[ANALYSIS and OPINION.]
Student debt, particularly federally guaranteed student debt, is a big problem. According to studentloanhero.com there is $1.75 trillion in federally guaranteed student debt out there. And, over 11 percent of those loans are more than 90 days in arrears. That amount of student debt, if it were all forgiven, would amount, by our calculation, to almost 5.8 % of all of the nation’s debt. The national debt according to US Debt Clock.org is about $30.4 trillion [excluding “unfunded” government obligations like Social Security, Medicare etc.] whereas America’s Gross Domestic Product (GDP) is around $24 trillion. (The amount of federal debt is the sum of all annual federal budgetary deficits less budget surpluses for every year since they began counting).
What makes the present federal debt situation so alarming is that total federal debt [even when excluding “unfunded” future federal obligations like Medicare and Social Security, which are also gigantic] is currently more than one and one-quarter times this country’s Gross Domestic Product (GDP). This is much higher than it historically has been. All of which is to say that the federal government is already in a position where it will be forced to do more borrowing than it historically has done well into the future. Forgiving a lot of student loans would only make a very bad budget situation much worse.
Obviously, forgiving some or all of these loans would have very serious budgetary consequences. Most folks could reasonably argue that forgiving a substantial portion of this student debt would greatly add to the current problems we are having with inflation. This is because, budget deficits have to be financed by further government borrowing, which usually causes increases in interest rates and/or the money supply, both of which are, more often than not, inflationary. [In this regard, it is important to note that today’s money supply (M2) is more than four times what it was in the year 2000, whereas during that same time period the U.S population increased by only 19 %. This means that there are many more dollars in print today per person than there was back in 2000. Why we haven’t experienced more inflation than we have is material for a separate article, but the point is that traditionally that kind of money supply increase would be highly inflationary.]
Many want President Biden to merely sign an executive order forgiving much of this debt. Considering the size of the problem that strikes us as something that Presidents ought not to be able to do by executive order alone without prior express legislative authority from Congress.
Many Democratic voters are somewhat and understandably frustrated that a lot of President Biden’s legislative agenda has been blocked. (Often by two members of his own party, presumably for reasons closely related to the concerns mentioned above [but that’s another article]). This despite the fact that President Biden got 7 million votes more than former President Trump in the 2020 election. *** However, and although it is a difficult pill to swallow for many political progressives, the reality is that the President is being circumspect and fully realizes the gravity of the dual concerns of inflation and the equally large Constitutional issue of acting by executive order alone.
This is where Democratic and Republican Congressmen need to start talking to each other because, over 11 percent of student borrowers (about 4.5 million of them by our calculation) are defaulting or are close to defaulting on their student loans, and perhaps worse, millions more are struggling under a mountain of student debt. This prevents them from buying houses, cars, and more. Who knows what the effect is on their children. In a sense, this mountain of student debt is also a drag on society and the economy.
One might argue that this would be a bigger concern were it not for the fact that we currently have an unemployment rate of right around 3.5%. Many economists would say that’s actually so low that it actually represents “full employment”, and that the stimulus of loan forgiveness under present circumstances would, at least according traditional Keynesian Economics, indeed be inflationary. [ Several years ago we posted a video on our website (it’s still there) as to why that 3.5 percent figure [back then it was 5% may or may not constitute full employment and why full employment has inflationary significance.]
However, even if we assume, for the sake of argument that student loan debt forgiveness on any large scale is not desirable at the present time, still, a strong argument can be made that some important steps need to be taken to address this issue and provide relief to those who need it most. This is where the “balance” of considering the actual hardship on individual student borrowers comes into our analysis.
If all of the above is true then our political leaders should consider the following: Under present bankruptcy law, federally guaranteed student loans are not discharged (forgiven) if a former student files for bankruptcy. That former student must live with and pay his or her student loans regardless of whether they have found themselves under tens of thousands or even hundreds of thousands of dollars in student debt.* This can have a devastating effect on the former student and his or her family.
