Michael Olenick: How Biden Could Tackle the Student Loan Crisis

Yves here. The wee problem with the Olenick plan, as readers know well, is that Biden does not appear willing or able to change his spots. The Senator from MBNA who pushed hard for the passage of the 2005 bankruptcy “reform” act, after it had failed previous Congressional votes, isn’t the sort to admit error. Witness his campaign efforts to justify his support for the “superpredators” bill, or the appointment of Iraq War fanboy Anthony Blinken to State.

The very fact that top bankruptcy professor Elizabeth Warren never once advocated for discharging student debt in bankruptcy speaks volumes about Democratic party priorities. They find it easier to stump for complicated programs (which typically have complicated documentation requirements) rather than a Gordian knot approach which would also give relief to the most distressed. And it’s not as if declaring bankruptcy is a party; it’s stressful and commonly seen as a big black mark by recruiters.

The reason for the reluctance to do anything other than tinkering or one-offs, even if potentially large ones, is that higher education, both the instructors and the administrators, are a solid Democratic party bastion. Can’t threaten those meal tickets, even if the resulting debt peonage is making “socialism” a good word among the young. As Olenick added by e-mail:

I think it is implicit that my belief is the entire system is rotten to the core from the cost of tuition to the loans; it needs a serious rethink. There are hoards of administrators, elaborate gyms, wildly expensive sports programs (students don’t get paid for), dorms that are nicer than most houses, and professor pay that’s way beyond anything they could earn in the private market; the entire system is broken.

To keep students in supporting it – and justify all those people – schools make graduation requirements ever harder. I had a friend who was working on a two-year associate degree at a state-run community college. That required a full year of accounting (financial and managerial), calculus, and a year of econ (macro and micro). I think the econ classes were reasonable though the textbooks, for introductory macro and microeconomics, cost over $200 each, the same bloated pricing for all the classes. The math classes required expensive textbooks that had an online component so couldn’t be resold. Krugman’s textbook lists for $316.25 on Amazon and is on the sixth edition because, you know, introductory economics for two-year degree students has radically changed since the first edition was published in 2005. Amazon sells a “printed access code,” for the fifth edition, for a mere $115.24. It’d be interesting to hear Krugman’s thoughts on the textbooks that bear his name and their effect on the cost of college, access to college, and the student loan burden they eventually cause.

Nevertheless, it’s useful to throw down fixing bankruptcy as a marker against which to measure what if anything Biden actually does on the student loan front.

By Michael Olenick, a research fellow at INSEAD whose recent articles can be read at at innowiki.org

Countless people are pressing President-elect Biden to solve the student-loan crisis through executive order, forgiving $50,000 of student-loan debt. Additionally, Biden has proposed the atrocious idea of the US buying up to $10,000 of private student loan debt.

I 100% agree with the need to deleverage the student loan burden but not so much the proposed means.

Before readers throw lawn darts, hear me out because I suspect we’re all on the same or a similar page.

There’s about a $1.7 trillion student loans outstanding, acting like a boat anchor tied to the ankles of people as they try to thrive in the modern US. The 80s TV show “thirtysomething” showed young people frustrated in careers as architects stymied by a boss who just didn’t understand. Today’s thirtysomething’s, with more degrees, are living in their parent’s basements working three dead-end jobs. They can’t afford houses, can’t start businesses, can’t have children, and can’t even get married lest they expose a spouse legally to their student-loan burden.

If the as-is student loan system existed forty years ago, a young Steve Jobs – who’d focused on calligraphy and ancient art classes – would be working as a bartender rather than attending the Home Brew Computer club on his way to founding Apple. There are few similarly historically economically destructive analogs beyond slavery.

A Brief Background

Briefly, for those not in the know, there are three general types of student-loan debt. The first is government-guaranteed loans where a private or semi-private business lends the funds that are guaranteed by the US (Sallie Mae started out as a government sponsored enterprise but privatized). Next are funds lent directly by the US to a student. Finally, there are private loans that are not guaranteed. All three type of loans are collected by servicers and, under current interpretations of federal law, they’re all ineligible for bankruptcy relief except under dire circumstances.

Biden may be able to forgive the money lent directly by the US government without Congressional approval that Republicans would never agree to. That becomes far iffier for the funds lent by third-parties but guaranteed by the US. It’s impossible for private loans.

Furthermore, forgiving the debt would likely be classified as a “taking” so bill collectors (er, I mean “servicers”) would theoretically be due all the funds they would’ve otherwise collected. Students get some relief … maybe. Collectors collect a windfall. For Biden’s private loan relief idea, “investors” – who, let’s face it, are largely predatory lenders – get paid back funds they might never otherwise collect. Oh yeah, if the scheme works students are on the hook for taxes for the discharged amounts; tax bills they can’t afford.

Bailing out predatory lenders and bill collectors, for amounts they’d likely never otherwise recover, sounds like a shitty dealquoting former Sen. Carl Levin. Especially when it saddles students with IRS debt instead of student loan debt; frying pan, fire and all that. I’m also a first-generation college student; the only one of my siblings to finish an undergraduate degree so I get how difficult it is. I took out my first student loan at 17, worked all through undergraduate and law school, and only paid the loans off in my 40s. Those loans functioned like an anvil tied to my ankle while trying to stay afloat; the stress and opportunity costs were immeasurable.


There’s a better solution. The Donald Trump special … bankruptcy.

Right now student loans are all but ineligible for bankruptcy discharge due to a judicial interpretation. Under federal law, student loans may be discharged for “undue hardship” which, absent a legislative definition, courts have defined as being braindead. Owe 120% of your take home pay to student loans? That’s not undue hardship according to judges because you might, someday, make more money (never mind that’s unlikely since you can’t do much to advance thanks to the loans). Very few people meet the undue hardship standard.

The decrees of unelected, unaccountable, and typically wealthy law school grads who ended up as judges decided the poor schmucks who didn’t do as well should be sandbagged with student loan debt forever.

Reagan Accidentally Rides to the Rescue

There is an easier solution; Biden’s various agencies can define “undue hardship” to a standard ordinary people meet.

There’s a strong precedent for this. Up until 1982, stock buybacks were defined as “stock manipulation” making them all but illegal. Rather than push to have Congress change the law, Reagan’s regulators passed a rule that buybacks, under certain circumstances, were legal as long as they confirmed to certain base rules.

Reagan used administrative authority to change the definition, bypassing asking Congress to change the law.

Businesses went wild over future decades buying back far more stock than they invested in R&D or anything else. They not only used all extra profits to buy back their own stock, bumping up executive pay as a side effect, but even borrowed money to buy back their stock. Today, about 20% of large businesses owe more in debt payments than they make in profits largely due to borrowing for buybacks, though I digress.

If Reagan’s SEC can change the definition of what’s kosher for a stock buybacks then Biden’s DOE can change the definition of “undue hardship.” And, oh yeah, if courts decide Biden can’t change the definition then the original change enabling buybacks also disappears, not that I’d recommend legislative hostage taking or anything.

Defining “undue hardship” for student loan discharge eligibility as loan payments more than, say, 10-percent of net income in the prior year would free countless students to file bankruptcy and discharge student loans and other debts.

Well-meaning students would rid themselves of predatory loans they took out before they were too young to drink. Loans taken out by seventeen-year old’s – who were too young in many states to consent to sex but old enough to sign off on loans that can never be eliminated – would finally be eligible for bankruptcy relief.

Besides breaking through the artificial $50,000 cap on loans, this method would also stiff student loan bill collectors on unrecognized profits, as they should be. Debt discharged in bankruptcy isn’t taxable, eliminating that burden. Mitch McConnell & Co. couldn’t do anything about it: like the rule-based change enabling stock buybacks this change would be entirely up to administrative authorities; most likely the Dept. of Education. Even those who say student borrowers shouldn’t get off the hook easily are appeased because – though I’ve never personally been there – I’ve worked with enough others to know that bankruptcy sucks, though it sucks less than the lifelong burden of student loans.

Public Policy

Like I said above, I’m a first-generation college grad. Nobody in my family graduated college much less earned a graduate degree. I did but with lots and lots of student loan debt that sandbagged me for years. I eventually paid it off but, when I compute the opportunity cost, that debt was insanely expensive. Do I resent it? Absolutely. And so should the people who’d be employed by the budding businesses I would and could’ve built but for servicing that debt.

When I took out those loans they were eligible for discharge in bankruptcy then Congress changed the law after the fact. They kept changing the laws, making student loan discharge in bankruptcy ever harder. Their initial reasoning was it wasn’t fair since tax money was involved but they dropped all pretense with the Bankruptcy Reform Act of 2005 when they subjected private student loans to the undue hardship standard. That was supposed to lower the cost of the loans but, surprise, the costs didn’t budge. If the rules can be changed after the fact to the detriment of borrowers then the same can be done after the fact to the detriment of lenders.

It would be irresponsible to ignore that easy availability of student loans led to enormous tuition inflation with the funds sometimes being used for questionable purposes. In the interest of keeping this an article rather than a dissertation, I’ll pass going into detail but some expenditures and salaries need to be reviewed.

The founders of the US realized the need for bankruptcy and specifically enabled bankruptcy in the Constitution. Why? Because the possibility of bankruptcy enables risk which encourages innovation; it’s the reason the US smokes other countries for startups. Countless countries want to see the secret sauce of Silicon Valley. It’s not the weather. Check out California’s ban on the enforcement of noncompete clauses coupled with American bankruptcy law to get an idea. Plenty of colonialists came to the US to escape serfdom, including lifelong debt slavery. Bankruptcy was their solution. It’s time to make student loans again eligible for discharge in bankruptcy.



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  1. .Tom

    Abolish the colleges.

    They have all but destroyed scholarship for it’s own sake. Professional training should be handled by the respective industry. The overpriced daycare for late teens isn’t needed. Neither is the machine for maintaining PMC privileged.

