The nondischargeability of student debt and the urban legend of the student deadbeat

I didn’t want to end my weekend blogging stint without linking to Maureen Tkacik’s excellent recent piece about the history of the student debt crisis (H/T: Scott Lemieux). Tkacik is a fine journalist who has does some outstanding work on business and finance topics. Her article focuses on one feature of the student loan debacle that has always struck me as most curious: the fact that student loans are completely nondischargeable in bankruptcy. This is totally bizarre, because few (possibly no?) other forms of debt are treated in the same way. I mean, theoretically I could charge up $50,000 worth of Manolo Blahniks on my credit card, and eventually get that discharged if I go into bankruptcy, but my student loans? Never! Or at least, only under the rarest of circumstances. When and why did this come to pass?

Well, Tkacik explains that like so many cruddy things in contemporary American life, it began in the late 1970s. Back then stagflation and the craptastic economy meant that more and more people were having trouble paying back various types of loans. And she doesn’t spell this out, but high inflation meant we had an economy that was bad for the rentier class but good for folks who were paying off their debts — in other words, you and me — because it basically lowered the cost of those debts.

The banks started freaking out and racking their brains for ways to squeeze some more money out their customers. Making student loans nondischargeable was one of the ideas they came up with that proved to be wildly popular. And the reason why it was so popular is that the bankers cleverly sold the idea in culture war terms: on the one side were good, solid Silent Majority types who worked hard and paid their bills on time; on the other side were lazy, rotten, spoiled hippies who expected to go to college and grad school on the taxpayers’ dime, and then dodge the bills for it, just like they dodged the draft. Newspaper reporters wrote entire stories about the alleged epidemic of student deadbeats on the basis of flimsy, highly suspicious anecdotes such as this one:

A typical syndicated dispatch on the surge in student deadbeats was the August 27, 1972 exposé by Los Angeles Times reporter Linda Mathews, which began with the personal anecdote of an anonymous “Washington banker” who purported to have once “handed a $1,500 check” for the year’s tuition to a nameless “18-year-old college freshman” only to be insouciantly told, “Oh, I never intend to repay this loan.” The anonymous banker -who had since joined “the staff of the American Banking sic Association” – helpfully explained to Mathews that the kid was, “acting on advice in underground newspapers urging students to use bankruptcy to avoid paying loans.”

And you know something, this rings a bell. I remember hearing, during the 80s, stories about rich doctors and lawyers who took out student loans to finance their expensive educations, then opportunistically declared bankruptcy to avoid having paid back the loans. These people were never specifically identified to me, but nevertheless I was assured that many of these people existed, and that unscrupulous types like them were why all student loans had to be made nondischargeable — they were the rotten apples who spoiled everything for the honest ones. All of which goes to show that making policy on the basis of urban legend is a terrible idea.

Especially because, in reality, there wasn’t actually an epidemic of deadbeat student loans. As Tkacik reports,

only about 4 percent of people who filed for bankruptcy protection in 1975 had student loans on their balance sheets, and of those, fewer than one-fifth did not have substantial other debts motivating them to file.

Nevertheless, the law making student loans nondischargeable was passed in 1978. At first, it applied only to the first five years of the loan, and then, only to the first seven years of the loan, but now, it’s forever. Also, originally, it was only for federally guaranteed student loans, but since bankruptcy reform in 2005, it has covered any and every type of student loan, a little detail I find especially outrageous. What could the justification for that possibly be?

Tkacik notes that in the intervening years, the cost of college, especially relative to income, has skyrocketed:

In the years since the Bankruptcy Reform Act passed in 1978, the nominal price of college tuition has risen more than 900 percent. Over the same period the median male income – again, nominally – has risen 165 percent. And since the percentage of the workforce boasting a bachelor’s degree has expanded from less than 20 percent to nearly a third, I don’t have to convince you that the median de facto return on investment on those diplomas has diminished greatly over the same years.

So all too predictably, you get horror stories like these:

A military veteran sharing his story with Occupy Student Debt has paid $18,000 on a $2,500 loan, and Sallie Mae claims he still owes $5,000; the husband of a social worker bankrupt and bedridden after a botched surgery tells Student Loan Justice of a $13,000 college loan balance from the 1980s that ballooned to $70,000. A grandmother subsisting on Social Security has her payments garnished to pay off a $20,000 loan balance resulting from a $3,500 loan she took out 10 years ago, before she underwent brain surgery.

That brings us up to the present, sad state of affairs. One of Occupy’s successes is that, at long last, it shone a spotlight on these shocking abuses. Given the stranglehold that the financial sector has on our political system, I’m not optimistic about the possibility for the kinds of changes we need. But at the same time, given the alarming rate at which student loan debt has ballooned, and the potential it has to crush dreams and destroy lives, I think it’s incumbent upon us to fight for what change we can wrench from the system. There’s too much at stake to do nothing. Student debt has become the modern-day cross of gold.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee