“A man in debt is so far a slave.” These are the words Ralph Waldo Emerson uses in his 1860 essay, Wealth, to succinctly lay bare the concept of debt.
Though Mr. Emerson likely did not foresee the looming—and now present—crisis of student loan debt in the United States, his words encapsulate the existence of more than 44 million Americans today. These citizens, saddled by student loan debt, are trapped in an indentured state of existence. Consider that figure in this context: it is roughly one-sixth of the United States population over the age of 18.
While not bound by literal shackles and chains, these student-debtors are fettered nonetheless by intangible restraints in the form of suffocating and metastasizing student loans. Second only to the amount of debt held by mortgagors, the debt from federally-backed student loans collectively exceeds $1.5 trillion and grows every day. That amount surpasses credit card and auto loan debt, is larger than the GDP of both Spain and Sweden, and represents more than two and a half times the amount of student loan debt owed just a decade earlier. It should be noted these figures only speak to federal loans—not the estimated $119 billion in private-lender student loans, which are not backed by the federal government.
Of course, not every student borrower is in dire straits—though such knowledge provides little comfort to the many who are—but this burgeoning debt raises broader concerns for our national economy. Thus, this issue is one reaching beyond just those citizens dealing directly with these loans.
About one-third of former students are financially burdened for much of their lives by their debt obligations. These persisting obligations often operate as a sort of financial rigor mortis by preventing student-loan-debtors from investing their income or purchasing equity because many of them must put most—if not all—of their expendable monthly income towards keeping their loans out of default. This “chilling” effect on financial freedom results in the delaying of marriages, the buying of homes, and fewer children being born to married, financially-stable parents. Moreover, when student-loan-debtors do default on their obligations, the burden is ultimately dumped on the taxpayers.
Perhaps most concerning is not the regularity with which prospective students, many of them young and impressionable, are being told they need to take on this suffocating debt, but that there is no escape once they have—not even in bankruptcy. They become subordinate to those lenders until the debt is fully paid or until death. The fact that it is virtually impossible to discharge these exorbitant loans—and their compounding interest—make their pervasiveness all the more dangerousness; not only are the loans virtually inextinguishable, but they can also grow to become more burdensome in their restraint on those beholden to it. As Mr. Emerson also said, “the eating quality of debt does not relax its voracity.”
Two big questions present themselves here:
- How did we get into this situation; and
- What can be done to combat it?
After briefly overviewing the cause of this student debt crisis, this article proposes a solution: amend the bankruptcy code by allowing for student loans to be discharged in bankruptcy while also allowing colleges to be held liable for predatory lending schemes.
The Student Debt Crisis: How and Why We Got Here
First off, student loans are not the reason for the student debt crisis, just the vehicle that allowed it to form. The comprehensive answer for why we are here is a multifactored, complex, and disputed one. The abridged answer is that the student debt crisis is a product stemming from 70 years of federal government legislation and drastic tuition hikes that are disproportionate to the average earnings of the American middle-class.
The Inceptions of Student Lending
Before World War II, a college education was a pursuit mainly for the wealthy elite or those who possessed incredible intellect in certain fields. Accordingly, only a small percentage of American citizens went to college and earned a degree during that time. This model worked as the majority of jobs—from manual labor to what today would be considered some “white-collar” jobs—had no degree requirement. As technology advanced, however, jobs were created that required more skill and thus, more education.
Coextensive with the growth of jobs in post-World War America was a proliferation of digital media—particularly in Hollywood—which led to an increase in coverage and emphasis on colleges and their role in American culture. One need look no further than the persisting legacies of iconic films like Animal House and Revenge of the Nerds to see how the college experience has been underscored and romanticized in our culture.
Since 1944, many changes have been made to the higher-education system through a steady stream of progressive federal legislation. These legislative enactments sought to combat the inequality of opportunity among potential college enrollees by reducing the financial barriers for the less-wealthy applicants. Indeed, the first major congressional law enacted, The Higher Education Act of 1965, did increase opportunities for the poorest Americans to attend college but did little in the way of making college more affordable for ordinary middle-class Americans. In fact, soon after the passage of this Act, middle-class citizens found it to be increasingly difficult to pursue higher education. One of the primary reasons for this came from the fact that colleges—unchecked in their discretion—soon began hiking tuition after experiencing a rapid influx of less-wealthy students enrolling with their new federal loans. In only ten years, the cost of a college education increased seventy-seven percent.