  2. ArkansasAngie

    Well … I’d like a little bit of discussion on how one keeps moral hazard from simply being thrown out the window.

    The “real” issue with wiping out the debt is that it is disinflationary.

    Today … money is created with debt. You reduce debt and you are taking money out of circulation.

    1. Noone from Nowheresville

      Who should be responsible for the moral hazard? A teenager or an experienced well connected with the ability to influence / change policy / law after the original loan lender? Cultural whispers say it’s the least sophificated party in the legal agreement. If only they’d fill in the victim blaming blanks.

      I’d rather see these loans handled through bankruptcy because the loans are symptoms of the problem rather than the problem itself.

      If one wants to spend political capital, then start by going after raising the minimum wage to $30 / hour, universal health care on the order of Jayapal’s proposal and well so much more. An inter-generational fight to be sure. Raising the minimum wage and something like M4A would have a much broader and immediate effect for the entire populace which includes student loan debtors.

      If we go beyond making the debts dischargeable in bankruptcy, what’s our justification for saying these debtors are more important than say liar loan debtors or payday loan debtors or even the people who were foreclosed on after the 2008 tragedy? It’s a mine field. And although the government picks institutional winners every day without a lot of public hassle, picking which neighbors get a winning lottery is a dividing populace tactic. It also kind of smacks of a loyalty seeding. Policy knowingly creates a “problem” which only policy can undo but only if one is judged “worthy.”

      There is too much easy money in circulation. It warps the system, especially when the vast majority of it is held and created by those at the top of the pyramid. With the easy “money” they have access to, they can pretty much buy up the world while getting others to “pay for” their purchases. No moral hazard there. Neat trick that.

      1. John Rose

        Student debt is a HUGE anchor not just on the individuals but on the economy. Those debtors are the primary engines of the economy by the massive drive to consume created by having children and ambition. This most dynamic portion of the U.S. population could finally expand the current plutonomy of stock prices, houses and other accouterments of wealth.

    2. James Cole

      If creation of debt is an increase in the money supply, it is repayment of that debt that reduces the money supply and is disinflationary. Forgiveness is inflationary.

    3. John Zelnicker

      November 23, 2020 at 7:29 am

      and James Cole and Anonymous, above.

      Forgiveness is actually neither inflationary, nor disinflationary.

      Payments made on student loans are unearned income to the lender that contribute nothing to the productivity of the economy. In fact, they detract from it by diverting a significant amount of discretionary income from purchasing goods and services to making the rich richer.

      Once that discretionary income is released from debt repayment, it will be used to facilitate all of those things that have been delayed or abandoned, such as marriage and family, buying a first home, etc. This means these folks will be spending that money into the real economy, increasing effective demand, which will lead to higher capacity usage, and eventually to capital expansion, to meet the higher demand. It creates a virtuous circle that should have no noticeable effect on inflation.

      1. UserFriendly

        Since the payments go to the federal government they work the same way taxes do. Canceling the debt = cutting taxes = increasing the national debt = increasing the money supply. Which, if anything would be inflationary, but only if we hit supply/labor shortages, so not likely to do either.

  3. CSP

    I have been disappointed that all the student loan narratives I’m reading focus on the most divisive issue of how to forgive all or a portion of existing student debt. The first rule of common sense would dictate that when you are in a hole, stop digging. Therefore, why are we not primarily concerned with fixing the student loan issue going forward such that we do not create debt slaves of our children who are simply seeking a decent education for themselves? Once we’ve solved that problem, the actual source of the issue, then we can tackle the more divisive issue of outstanding current debt.

    I would argue that you know the “fix” is in when the serious people all focus on the most divisive issue. The one sure to divide us along the usual lines of wealth and identity.

    Please stop digging this hole for humanity. Make all education tuition free for the deserving.

      1. Fraibert

        I took it to mean that there would be some consideration of academic ability in covering tuition. I’ve noticed that countries that offer free or very low cost higher education funded by the government tend to (I suspect it’s universal, but it’s a hard question to research quickly) ruthlessly weed out potential students using tests.

        1. The Historian

          You don’t think that happens here? Try getting into some of the really good colleges in the US these days. Even state colleges can’t accept the number of students that apply and have their own ‘weed out’ procedures.

        2. NotTimothyGeithner

          The argument was let’s ignore the crippling debt and focus on the deserving despite not having put that public consciousness. It’s a strategy to deflect action by pretending to be more progressive. Then it was finished with “deserving ” .

        3. NotTimothyGeithner

          Then I would add the argument I was responding to is make the ludicrous argument that making college free to future “deserving” generations will be a less difficult fight than an executive order forgiving the debt.

          This is the kind of garbage “liberals” and Republicans pull when they are seeking to derail actual efforts to make any kind of positive change.

          1. Dirk77

            +1. It’s also important to recognize that allowing student loans to be dischargeable in bankruptcy helps to stop digging the hole for humanity. So if one believes in CSF’s stated goal of making education free, this is a practical step toward it, which can be done NOW.

