President Obama has ordered the Department of Education and its network of federal agencies to determine whether or not to allow student loans to be discharged in bankruptcy proceedings.
The White House unveiled a “Student Aid Bill of Rights” on Tuesday, declaring every 18-year-old in America—regardless of ability or interest—must be granted access to a college education, must borrow money from the government to finance that education on a payback plan set by the government, and must be “treated fairly” by government debt collectors. Obama instructed federal agencies to “[clarify] the rights of Federal student loan borrowers in bankruptcy” and consider “possible changes to the treatment of loans in bankruptcy proceedings and when they were borrowed under fraudulent circumstances.”
With forty million Americans holding outstanding student loans worth $1.3 trillion, the White House’s proposal is fraught with difficulties.
On one hand, naive teenagers who signed off their financial futures to leftist, anti-American institutions would catch a break. The college cartel screwed you; now here’s a government waiver to make you forever grateful to the Democrats. The ferocity with which federal agencies pursue cancer patients and even Americans who already paid off their balance is disturbing.
On the other hand, the mad push to make college “affordable” has led to a relaxation of lending standards that makes the lead-up to the 2008 housing bubble look responsible. Minimal credit checks, no estimate of future earnings, no estimation of the job market four years down the road, and sometimes no co-signer—none of these impede many Americans from getting a loan.
The damages bankruptcy inflicts on debtors looks appealing to the twenty percent who say they’ll be in debt until they die. Obama’s proposed change could start a run that would greatly increase costs to the federal government and, by extension, taxpayers.
Currently, in order to discharge student loan debt in bankruptcy, a debtor must prove in court they will never be able to afford their monthly payments. That’s difficult to prove even for borrowers like pancreatic cancer victim Stacy Jorgensen, who was told by collectors from the Educational Credit Management Corporation (ECMC) that the “mere possibility of recurrence is not enough” to allow her to discharge her debt as she underwent chemotherapy. (The survival rate for pancreatic cancer hovers between 19 and five percent.)
Democrats effectively nationalized the student loan industry in 2010 by transferring eight million loans into the federal government’s hands. Republicans claim that higher interest rates students pay on their debts will fund Obamacare to the tune of $8.7 billion, while the mainstream media charges that’s a lie.
Rather than reducing federal subsidies to universities and placing the leftist institutions at the mercy of the free market, Obama wants to increase the amount students can borrow with interest from the government. Earlier this year, Obama raised the maximum amount students could borrow in Pell Grants another $1,000. His administration also streamlined the Free Application for Federal Student Aid (FAFSA), making it easier to borrow money from the government—which is also over $18 trillion in debt, a 70 percent increase since Obama took office in 2009. In June 2011, Obama issued an executive order that allowed five million debtors to cap their monthly payments to the government at 10 percent of their income—and see their loans forgiven in 20 years.
Obama’s memorandum may encourage more Americans to take on student loan debt instead of deflating the higher education bubble.
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