruptcy protections to student loans.  

If they don’t, then they may find themselves having to explain to the taxpayers why the entire lending system evaporated into a mist of illegitimacy.

 

Alan Collinge is the founder of StudentLoanJustice.org and author of "The Student Loan Scam: The Most Oppressive Debt in U.S. History and How We Can Fight Back."


 

The views of contributors are their own and not the views of The Hill.