Intersection of Education and Bankruptcy: Finding and Improving Synergies
In a recent article in IHE, it was noted that the Department of Education recently issued a directive to federal student loan servicers in an effort to clarify (improve?) when servicers should affirmatively object to a debtor's effort to discharge student indebtedness through the federal bankruptcy laws. Procedurally, in most cases, the debtor files an adversary proceeding seeking to make student loans dischargeable; creditors (like the government or banks) get notice and can and do object.
Many believe, me included, that the Department missed an opportunity to rectify a serious problem in the bankruptcy laws. I say this recognizing that I have worn many hats that impact this and have affected my perspective on this issue: law professor specializing in consumer debt; college president; Founder and President of educational non-profit specializing in debtor education; legal aid lawyer; author of a book on bankruptcy, editor of a treatise on bankruptcy (Collier); co-author on empirical work assessing effect and effectiveness of financial education; and frequent commentator and consultant on education, financial literacy programming and indebtedness.
The central issue posed here surrounds whether the current statutory provision denying the discharge of student debt (both federal, state and private) in the absence of undue hardship (Section 523(a)(8) of the Bankruptcy Code) is wise, appropriate in the current environment and effectively and correctly balancing the interests of debtors, creditors, the government and our economy. Student debt is one of the expanding list of non-dischargeable debts, making the scope of the sought after discharge narrower and narrower.
At both a technical and philosophical level, the problem stems from the fact that the term, "undue hardship" has not been defined in the Bankruptcy Code and has led to a series of judicial decisions (by multiple courts at different levels within the federal system), which are not all in concert. Moreover, the bar is generally set high, and lenders/servicers seek collection (by objecting to discharge) even when it is clear to many of us that these individuals can never and should never be forced to repay their debt -- wounded warriors, those living in poverty and receiving food stamps and other state and federal supports, those with mental illness or other serious disabilities, those with outsize debt and limited or no employment options or opportunities and the list continues.
Yes, it is time to re-think the way student debt is treated in bankruptcy -- despite the other options available for restructuring federal student debt outside of bankruptcy. But our work cannot end there.
In a nutshell, it is high time to rethink all the intersections between education and bankruptcy -- and there are plenty of them. Student dischargeability is just one example --- a myriad of student loans need to be considered for discharge, even those where the lender does not consider the monies lent as "debt." Next, consider educational entitles seeking bankruptcy relief and the total present and future denial of Title IV funds. Might it be wise to rethink this absolute bar for non-profit colleges/universities, with protective stipulations of course. Ponder, too, the Corinthian bankruptcy and the way the claims of students (both Title IV loans and GI Bill expenditures) are being handled -- some within and some outside the court's jurisdiction. Ponder fraudulent transfer laws (state) that co-exist with bankruptcy and have a long reach back. Bad acts can lead to recovery. Ponder governance and leadership issues at educational institutions that could be remediated, if not cured, within bankruptcy.
Here's one very doable and important option: Ponder the counseling/education requirements within the bankruptcy system (mandated pre-bankruptcy counseling and post-filing debtor education). Why couldn't we better synch these programs so they address directly and clearly student loan/debt issues. This would be a real opportunity there if there is quality information, quality pedagogy and quality understanding.
We know that the education given when students take out loans (front end) and then depart from college (back-end) are not highly effective. If they were, we would not see so many defaults and such low uptake of alternative approaches to repayment. Two less good teachable moments could not be found. But, pre and post bankruptcy -- with the right information -- could be teachable moments. And, these are moments we are not effectively capturing and to the best of my knowledge, the Department of ED is not partnering with the US Trustee and the approved counseling and education providers to create the needed synergy. Serious missed opportunity.
There are many many similar issues on the platter. It is time for a comprehensive look at how bankruptcy and education intersect and ways in which those intersections can be navigated more effectively. An open-minded forthright look would benefit everyone. The time is now. Let's seize the opportunity folks.