      2. Grumpy Engineer

        @NotTimothyGeithner: Not “for the deserving”, but “for those who can reasonably be expected to repay”.

        Right now the US Department of Education does zero evaluation as to whether the issuance of a loan is a good idea or not. They make small loans to excellent students who attend good schools and are studying fields where jobs are plentiful and the wages high, and they make large loans to poor students to attend crappy schools and study fields where jobs are scarce and the wages low. In the latter case we’re almost certainly dooming them to financial ruin, but nobody checks.

        In the years leading up to 2008, the banks routinely made home loans to people who obviously could not repay. This tactic helped fuel the housing bubble and made the inevitable crash all the more destructive. We’re essentially doing the same thing with student loans. Is it any wonder that we’re experiencing a crisis? CSP is right. We need to stop digging this hole.

        One possible answer to this is lending standards. Look at the track record of the academic department to see how their students repay. Look at the student’s existing debt load. Look at the caliber of the student (test scores initially, then within-department class rank). The US Department of Education could easily obtain all of this data and come up with lending guidelines that would significantly reduce the risk of over-lending without being overly stingy.

        But the Democrats won’t do that. Part of it is their wish to continue feeding the educational industrial complex (EIC) with maximum dollars, and part of it is their long-standing opposition to lending standards. After all, “lending standards” = “some loans denied” = “racism”. Right? Never mind that under today’s scheme, minority students default at higher rates than white students and are more likely to never recover financially.

        Are we really doing people a favor when we lend them more money than they can repay?

        1. Noone from Nowheresville

          Somehow the educational system was a lot more affordable back in the day. Seems to me that the funding and outcomes for said system changed rather dramatically. And it’s not Democrats, it’s policy makers on every possible side of an aisle. We’ll never fix anything if we primarily rely on or point fingers at the either side of the two-faced political coin.

          Couple of questions:
          1. What was the purpose and outcomes of the more affordable system back in the day? Who did it serve and what were their potential goals?
          2. What is the purpose and outcomes of the current system?
          Who does it serve and what are their potential goals?

          3. Are we really doing people any favors by focusing on the symptoms (e.g., loans “affordable” / “deserving” or otherwise) as opposed to identifying the rot in the system and trying to “cure” it? Cure the rot and perhaps loans are minimized or not even required. It used to be more like that once upon a time.

        2. NotTimothyGeithner

          Ah, the GOP position. Wow, if only this had a broader reach than talk radio, cable news, newspapers, then people would see the light.

        3. Dirk77

          GE, you are missing the point of this article. And that is the risk of loans to students should be the same as to anyone else in this society: if they impose undue hardship on the borrower, they should be able to file for bankruptcy to discharge them. Really, the 2005 law should be declared unconstitutional, it’s so contrary to what the USA is supposed to be about.

          1. Grumpy Engineer

            No, I’m not missing the point. I’m just discussing an ancillary point. I agree that bankruptcy protection should be restored to student borrowers (and have held that position for many years), but I also believe that we need some prudent lending standards to reduce the risk of needing bankruptcy protection in the first place.

            After all, having to file for bankruptcy isn’t an easy or fun experience. People find it very difficult, and it often takes them several years to recover financially. [Though it would surely be better than today’s practice of government-paid contractors hounding delinquent student borrowers to the grave.]

            And yes, I agree with your assessment of the 2005 law. It was truly awful. One of the most terrible policies to come out of DC in many years.

            1. Dirk77

              Ok, I understand. I would expect that allowing bankruptcy would make everyone more prudent. I mean it is the least done for all other types of loans.

              1. Grumpy Engineer

                Yes. Student loans should indeed be treated like other loans. Both with bankruptcy protection and with lending standards.

                And for private lenders (who cover about 10% of the student loan market), restoring bankruptcy protection alone would make them more prudent. Fear of increased losses would encourage more caution when lending.

                But for the US Department of Education (which covers about 90% of the student loan market), there is no caution. Current policies require them to issue loans that are clearly doomed to default in many situations. Adding bankruptcy protection would lessen the ultimate damage, but at current default rates there would still be a lot of carnage. They need to be more cautious with the lending.

                1. Alan Michael Collinge

                  I spotted the bankruptcy problem many years ago. The removal of both bankruptcy protections and statutes of limitations created a massively predatory, and hyper-inflationary lending environment. The dirtiest secret that no one knows: Many years of White House Budget data confirm that the government has been making a profit- not a loss- on defaulted loans in the absence of these fundamental consumer protections. While the piece I just linked looks at 2010, I can assure you that this trend continues today, and was true since at least 2004.

                  This is the hidden dynamic that explains much about why the Department of Education is so happen to shovel out ever increasing amounts of money, why the colleges have carte-blanche, nearly, to continue to raise their tuitions, and why bankruptcy and statutes of limitations remain gone from these loans.

                  I have been fighting for 15 years for the return of bankruptcy. In 2008 we got sort of close to getting the protection returned to private loans, but alas, the “Blue Dog Democrats” were lobbied at the last minute by people like Buck McKeon, and that legislation never passed.

