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Discharging Student Loans in Bankruptcy

According to the ABA Journal, Senator Richard Durbin, a Democrat from Illinois, has been trying to drum up support for a bill to allow the discharge of private student loan debt in bankruptcy. I wish him luck.

I think he’s going to fail, however, seeing how banks seem to run everything. The government happily lets them dip into its resources whenever the negative implications of their own poor decision-making come back to haunt them, and the poor graduates who are struggling with their loans don’t exactly have the kind of money it takes to elect themselves a congress. Regardless, I’m glad Senator Durbin is at least bringing up the topic.

I have student loans, and I dutifully pay them each month. I probably wouldn’t take advantage of the bill if it passed, and neither would most of the lawyers I know. Based on the lawyers I know, the people who would actually benefit from the bill are 1) people with expensive educations from top school toiling away at big firm jobs they hate because their student loans prevent them from doing the public service work they want to do, 2) people who barely got into law school in the first place and believed their guidance counselor when he or she told them law school was a good investment, and 3) struggling solos and small firm lawyers who are living from one meager salary draw to the next, buried in taxes, and unable to get credit to build a viable business.

I feel the least bad for the first group, but they are probably the ones whose situation should most make politicians wake up and listen. Believe it or not, there are brilliant lawyers with good hearts out there. They would make exceptional, tireless crusaders for the less fortunate if only they could swing it financially. Don’t we as a society want them to devote their talents to those in need? Do we want to lock some of our best and brightest into a life of dull transactional work that only matters to the rich when they could be making the world a better place?

I feel the worst for the second group. They are often the first person in their family to go to college, they were idealistic, and they had no reason to distrust the counselor who didn’t tell them law school is a never-ending money pit that at best leads to a difficult, stressful, and only moderately remunerative career. Not everyone spends their time trolling the internet and viewing endless streams of comments from embittered law students and lawyers bitching about their crappy life decisions, so how would they know they might not be making a sound decision? Getting into law school was a big feat for them, something to be proud of, for sure, and they probably grew up hearing that education is important if not the secret to success. No one mentioned that in today’s crazy world, an education can also mean lifelong financial handcuffs.

The third group is the one with which I can sympathize the most. Many new lawyers open up shop because they want to, like I did, but I’ve found that most people I meet these days did it because they had no other options. They went to law school and got buried in debt. No one was hiring. To start a business, the smart ones knew they needed cash because not everyone wants the be a Starbucks lawyer. Real lawyers should have a physical office, letterhead, and malpractice insurance, none of which is free. They couldn’t get business loans because of their student loans, though, so they have to pay cash for necessary things when there’s hardly any cash coming in. What little they make is taxed because even though they’re dirt poor, they’re self-employed. They’re stuck struggling to live off the scraps the government leaves them from their own hard-earned money while the government gives what they pay to banks that bleed them dry and deny them credit because of the loans they have with those same banks, loans that are more or less risk-free for the lender thanks in part to their own tax dollars.

The system is so exceptionally screwed up that it’s mind-boggling. People argue that it would be unfair to those people who didn’t go to school for fear of taking on student loan debt if those that did could wipe the slate clean. That’s the type of thinking that leads to all types of government injustice though. People will jump on the opportunity to hurt other people if it successfully prevents those other people from benefiting from something. Think about taxes. Most people would rather suffer in poverty under an oppressive tax code than know that someone somewhere is deducting a three-martini lunch. What I don’t get is how discharging student loans is any different from bankruptcy in general. Sure, it’s unfair that people who take on more debt than they can handle get to discharge the consequences of their actions, but those people have to prove they can’t handle it and deal with all kinds of negative ramifications of their decision to declare bankruptcy.

If anything, student loans should be the kind of debt that people are most okay with discharging in bankruptcy. Imagine the government was willing to guarantee loans to people charged with crimes. Imagine every defendant could get up to $50,000.00 to pay for their defense. What do you think most criminal defense attorneys would charge for a felony? $50k! For a DUI? $50k! Today’s special on misdemeanor assault without trial fees, just for you? $50k! Like with an education, some people may get their money’s worth. Some won’t. Not everyone ends up in Harvard, and the people who find themselves with the Thomas Jefferson Law School of lawyers will probably regret their decision. The lawyers wouldn’t care because they get their excessive fee no matter what, and the banks wouldn’t care because they’ll get bailed out if too many people quit paying. Like with student loans, it wouldn’t just be an unfairly inflated loan amount, but an unfair debt overall.

I hope Senator Durbin succeeds because he’s right about things. The student debt crisis in this country is largely ignored by congress, and it’s not entirely the fault of the students. Although I’m pessimistic, something really should change. People need to wake up and quit letting the government and the banks trample all over them. Even though he probably doesn’t have a snowball’s chance in hell of making a difference, at least Senator Durbin is aware there’s a problem and is trying to address it.

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4 Responses to "Discharging Student Loans in Bankruptcy"

  1. Student loans are really looking like they are going to the way of house loan bankruptcy. With very little disposable income, low paying initial jobs to students passing out and low cash flow in the economy due to these reasons, very soon Government needs to come up with some solution. And sallie mae support may be really helpful to reform the law for good.

  2. Matt Brown says:

    That Sallie Mae would support it is amazing. Even topping that with the fact Jordan is spot on about the effect on the economy, though, I still think it’s a pipe dream. People are way too concerned about making sure others can’t luck out, and banks that don’t feel the same way still have way too much influence.

  3. Here’s another thought…

    My wife and I, combined, make pretty good money. However, we have very little disposable income due to student loan payments. Our situation is typical for most people our age – we make good money but have nothing to show for it.

    Why is this a problem?

    Because who is going out to the local restaurants? Buying new TVs? Starting a new business?

    While many would say “suck it up, you borrowed the money, so pay it back!”, that attitude is also going to suck all demand out of the economy. If our generation spends all their income paying off loans, that’s going to be a problem.

    In my opinion, the student loan bubble is going to be far worse than the housing crisis. Cash strapped professionals are either going to default on their loans. Professionals making money aren’t going to be able to put that money back into the economy.

  4. Rob Switzer says:

    Couldn’t agree more. And I fall into your third group.

    Regarding the influence of the banks, lenders, however, I read something fascinating yesterday. Sallie Mae has apparently went on the record supporting this:

    “Sallie Mae supports reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and still experience financial difficulty,” Patricia Nash Christel, a spokeswoman for the company, said in an e-mail.

    http://www.bloomberg.com/news/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html

    If they’re on board, why does this kind of reform seem like such a pipe dream? It seems like nobody would stand to lose as much as Sallie Mae.

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