Recently, my colleague Sheiresa Ngo, multimedia content producer for consumer affairs for Black Enterprise, made a quite reasonable case for her belief that private student loans should be dischargable in bankrutpcy. Her post, Opinion: Student Loans Should Be Discharged in Bankruptcy, generated lots of comments, mostly in support of her proposal, which could become reality if the proposed Private Student Loan Bankruptcy Fairness Act of 2010 becomes law. As a father of a daughter who is struggling to pay back her student loans since graduating from college in 2005, I absolutely understand the challenges many Americans, and Black Americans in particular, face in coping with the burden of student loans.
However, I believe making student loans dischargeable in bankruptcy is not a good idea, and would really backfire on students whose families don’t have the means to front the cost of college tuition and/or who are not able to compete for athletic or academic scholarships or secure enough financial aid to cover education costs. Once you make student loans from banks dischargeable in bankruptcy, they will immediately become unavailable to most students (and probably all students of modest means) or available only under the most onerous terms, including much higher fees and interest rates. In short, it would be even harder to pay the loans back. And it would be costly and difficult, if not impossible, to prevent abuses of such a policy, i.e., people generating student loan debt with no intention of paying it back. In fact, it could take the current student loan crisis and make it immeasurably worse, as people, out of either ignorance or laziness, forgo the challenge of securing scholarships, grants and other preferable forms of aid. They could end up borrowing more money than wise or necessary for college, when the better option would be to go to an in-state school, a public university or a two-year college and then finishing up at a four-year school. “After all,” they’ll mistakenly believe, “if I can’t pay it back, I’ll just file for bankrutptcy protection.”
Actually, the last thing a young person needs on their credit report coming out of college (especially if they are unemployed or underemployed) is a bankruptcy filing–the financial event with the worst possible impact on your credit scores, far worse than the impact of defaulting on a student loan. Remember, everyone from potential employers to apartment renters will look at those credit reports, making it more difficult for a young person to land a job, get affordable car insurance or rent an apartment, as all of these are impacted by your credit worthiness. And many recent college graduates have weak credit histories to start with, as they’re in the early stages of their careers (with incomes to match–if they’re lucky enough to have landed a job) and have shorter credit histories.
It’s important to remember that bankruptcy is far from an easy way out of financial woes. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 made sweeping changes to American bankruptcy laws, with provisions explicitly designed by the bill’s Congressional sponsors to make it more difficult for people to file for bankruptcy. Those who want to file must jump through a variety of hoops, including mandatory credit counseling and a means test based on a comparison of their monthly income versus the median income in their state. And remember, filing for bankruptcy costs money in the form of legal fees, court costs and other expenses–which must be paid even if the bankruptcy filing is rejected.
Finally, here’s an unpopular and inconvenient truth: While there are many who have been legitimately unable to keep up with student loan payments, I suspect that there at least as many people who just did not make such payments a priority, even after they gained employment. I had student loans to repay when I graduated from college back in 1983, which also happened to be during a recession. (My mother, a single parent of four dependent on public assistance, was unable to contribute anything toward my college costs.) After graduation, I slept on a sofa bed in my mother’s living room during the four months it took me to find two
low-paying, part-time jobs. When I finally landed a full-time entry-level job in Brooklyn, N.Y., I shared an apartment with a college classmate who also went unemployed for 6 months after graduation. I went without furniture (sleeping on a mattress on the floor and later securing second-hand furniture donated by a relative), relied on public transportation, bought no new clothes for nearly two years and rarely spent money at restaurants, clubs or the movies.My goal: To pay back my student loans as quickly as possible. My motivation: I’d worked hard to earn my degree, and I wanted to own it outright. Â I knew up front that a college education is not free–that’s why I pursued scholarships, applied for financial aid and took out student loans in the first place. After rent, utilities and food, paying off my student loan was my top priority. (Some months, it came ahead of spending on food). As a result, I did just that in less than three years (saving a bundle on interest), despite never earning more than $15,000 annually during that time and with no help from my parents or other family members. To me it was a no-brainer. I had no wife, no kids, no mortgage, no car note, no other major obligations–just me. Why shouldn’t I be able to pay back the loan once I started working?
Though it’s important to borrow as little
money as possible to toward college financing, if there is any kind of debt to be stuck with, it’s student loan debt. It’s called good debt for a reason: you still have a better chance of gaining employment and earning more money during the course of your working life with a college degree than without one. The catch is, once you get that degree and start generating income, you have to start paying that money back as soon as you can, even if you have to make painful sacrifices to do it. Unfortunately, too many recent newly minted graduates put establishing a lifestyle ahead of paying their student loans after finding employment.Americans struggling with student loan debt definitely need relief, including banks, the government, the private sector, and colleges and universities working together to come up with more creative ways for people to pay off their student loan debt. God knows, as a parent of a college graduate struggling with student loan debt and three other children in various stages of college, I need all the help I can get–we all do. However, bankruptcy is not the answer.
What’s your opinion on the Private Student Loan Bankruptcy Fairness Act of 2010? Is bankruptcy relief the answer? Leave your comments below.
Read more: Opinion: All student loans should be discharged in bankruptcy
Alfred Edmond Jr. is the editor-at-large of Black Enterprise.