                  I really do not see that dynamic changing. Now, the lending system has been allowed to grow to monstrous proportions, and by every reasonable metric, it is a catastrophically failed lending system.

                  It is, frankly, too late to return bankruptcy to the loans. Before the pandemic, 80% of all borrowers were either unable to pay, or they were paying, but their loan balances were increasing. Most of that 80% are the “unable-to-pay”‘ers, btw). At this late date, returning bankruptcy will only ensure the bankrutpcy of 20+ million people. In typical year only about a million people file bankruptcy on all loans, so you can see that this would overwhelm the bankruptcy courts to the point of seizure.

                  We need to recognize this fact, and simply wipe all the loans away at this point. This pandemic offers the perfect opportunity to take it to the bath, drown it in the tub, and come up with a far better, more efficient, and rationally priced way to fund colleges in this country.

    1. UserFriendly

      Yeah, no rush on fixing the debt problem. I’ve only had my life on hold for 4 years because between income based repayment and medicaid it doesn’t make sense for me to work unless I can start at around $50k with benefits and they don’t hire people with holes in their resumes. But since Biden is more likely to personally come find me and literally stab me in the back than fix any of this I guess the point is moot.

      1. Alan Michael Collinge

        Be glad your time in is only 4 years. Many people have spent their entire adult lives strangled by this predatory, unconstitutional debt. I hope you will spread the word about this petition. It is truly time for a jubilee.

  4. Bob Hertz

    Great article by Mr. Olenick, thanks. His contributions are always valuable.

    The average student loan debt is close to $30,000. (per Mark Kantrowicz). This is not much more than a new car debt. Graduates with no more than this level of debt can still buy homes, start a family, etc. I despise much of the student loan program, as does Mr. Olenick, but I would go easier on the rhetoric.

    About 83% of all student loans are federal in nature. Most of these borrowers can access some form of income-based repayment. Close to 10 million borrowers are on such programs already. If their loan payment is 15% of above-poverty level income, that is not enough to declare bankruptcy.

    (It is true that they will be paying on these loans for far too many years, and then maybe still owe the IRS…..but that is not a problem for bankruptcy courts.

    The poor graduates with private loans are the ones who would benefit from easier bankruptcy laws. They should be able to treat student loans just like charge cards or medical bills.

    The government will have to compensate the private lenders in many cases. I have no problem with this; it is the consequence of our cowardly endorsement of student loans instead of increasing Pell Grants. Subsidized student loans is off-budget, so Democrats could claim they were helping the young and not raising taxes.

    Small point, but I think that Elizabeth Warren does endorse more liberal treatment of student loans in bankruptcy. She just went further because she wanted to harvest more votes.

    1. run75441

      Hi Bob:

      The average U.S. household with student debt owes $47,671, according to NerdWallet’s 2018 household debt study.

      Students who pursue professional degree programs can expect to take on much more. Here’s how their average student loan debt stacks up with the most recent available data for each:

      Average debt for medical school graduates: $201,490.

      Average debt for dental school graduates: $292,169.

      Average debt for pharmacy school graduates: $179,514.

      Average debt for veterinary school debt graduates: $149,877.

      Average debt for graduate students: $82,800.

      Sources: The Institute for College Access and Success, Association of American Medical Colleges, American Dental Education Association, American Association of Colleges of Pharmacy, American Veterinary Medical Association, National Center for Education Statistics.


      I think Alan Collinge of Student Loan Justice would disagree with you the same as I do.

      Similar issues exist with the Federal Loan programs and those are administered by commercial companies such as Sallie Mae, Navient, mohela, etc. There are so many ways to make it difficult such as forcing the payment of penalties and interest from forbearance before principal is even touched. 40% of those who have student loans will be going into retirement and may have their retirement garnished. What the hell, just shift the cost to the public sector , heh?

      The IBR, which one University of Michigan lobbyist was promoting in my face after my asking Stabenow my question, is a failure as is Repaye both of which take 20+ years to complete. If you take forbearance at any time, you have the interest to pay. There is nothing easy about this and it is purposely made difficult, In many cases, the penalties and the interest are more than the original loan. Students with loans are a cash cow to be milked even into retirement.

      My Masters out of Loyola University Chicago was an ~$5,000. Today it is ~$90.000. DePaul in Chicago is almost double.

      1. Bob Hertz

        Here are the numbers that I got from SavingforCollege.com.

        (The numbers I get from Zach Friedman are about the same.)

        Note that the term average debt at graduation refers to the average among just the students who graduated with debt. The mean debt at graduation for Bachelor’s degree recipients, which is the average among all students who graduated with a Bachelor’s degree (including those who graduated with no debt) is $20,600. This is the same as the product of the average debt figure with the percentage who graduated with debt. For example, $29,900 x 69% = $20,600.

        Average debt at graduation for Bachelor’s degree recipients varies depending on the type of college. The average debt at graduation for Bachelor’s degree recipients was $27,700 at public colleges (68% borrowing), $30,800 at private non-profit colleges (66% borrowing) and $41,000 at private for-profit colleges (85% borrowing).

        I think very highly of Alan Collinge, so I do not mind being corrected if appropriate.

        1. Yves Smith Post author

          You data therefore misses students who didn’t graduate. A significant prorportion of students who borrow don’t complete their degree. A long enough period of interruption of studies also triggers repayment, which students who’ve suspended study due to illness or a personal/family crisis often can’t handle:

          Most days, 25-year-old Chavonne can push her student loan debt to the back of her mind.

          Between short-term office jobs in the Washington, D.C., area, she drives for Uber. But once in awhile, a debt collector will get hold of her cellphone number — the one she keeps changing to avoid them — and it all comes back fresh. “I’ll be like, ‘Oh no!’ ” she says. “It’s a sad reminder that I owe somebody money!”

          In April, she got another reminder when the government seized her tax refund.

          All this for a degree she never finished.

          Back in high school, she recalls, her teachers and friends pushed her to go to college. And so, without too much thought, Chavonne enrolled at the University of Mississippi and borrowed about $20,000 to pay for it.

          Far away from home and in a challenging environment, she struggled — and after three semesters, she’d had enough. Her college days are five years behind her, but the debt she took on is not.

          Today, rent, car payments, gas and food are higher up on her list of priorities. And so she’s in default, not paying on her loans.

          Get shareable insights, innovative ideas and the latest education news, sent weekly.

          We’re not using Chavonne’s last name — or those of any of the borrowers we talked to — so they can talk candidly about their personal finances.

          The one thing that could help Chavonne earn more money, of course, is earning a degree. But because she’s in default, she doesn’t have access to federal student aid that could help her go back and finish. It’s a vicious cycle for Chavonne and millions of other students who leave college with debt and without a degree.

          From mid-2014 to mid-2016, 3.9 million undergraduates with federal student loan debt dropped out, according to an analysis of federal data by The Hechinger Report, a nonprofit news organization.

          The default rate among borrowers who didn’t complete their degree is three times as high as the rate for borrowers who did earn a diploma. When these students stop taking classes, they don’t get the wage bump that graduates get that could help them pay back their loans….

          Students at for-profit colleges are in a particularly tough spot. More than half of students who drop out of a for-profit college default on their loans within 12 years, according to one analysis from The Institute for College Access and Success.


          1. Glen

            Thank you for posting this. Most of the young people I know with student debt DO NOT have degrees.

            I am close to retiring, and blame only myself for not paying attention to what was happening with higher education in our country. When I was in college, it was very, very inexpensive, and yet, the education I got was world class, and the good jobs available made it a good choice.

            So now I am paying attention, and what I see is distressing. The education system has morphed into one more industry run by Wall St and the PMC. Suck the maximum amount of money out of the customer, and provide the least possible education.

            Not only that, our mega corporations are working very hard to make the jobs available after you graduate just more crap. The pay is too low, the benefits suck. I have met young MDs who live in RVs because they cannot afford to pay the debt and live in a home after they graduate.

            Way back when, we as a country understood the very, very, real benefits of a free and very good education. This is how you get a country that has a Silicon Valley. But more importantly, you understood that the jobs available after you graduated made it worth the effort. I am heartened to see that we may begin to deal with student debt, but we must also USE the EXISTING trust busting laws such as the Sherman Act to break up the mega corporations that stifle job creation and job competition.

    2. Alan Collinge

      To say that the forgiveness/repayment programs already in place are suitable substitutes for bankruptcy is wrong on many levels. First, The programs are being administered with the cruelest of bad faith, where 99% of the people trying for them are being disqualified for one reason or another. The Department of Education never had any desire or intentions of cancelling any loans through these programs, and the data supporting that is now incontrovertible.

      Second: The Founders called for bankruptcy laws ahead of the power to raise an army and declare war in the Constitution for very good reasons. This student loan exception proves their wisdom in spades. Removing bankruptcy protections (as well as statutes of limitations) has created the worst, most predatory and hyperinflationary lending scam this country has ever seen. Bankruptcy is required to ensure at least minimal good faith across the lending system. It also is a critical feedback loop for keeping prices rational.

      However, the bigger picture, here, is that it is now frankly too late for bankruptcy.

      Before the pandemic, 80% of ALL borrowers were either unable to repay their loans, or they were paying, but their balances were going UP. Those the are the words of Wayne Johnson, who recently resigned as HEAD of the federal lending program! Also, the class of 2004 has a default rate of 40%, and they were borrowing less than a third of what is being borrowed today. So it is not controversial to say that MOST student loan borrowers were either in default, or were going to default on their loans. Again…this is BEFORE the pandemic. Interestingly, MOST student loan borrowers never even graduated.

      The facts above are rock solid. This is now a catastrophically failed lending system. Returning bankruptcy at this late date will only ensure the bankruptcies of twenty million or more of our citizens for the “crime” of not being able to afford college, and trusting their universities in signing for these predatory notes.

