The trillion-dollar mess of student loans has been a political football for years. Forgive and forget was never part of the loan agreement, as evidenced by changes to the bankruptcy code, limiting one’s ability to purge the liability from a student (or parent’s) budget. In 1987., according to the Student Loan Borrower Assistance site:
- The most common test is the Brunner test which requires a showing that
- 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
- 2) 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, and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).
However, the non-dischargability of student loans through bankruptcy receives plenty of media attention. As NPR noted, with an example of “Lauren.”
- Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.
The topic of student loan bankruptcy will likely accelerate as President Biden indicated a shift, as CNBC reported.
- On the campaign trail, President Joe Biden issued his support for $10,000 of undergraduate or graduate student debt relief for every year of national or community service, up to five years and $50,000. Since then, House and Senate Democrats repeatedly urged Biden to “broadly” forgive up to $50,000 of federal debt through executive order during his first 100 days in office.
- Biden’s first 100 days are now behind him, and he has repeatedly pushed back against leaders of his party, stating that he will only support up to $10,000 of debt forgiveness and that he would prefer Congress craft the legislation.
- On Friday, The Washington Post reported that several “ambitious Biden campaign pledges” will likely be left out of the annual White House budget — including student debt forgiveness. The Biden administration is reportedly reviewing federal student loan relief programs separately.
- But higher education expert Mark Kantrowitz says the news is “not surprising.” He says those interested in the future of student debt forgiveness should instead pay close attention to the memo Biden has requested about the use of executive authority to cancel student loans.
- “President Biden is still waiting for the U.S. Department of Justice and the U.S. Department of Education to report on their review of his legal authority to forgive student loan debt through executive order,” explains Kantrowitz. “Only after he receives that report, which I expect will find that he does not have the legal authority, will the ball be in Congress’ court.”
While students (now graduates) face financial challenges in repaying their loans, the payments industry needs to watch the decrease in borrowing habits caused by overloaded debt burdens. The CARD Act of 2009 severely limited a college student’s ability to borrow without a parental sponsor. With lower credit scores and student debt that will not go away quickly, there is another problem.
According to the Federal Reserve, household debt owed by those older than 70 years old is outpacing those aged 18 and 25. This means that the feeder group for new credit accounts is failing, which requires credit card issuers to review their strategies and normalize their approach through the next decade.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
