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A Better Way to Deal with Student Loan Debt

posted by Adam Levitin

My Georgetown colleague Jake Brooks and I have an op-ed in Politico about the best way to address the student loan debt problem. We argue that existing proposals for outright student debt relief, whether $10k, $50k, or everything, are problematic, at least standing on their own, particularly because they fail to address the student loan problem going forward. Instead, we see income-driven repayment (IDR) plans as a key part of addressing the problem. 

Income-driven repayment plans for federal student loans require borrowers to make means-based payments for 20 or 25 years, with any remaining balance forgiven thereafter. Bankruptcy folks might see a glimmer of chapter 13 in IDR plans—the borrower pays what he can for a period of years and any remaining balance is then discharged.

While most federal borrowers are eligible for income-driven repayment plans, many are not in them as IDR is not the default option and requires annual recertification. There's also a host of implementation problems with the current IDR program. Nonetheless, Jake and I see it as the right conceptual model for a system that lacks any sort of front-end underwriting or ability-to-repay requirement: IDR functions as a back-end ability-to-repay safeguard. 

IDR is not a solve-all solution. As we see it, a reformed income-driven repayment system is the best approach going forward and also for recent borrowers; for borrowers who have been paying for years, however, some graduated level of forgiveness is appropriate.

Now, some Slips readers might ask "what about bankruptcy"?  We don't discuss it at all. IDR doesn't require bankruptcy to be successful. While I support broadening the dischargeability of student loans, bankruptcy should not be the primary safety valve in our student loan system, and if we get IDR right, it won't be needed in most cases. 



I beg to differ with Prof. Levitin that IDR is a "better" way to deal with student debt, rather than the bankruptcy process. I believe that there is much that could be done to make student loan debt more manageable through the bankruptcy process, without necessarily completely eliminating the exception for discharge under Section 523(a)(8), including:

1. Preparing a "technical" re-write of Section 523(a)(8). At present, the language used in 523(a)(8) is written so obtusely that it gives rise to substantial questions of ambiguity that courts must wrestle with. By making the exception for discharge linguistically "clearer". By providing clear examples (either in the statute or by means of the Committee Note") of what "undue hardship" actually means, the process of obtaining a discharge of student loan debt might be more streamlined and understandable for all.

2. Explicitly including student loan debt under 523(a)(8) as those debts that can be separately classified in Chapter 13 Plans under Section 1322(b)(1), would allow more Chapter 13 plans to be confirmed without the unnecessary "gyrations" presently required in jurisdictions that require student loan debt to be paid only as part of the general unsecured creditor class.

3. Include student loans with a proof of claim amount of less than, say, $3,000 or so, to be treated under Section 1322(a)(2) (in the same manner as tax debts) and discharged so long as the principal is paid in full over the life of the Chapter 13 plan.

4. Allow for the bankruptcy discharge of those student loans where, pre-petition, the Debtor has a documented history of 2 years (or some other interval of time) or more of participating and completing the IDR process but not being required to pay anything under IDR.

Bankruptcy is for those persons who face such financial (and therefore emotional) distress that they feel that they can no longer properly manage their financial affairs and need real help. Bankruptcy, by both it's mere existence as a deterrent to creditors, as well as it's salient provisions, provides this relief. All, that is, except persons facing seemingly insurmountable student loan debt. All of these ideas would work to make student loans more manageable and useful during the bankruptcy process. It's not a "cure all", but it would be a REAL start.

I have no problem with expanding Income Based Repayment...

but we must get the IBR process out of the foul private sector of loan servicers.

Consider the following:

However, according to three responsible reform groups, the first borrowers to reach 20 years on this program are often not getting forgiveness. The usual culprits of picayune rules, multiple confusing programs, and sloppy recordkeeping
have tormented the early participants.

The solutions proposed here are not complicated:

- include all loan programs
- do not rely on loan servicers to process forgiveness
- initiate forgiveness from the Department of Education itself


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