Widespread demands for further financial aid prompted the 1978 passage of The Middle Income Student Assistance Act, which made federal student loans available to students without significant regard to need—i.e., one no longer had to be from a poor family to receive federal financial aid. An explosion in the number of student-borrowers followed. Around that same time, state legislatures, noting that the federal government was providing all the loan-funding legwork, began to decrease their own funding programs in expectation of the federal government’s continued lending practices. Accordingly, this meant that federal lending was rapidly becoming the primary source of funding relied upon for a college education.
The Middle Income Student Assistance Act fundamentally altered the economic dynamics of higher education financing. Colleges and universities—no longer bound by rational economics in their operations—could now continue increasing tuition rates while engaging in massive expansion projects. To understand how rapid this change was, consider that federal expenditures more than doubled from 1978 to 1981 and that the percentage of students with student loans increased from 15% to 33% in those three years.
In 1992, Congress again passed legislation making it easier for middle class families to receive loans for higher education. And again, borrowing under federal loan programs rose. By 1996, the percentage of all students with federally backed loans was 57% and accounted for $23.1 billion in annual government expenditures. Tuition costs exploded faster than ever before and continue to trend upward to this day.
The Current Impacts of this Lending
Fast-forward to 2019 and it is quite plain that a great many former students are having difficulty repaying their student loans. As stated above, this is due to many factors, but in large part to the dynamic between indebted Americans having to pay the skyrocketing tuition and fees just discussed and the fact these loans—and their repayment rates—are disproportionate to their income or other means of paying off the loans over time.
For example, incomes for American families in the 80th percentile have failed to make inflation-adjusted gains since 1970 but the tuition at Yale has increased from $1,000 to $60,000 between 1950-2015—a surge of more than 500%. With college costs disproportionately skyrocketing, the lack of wage increases has led to further increasing numbers of students relying on federal student loans to pay for college. Unsurprisingly, this trend is reflected in the greatly increased number of borrowers defaulting on their loans.
Another troubling feature of our student loan debt situation is the unevenness in distribution of the burdens imposed by these booming tuition costs. That is, the burgeoning costs fall the hardest upon students of color and other disadvantaged demographics like single-mothers and those from impoverished, rural areas. This is ironic in that these are by and large the same demographics the federal legislation was originally designed to help the most. In order to finance higher education, many of these families—already disadvantaged by generational wealth disparities—rely more heavily on federal student loans, as well as riskier forms of student debt (like family members borrowing from private lenders on the student’s behalf), than many “ordinary” middle-to-upper-class families do.
A more insidious facet of this debt disparity is the predatory lending services of for-profit colleges that engage in race-based marketing and whose lending terms border on the usurious. These inequities likely explain why students of color are less likely overall to make it to graduation as compared to their white peers and also why they are three more times more likely to default. But similar to this being an issue reaching beyond the debtors and to the nation as a whole, this crisis likewise reaches across demographics and social barriers. This reality is reflected in a 2018 Brookings Institution study, which bleakly projects that “nearly 40 percent of all students” who took out loans in 2004 may default by 2023.
Unfortunately, one of the effects of guaranteeing federal financial aid seems to be that many prospective students take on huge debt-loads before really considering whether college is the appropriate route for them or if there are alternatives to taking out so many loans to obtain a degree in a field that may not yield a high income.
One might question, and rightly so, why default rates are rising so alarmingly if, on average, most students are still graduating with degrees. After all, one would think that even if the cost of acquiring the degree is outrageous, the income afforded from a more lucrative job would allow most graduates to make their payments rather than risk financial ruin by defaulting. While this is certainly true in some cases, many student-debtors are quickly disillusioned with this notion upon finding out the initial starting salary they can realistically expect to make in their respective fields. Simply put, this means they are not being paid nearly as much as they initially expected when taking out those loans despite being told by our college-oriented culture and well-meaning family members otherwise.
Another contributing factor to rising default rates is that many former students are not reaping the benefits of their college diploma. That is, in contrast to graduates who find out the salary they can realistically expect to make in their field is lower than those typically marketed, some graduates are not being paid as if they hold any degree—usually because they are forced to take jobs that do not require a bachelor’s degree. This situation is often referred to as being “underemployed.” Some 43 percent of college graduates are underemployed and while unemployment among recent college graduates is at historic lows, underemployment is not. New research shows underemployed graduates are more prone to remaining that way even later in their careers—i.e., little vertical or lateral progression—as opposed to their graduating class peers who are not underemployed out of college who, on average, progress with more success. So, despite putting off entering the workforce straight out of high school and foregoing four years of earned income and experience, many graduates find themselves applying for the same jobs they could have held four years ago except now with a growing mountain of debt weighing them down.
