Another year of college classes has begun, paid for with another round of student loans.
According to a recent article from the Center for American Progress, cumulative student-loan debt increased by 80 percent for students at public institutions and by about 50 percent at both private non-profit institutions and for-profit schools between 1990 and 2008. In addition, recession-level unemployment rates ranging from 10 – 16 per cent for young adults continue to keep vulnerable college graduates from finding work.
“While borrowing has increased,” the article’s authors note, “the employment prospects of young adults have not kept pace.” Not only are unemployment rates considerably higher among recent college graduates, but current college students, the article points out, are often being prepared for jobs that are not paying high enough wages for those students to repay their debts even if they find do work after graduation. “Some borrowers,” the article suggests, will ultimately “be forced into poverty by the very student loan that was intended to help them break out of poverty.”
So what’s a student struggling under a crushing load of debt to do when there seems to be no hope of repaying their student loans? Bankruptcy is no longer a viable option for all but the most extreme hardship cases due to a series of laws that have been enacted since the mid-1970’s taking student loans off the table for forgiveness under bankruptcy protection laws. The logic behind these new laws stems from a fear that college students will abuse bankruptcy protection because, being young, they don’t have enough to lose since the consequences of bankruptcy are “temporary over a long career.”
The article’s authors, Joe Valenti and David Bergeron of the Center for American Progress, offer up a solution that involves revamping the existing system of student loans at the source, keeping students and families from getting into trouble with high-risk loans and making institutions more responsible for taking on some of the risk if their student loan terms are unfair or their degree programs are not up to par.
Valenti and Bergeron lay out a program of Qualified Student Loans in the article which would, “need to meet established, reasonable standards regarding affordable interest rates, flexible repayment options, and death and disability protections. It would also need to meet minimum disclosure standards so consumers are able to clearly understand their student-loan burdens when making choices about higher education. Loans meeting these criteria would still be subject to the existing bankruptcy laws that only allow student debt to be discharged in cases of undue hardship. But loans fitting this definition would be available only for institutions of higher education and programs that meet minimum standards in terms of completion, or graduation rates, job placement, and evidence-based future salary projections—programs that can assure that their graduates have a reasonable chance of repaying their student loans.”
Loans which do not meet these standards, or Nonqualified Student Loans, would become eligible for bankruptcy protection as they were prior to 1998. Students would benefit from this change because their would be more transparency in the student loan process and financial protection for those who need it most. Lenders would have to tailor their student loans toward the schools and programs that offer the best chances for repayment or be willing to accept the risk, and schools would need to offer high quality education and help their students find gainful post-graduation employment to continue attracting enrollments by qualifying for student loan programs. By tailoring student loans toward “amounts that borrowers may reasonably be expected to pay,” a Qualified Student Loan program might help keep the rate of tuition inflation down as well.
What do you think? Should students loans be eligible for bankruptcy protection and under what circumstances?