      We are a better country than that. The lending system is vanishing into a mist of illegitimacy. The best solution at this point is the erasure of the all the loans that can be cancelled by executive order, and the return of bankruptcy protections to the loans that cannot be cancelled by the President. This pandemic provides a good pause to put a far more efficient, rationally priced, and fair higher education model in place.

      The lending system is going away by popular un-consent regardless of what the people in Washington do. They would do well to do the right thing, and wipe this catastrophy off the books and start over.

  5. cocomaan

    Joe Biden used his spot on the Senate Judiciary Committee to make sure that the Bankruptcy Abuse Prevention and Consumer Protection Act got out of committee.


    So the problem that Joe Biden created is now the problem that Joe Biden is going to solve?

    Let me know how things look in 4 years when we’re almost the exact same situation as we are today.

    The Bankruptcy Act was put together to deal with a non-problem, which was student loan deadbeats. I don’t care to do the research again, but when I looked up the strategic defaulters who were being deadbeats on student loans as a finance strategy, the percentage of borrowers was in the low single digits. Mostly doctors, too.

    1. Dirk77

      Out best bet really is another Trump executive order. I’m ready to sign a petition before he checks out. And let’s see Biden try to negate that.

  6. Fraibert

    In my view, bankruptcy is likely the most politically workable solution. Individuals normally file under Chapter 7 (full discharge) or Chapter 13 (5 year payment plan), with Chapter 13 being much more common. The Chapter 13 payment plan reduces the debt to what is deemed a manageable level for a 5 year repayment, but also requires lifestyle adjustments and the sale of assets. This seems to address reasonably stated “moral hazard” arguments but also gets the borrower out of obscene debt. In any case, given what is allowed to be discharged in bankruptcy (e.g., insane amounts of credit card debt), I don’t see why student loans couldn’t be added to the pile.

    It might be argued that the individual keeps the degree even after discharge, but I think that’s still fair. The student did the required work for the degree–what we are disputing here is solely payment of a loan related to funding the degree, which is almost never issued by the school in the first place. (Schools sometimes make loans, I know, but I doubt it is ever a significant portion of the “financial aid” package.)

    I would add one extra rule (though this would have to be by statute)–lenders may collect a percentage of discharged student loans from the institution which received the loan funds. Schools need to feel the consequences of excess debt–after all, students are going to help their economic prospects, not hurt them.

    However, I disagree with Mr. Olenick as to the administrative approach. “It is emphatically the province and duty of the judicial department to say what the law is.” (_Marbury v. Madison_).

    Once a court authoritatively interprets a statute, that interpretation is binding wherever the court’s jurisdiction applies. Trial courts only interpret statutes for the case in front of them, but do not bind other trial courts in the same jurisdiction. However, appellate courts’ interpretations are binding in their geographical jurisdiction. Hence, the _Brunner_ interpretationof “undue hardship” applies in the regions defined by the Second, Fifth, and Sixth Circuits (and others–but I don’t know off hand which others have adopted the test, only that several have). Only action by Congress or a judicial reversal (either a Circuit overruling itself _en banc_ or the Supreme Court) can formally undo the adoption of the “undue hardship” test being criticized.

    However, legally speaking, there is some play in how the test is applied. Some courts recently have been readjusting the application of the test as a whole to make it more realistic (e.g., for one summary of such a recent case, see https://www.financialservicesperspectives.com/2020/01/bankruptcy-court-rejects-brunner-myth-and-discharges-220k-in-student-loan-debt/).

    The above summary illustrates a quirky legal issue. From a purely formal legal perspective, only the “holding” of an appellate case is binding on lower courts. Strictly speaking, the holding is the minimum required to reach the result in the case, as well as the actual result. The rest of the reasoning is technically “dicta”–it does not bind lower courts, but normally is used as guidance by trial judges to avoid reversal on appeal.

    This means that unless the facts of a second case are identical to a precedent, a judge may be able to distinguish the second case on the facts and reach a different result. It also means that a judge does not have to follow any judicial glosses on an appellate precedent that are not actually holding in a relevant precedent–though it may increase changes of reversal.

    1. Fraibert

      To clarify, I don’t know that bankruptcy is the best _actual_ way of addressing the problem, but it’s the one I think that can actually be achieved.

      1. Dirk77

        I agree. I also think executive order is the best way to achieve it. If it’s incorrect legally, then it forces Congress to deal with the issue. Also your suggestion about getting colleges to refund lenders to a degree is an interesting one. But only if such a process exists in current bankruptcy law. The goal here is to make this bankruptcy the same as any other personal ones.

  7. GlassHammer

    Is artifical scarcity (the cost and debt) required for college education to create upward mobility?

    Does the relationship between income and credentialing scale?

    I can’t answer these questions as clearly as I once could.

  8. William Hunter Duncan

    A majority of students at my University were there to drink, party, hook-up and otherwise hang out until it was time to make money. It is just what we were told how it is. You go to college, you start a career, you buy a house, get married, have kids, retire. The American dream. College is just a way station on that journey. Grades don’t matter. Graduating does.

