A new bipartisan, bicameral Bill was introduced to allow bankruptcy for student loans. The Bill named Student Borrower Bankruptcy Relief Act of 2019 allows student debt to be treated like all other forms of debt through changes to the Bankruptcy Code. Currently student debt cannot be easily relieved through bankruptcy. This is unfair to students.
This legislation is introduced by Jerrold Nadler (D-NY), John Katko (R-NY), Joe Neguse (D-CO), and Dick Durbin (D-IL) and Elizabeth Warren (D-MA). It is supported by many of our Presidential Candidates including Sens. Bernie Sanders (I-Vt.), Kamala Harris (D-Calif.), Amy Klobuchar (D-Minn.) and Rep. Eric Swallwell (D-Calif.) who are also co-sponsoring it.
To get an idea of the scope of the problem the read this article in today’s Washington Post.
Let’s talk about bankruptcy. Americans owe a collective $1.5 trillion in student loan debt, an amount that’s increased from $90 billion over the past two decades. In 2018, more than two-thirds of college graduates graduated with student loans. The average amount borrowed (from all sources) by a 2018 graduate is just under $30,000.
This debt stunts the careers and lives of the millions of Americans striving for a better life. This debt is non-dischargeable unless you can show “undue hardship” which is nearly impossible to demonstrate in the courts. Allowing former students to declare bankruptcy would free them to pursue their life goals and make America more productive. It would also weed out bad actor lenders currently preying on students.
The history of how we got into this mess is described below.
The issue goes back to the 1970s, when the banks and media outlets began pushing the narrative there was an explosion in new graduates declaring bankruptcy to unload their student loans. The Government Accountability Office (then the General Accounting Office) found that such acts were extremely rare. But little matter: In 1976, Congress passed legislation that banned students from receiving relief for their student debts for a period of five years. Over the next several decades, they would extend that period to seven years, and then in 1998 they shut the door almost entirely on relief for federally issued loans. In 2005, as part of controversial “bankruptcy reform” legislation, that stricture was extended to privately issued loans as well. One man who supported all of this: Joe Biden, then a senator from Delaware. He championed the multiple changes that made it harder for people to declare bankruptcy and receive relief for their student debt.
Over that same period, student loan debt ballooned. That’s likely not a coincidence. Many things factored into the rise of debt financing of education, including the decreasing rates at which many states supported their public colleges and, most prominently, the growth of for-profit colleges. But the usual risk associated with loaning money is that the person might not pay it back; common sense says banning that outcome would lead to an exploding student loan market. When you can get blood from a stone, someone — the government, a bank or a financial institution specializing in refinancing student debt — will lend the rock money.
The Student Borrower Bankruptcy Relief Act of 2019 is a great example of progressive legislation. It identifies a problem facing many middle to low income Americans and provides a solution. This is the kind of legislation that can win lower and middle income votes in the next election. We need left-wing populism to defeat right-wing populism. We must do better than in 2016 with low and middle income voters. As shown below we dropped 16 points in support from that group in 2016.