The author of this article, a lawyer, has represented clients in bankruptcy cases in the past.[For ease of reference I will just refer to my firm as “we”]. Under present bankruptcy law student loans cannot be discharged (forgiven) in bankruptcy unless “hardship” can be shown. In the vast majority of instances, however, the reality is that student loans are not discharged (forgiven) in bankruptcy under present law.
Based on what we’ve experienced, we believe that Congress and the President should consider revising existing bankruptcy law to permit student loans to be discharged (forgiven) under the same rules as apply to virtually all other types of loans. In other words, Congress should just enact legislation changing the present bankruptcy law to allow student loans to be treated like all other loans, meaning normally those loans would be forgiven if the debtor with a student loan files for bankruptcy.
Some might say that students shouldn’t be allowed to borrow tens of thousands of dollars, graduate and then just walk away from that debt by filing for bankruptcy. In our view, the answer to that concern is that it is an overblown worry. The same concern could be expressed for virtually any other kind of debt like personal loans and/or credit cards. Credit scores matter a lot and most student graduates understand this. Graduates know full well that good credit scores are required to buy homes and reliable vehicles. As such, the idea of having poor credit acts as a big deterrent to the filing of any bankruptcy. In addition, the Bankruptcy Code already provides adequate protection for creditors and the public against freeloading debtors under what is known as its “means test” and also requires that bankruptcy petitions be filed in “good faith” otherwise the debtor will not be entitled bankruptcy loan forgiveness.
Moreover, it must be emphasized that if the approach suggested herein were adopted student loan forgiveness would only apply to those individual student borrowers who actually file for bankruptcy. It would not apply to all other student borrowers. This would mean that student loans would remain in effect for those who do not need financial help or bankruptcy protection. Forgiveness would only be given to those who need it, thereby greatly reducing the amount by which inflationary federal debt is increased.
The simple fact of the matter is that there are always going to be a significant portion of student borrowers whose careers just never get off the ground. This is a complicated subject, but our experience is that very much depends on the state of the overall economy when the student graduates and/or how much the demand for certain jobs and/or professions has shifted between the time the student loan is taken out and the date of graduation. Moreover, there are those, who get into the workforce and for whatever reason their jobs become obsolete. But the point is that the normal bankruptcy rules should apply.
Alternatively, for those who remain unconvinced, perhaps allowing student borrowers to obtain normal bankruptcy relief after a certain period of time, perhaps 5 years, may be another more acceptable option.
In summary, Democrats and Republicans need to think and, just as importantly, talk to each other about this problem without engaging in the all too typical rancorous political posturing that normally occurs nowadays. There’s room for compromise, and the beauty of what has been suggested above is that it helps only those who absolutely need the help without creating a lot of inflationary and Constitutional concerns.
[Footnotes are below.]
David Dixon Lentz May 22, 2022
Revised May 24, 2022
(© Copyright 2022; David Dixon Lentz ;All Rights Reserved)
*. We note that the Bankruptcy Code does allow for forgiveness of student debt if the debtor can show “hardship”. Whether this relief can realistically be had, however, is often a difficult question, and in any event requires effort, likely additional legal expense and a special hearing to obtain.
** In essence this means that all Americans would have to work for a year and three and one-half months (15.5 months) and pay nothing else (no defense spending, no Medicare, etc) except principal and interest on the national debt before all federal debt could be paid. And alarmingly worse, if unfunded federal obligations like Medicare, Social Security are taken into account the amount of Federal Debt is a whopping $94 trillion dollars. Using that figure it would require everyone to work 4.5 years to pay our national debt. In short, to put all of this in perspective federal debt was only 35 % of U.S. GDP in 1980; it was 58% in 2000 and now it is 129% of GDP. U.S Debt Clock.org
*** Given the fact that 35 states have total populations of less than 7 million people, this is, contrary to what some may say, a very large margin of victory and supports the arguments of most of President Biden’s supporters that he was given an election mandate from the voters to have his agenda enacted by Congress.