College: The Opportunity You Can Neither Afford nor Afford to Miss
Knowing all this, why then are so many starry-eyed pupils still flocking to the halls of higher learning? How is it that despite the increasing amount of former students defaulting on their loans, about 70 percent of recent high-school graduates—and their parents—have justified their enrollment in college?
For starters, the perceived monetary benefit. College is still considered the quickest, most sure-fire way to a steady, above-average job. To be fair, this view is not without merit. Statistically, college graduates still earn over 1.5 times more than those with just a high school diploma and the experience of attending college can be priceless for some individuals simply by the connections fostered or their natural aptitude for academia. Essentially these general figures and benefits make students and their families comfortable enough to roll the dice on taking out loans.
There are other reasons, however, for the rapid migration to college campuses and it appears be driven mostly by the simple fact that this is what so many Americans have been told is necessary to wealth and success in our modern society. It is hard for many prospective students—many of them young and unsure of their path in life—to resist this pressure. American society has been so well sold on the idea that obtaining a college degree is the key to success that not even many of these damning statistics showing otherwise cannot detract the prospective student’s gaze from looking colleges and universities through rose-colored glasses. Who would possibly want to miss out on this “once-in-a-lifetime” opportunity if the government is willing to flip the bill right now?
Some colleges have manipulated their emphasized role in modern America in conjunction with the influx of federal money in the hands of impressionable prospective students. Despite their core commitment to higher education, colleges often operate like businesses. This is not necessarily a bad thing; indeed, it would be silly for colleges to not optimize their endowments and other assets for the advantage of their students and its reputation, but it would be folly to not acknowledge there are also major issues with doing so. For example, the estuary of administrators wanting to increase access to education and the virtually “unlimited” federal money often results in lower-tier and for-profit colleges targeting new students from backgrounds not traditionally thought of as pursuing college education. The result: colleges increasing their revenue at the expense of overburdening misguided students with student loans.
Some critics accuse colleges of not adequately portraying the costs and benefits of enrolling in their institution. The obvious counter-point is that students should take it upon themselves in doing their research before signing up in less-lucrative programs or taking out loans. But in response, many of those critics analogize the current crisis to the 2008 housing debacle as to why current practices are nonetheless bad ideas. There are certainly similarities between the two financial predicaments in that there are misguided “easy-money” policies being proffered to encourage the masses to go into debt along with what appears to be an over-valuation of the product being offered. Consider: the rise of private student lending closely parallels the subprime mortgage boom, which went from 8% of home loan originations in 2003 to 20% in 2006, before the housing meltdown sent that mortgage sector over a cliff. Moreover, current default rates stand at 11 percent, eerily mirroring the peak of mortgage delinquency rates during the subprime crisis.
Some even harsher critics consider this as engaging in fraudulent and deceptive business practices and accuse the colleges of such. Since universities know that taxpayers will be on the hook if their students default, they have little reason to ensure that those students receive a good education. Educational standards are allowed to collapse. Mediocre (or worse) institutions churn out poorly prepared graduates whose skills are completely mismatched for the labor market they seek to enter. They find themselves with useless degrees, working retail with tens of thousands of dollars in debt hanging over their heads. Meanwhile taxpayers cover those costs upfront in the form of federal aid, while the universities have no skin in the game if their students default after graduating. Tuition thus goes up and up, and the dominant policy response is always to make federal aid even more available, inflating the bubble further.
These latter sentiments are, of course, about the most negative ways possible to view the situation and likely do not apply to the majority of colleges. In fact, several studies show the most dubious of lending practices, which tend to indicate some sort of student targeting scheme, are constrained mostly to for-profit colleges. A more reasonable explanation then, based on the discussion thus far, is that colleges use the influx of federal money to attract new students and develop new programs—like most any business—while sincerely believing they are offering quality educations and helping create a more-educated society. That said, the fact remains that we have this student debt crisis on our hands which spans prospective, current, and former college students across the nation.
A Solution: Amend the Bankruptcy Code and Hold Colleges Liable for Predatory Lending
So, how does we begin to address such a pervasive and complex issue? The “simplest” solution is that we can give students a clean slate—i.e., discharge student loans in bankruptcy.
Around the time Congress was expanding the student loan program, it was also rolling back the ability to discharge student loan debt through bankruptcy due to fears of bankruptcy abuse by student-debtors. That is, that upon graduation, debtors would file for Chapter 7 Bankruptcy and try to purge their student loans before seeking employment. Accordingly legislation was enacted to address this fear and since 1978, § 523(a)(8) of the Bankruptcy Code has exempted any student loan debt from being discharged unless its repayment would “impose an undue hardship on the debtor and the debtor’s dependents.”
To meet this standard, one would have to show the bankruptcy court that their student loans were so smothering that they would preclude any chance of financial viability onward in life. This standard is extremely hard to satisfy. And purposefully so. The metric most courts use for determining what is an “undue hardship” is the use of the three-part test crafted by the Second Circuit in Brunner v. New York State Higher Education Services Corp, 831 F.2d 395 (2d Cir. 1987). If you can satisfy each of the following three requirements, your student loan debt may be dischargeable:
- You cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans.
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
- You have made good-faith efforts to repay the loans.
Although courts tend to interpret the Brunner test strictly, whether you qualify for a hardship discharge will ultimately be a function of the individual facts and circumstances of your case as well as the attitudes toward student loan debt that are prevalent in your jurisdiction. So, while the application of the Brunner test is not consistent across jurisdictions, what is consistent is that it is very difficult, but not impossible, for litigants to discharge student loan debt in bankruptcy.
Critics of the Brunner test assert that it was developed during a radically different era. Under the former Bankruptcy Code, the relevant timeline for examining whether a debtor had made good faith efforts to repay a student loan was limited to seven years, and the number and kinds of student loan debts covered by § 523(a)(8) were relatively few. Other legislative changes have further exacerbated the burdens of the test: In 1998, Congress removed the seven-year look-back time limit, and in 2005 redefined “educational debt” to include many more private student loans.
In light of these changes over the years, critics claim the continued use of the Brunner test is unduly harsh, essentially requiring proof of unending poverty and barring discharge of numerous types of private loans that were not before the Second Circuit for consideration when Brunner was decided.
On the other hand, opponents of a change to the standard say that Congress could easily incorporate a less harsh and rigid definition of “undue hardship,” though no such change has ever been made. Furthermore, basic theories of economics suggest that a change to the discharge standard may result in an increase in interest rates for student loans and heightened standards for issuance of such loans, as lenders respond to an increase in uncollectable debt.
While not unreasonable concerns, when weighed against the reality that there are rapidly burgeoning economic concerns impacting millions, it is clear there needs to be safety valve, which could be addressed with either amending the Bankruptcy Code or a relaxed version of the Brunner test.
The costs of higher education and the associated student loan debt burdens carried by former students are large drags on economic growth, social mobility, skills generation, and simply the well-being of vast numbers of past, current, and future students. For example, financial experts note that higher education debt burdens are disqualifying a generation of young graduates from home ownership. Many commentators argue that to forgive student loan debt and return consumers debtors to normal economic life is an economic imperative. Traditional bankruptcy theory supports the proposition that society as a whole benefits by relieving the most hopeless debtors from their debt obligations. By experiencing relief from debt obligations, debtors are provided a fresh start so they may resume their lives as responsible consumers and producers. Accordingly, discharge of debts in bankruptcy serves an important traditional function in the American economic order and is considered one of the few traditional safety nets amid an otherwise free market economy.
One may notice that simply allowing for discharge in bankruptcy does not address fact that the burden is shifted to the taxpayer and predatory universities and lending schemes can still continue. For those reasons, in allowing student loan discharge in bankruptcy, Congress should also charge the college or university for the default and attorney’s fees where the student can prove by clear and convincing evidence that they were targeted by a predatory lending scheme. How the courts would go about crafting a rule for this cause of action would likely be akin to caselaw addressing unfair and deceptive business practices. The details of such a claim are beyond the scope of this article but the central point supporting the creation of a similar claim can be distilled to this: If these institutions want to make bad loans so they can increase their revenue at the expense of a misguided student’s financial viability, it is time they be held liable for such.
The reality of the student debt crisis is that bankruptcy is not a very viable solution at the present moment. That said, the test is not “impossible” for all student-debtors and there is a growing sentiment in both the consumer bankruptcy world as well as the public at large that believes student loan debt should be fully dischargeable in bankruptcy. As the student loan crisis continues to bubble, there are many beating the drums calling for legislative change so that those facing financial difficulty can shed their student loans and start over. Hopefully, the courts or Congress will soon step in to aid in this endeavor and provide much-needed relief to millions of citizens.
In the meantime, perhaps it is time for the country as a whole to re-examine the actual value of a college education and if we should be encouraging more and more prospective students to take out these loans. Though a college education does have tremendous benefits, we must continually examine our institutions to ensure they are actually serving the right purposes and that we are not simply blindingly following a tradition that may bankrupt millions of citizens in the long term. As Mr. Emerson also said, “[m]oney often costs too much.”
 Ralph Waldo Emerson, Wealth, in The Conduct of Life (1860).
 Ralph Waldo Emerson, Wealth, in The Conduct of Life (1860).