    At the same time, those who said this is how it is, were hollowing out the productive capacity of this nation, cutting the working class off at the knees.

    I hope in time we will look at this pandemic as a blessing. Insofar as it may be an economic reset, wiping out a lot of the unnecessary chafe, making the economy more about taking care of people and the earth, less about corporations, banks and gate keeping “professions”, more about making what we need.

    I don’t see how the trauma of bankruptcy is an answer either. It seems like we are avoiding the only real solution, which is some kind of broad form jubilee, long overdue.

    1. Chris Herbert

      It could be if it drops the cost of tuition and other bloated expenses. If we ever were to go medicare for all, that would be deflationary too. For the same reasons.

    2. Will

      Couldnt agree more. Less gate keepers, less chaffe. Thnx. As a small time landlord ( I live in the basement, the college girls up stairs pay the rent which pays the mortgage, I can see directly how loan forgiveness would be great. Makes my little college town stronger. Gives these kids a chance at buying a house in a hugely inflated market here. Great for parents who will spend not needing to worry about helping with college. Used to be at utah state, the pell grants paid most of the tuition for in staters.. Great for those that go when they are a little older. Its hugely inflated now. In 15 years it has become a giant debt trap. These kids get eaten alive

    3. John Rose

      And the proof of that hollowing out is the universal comment by those who teach college that they get strong pushback if they are not lenient with grading, even more than lenient.

  9. PeasantParty

    Fixing Bankruptcy is wonderful idea. However, as much as we have tried to push those entrenched politicians to the left, they have continued to build a thicker, more resistant wall to penetrate. Biden campaigned on returning to the old normalcy. Rumors about Cabinet choices show more of the same old same old. Lots of people, here and elsewhere, are talking about 2024 candidates from the left, or a third party. Recently I found a book that proposes another solution: reform through constitutional amendment. The idea is, if the game is rigged, we need to change the rules. Book reveals some astounding stuff. (SCOTUS actually ruled that there is no constitutional right to good government. Obama’s DOJ argued that there is no constitutional right not to be framed.) Reforms address gerrymandering, election integrity, term limits, universal single-payer health care, an economic bill of rights, and for violating these laws, mandatory prison terms “not subject to pardon, parole, suspension, or other reduction of sentence”. Sources and citations up the ying-yang for everything. This book pulls no punches, and gives clear facts, and history. It is a MUST read! I will also add it in the Links section. https://www.amazon.com/True-Reform-Jess-Money/dp/0991265092/ref=sr_1_1?dchild=1&keywords=Jess+Money+Restoration+Amendments&qid=1606144268&s=books&sr=1-1

  10. John Wright

    Re: “If the as-is student loan system existed forty years ago, a young Steve Jobs – who’d focused on calligraphy and ancient art classes – would be working as a bartender rather than attending the Home Brew Computer club on his way to founding Apple.”

    This is a bad example as Steve Jobs dropped out of Reed College after a single semester rather than have his auto mechanic father fund his education.

    Both Apple founders Jobs and Wozniak were college dropouts with Wozniak later getting a UC Berkeley degree AFTER he left Apple.


    1. Starry Gordon

      In general, what the student debtor is buying with all that money has become highly questionable, especially when one considers the general or social good besides the advantages of credentialing and class positioning to the individual.

      Questionable, that is, in an abstract sense. As someone says above, the Education Industry is a bastion of established Democratic Party power and is not going to be questioned, much less changed, because ‘nothing fundamental will change.’ Eventually, the system of which it is a part will fall of its own weight, but it may take a long time. Meanwhile imagining reform seems, well, pretty academic.

      1. John Wright

        It would be interesting to see if a study has been done on the drop out percentages/year for economics majors vs other majors at high cost tuition schools.

        If an economics student is learning about utility maximization and return on investment, one might expect to observe economics students leaving expensive schools for higher value/lower cost schools as these students learn more about economics.

  11. antidlc

    “professor pay that’s way beyond anything they could earn in the private market;”

    NOT. TRUE.

    I can personally attest to a family member who retired from a corporate job with a tech company and went to teach at a university. Had to take a rather steep pay cut to go teach.

    He wasn’t the only one.

    The statement may be true for some professors, but not true for all.

    1. Michael Olenick

      Definitely true.

      Many tech fields, yes. And probably finance and accounting.

      Comparative literature, gender studies, anthropology, sociology definitely not.

  12. Felix_47

    I don’t remember much from my high powered Ivy League education. If you are curious and work at it OJT is all you need for almost any job. At least in that era tuition was payable with a summer job and a job during school if you lived cheap. A few years ago out of interest I took a language class at a local Junior College. My classmates were largely female. I was interested to hear what they were doing in college and how they were financing it. They were mostly all on loans. The loans pay for housing, car payment, insurance, child care, most had Medi Cal, and tuition which was the small part. It turns out that a lot of women have children and their men are unable or incapable of paying any child support. Going to college provides the income and child care these women need to survive. Few of them seemed to care about paying any of it back. They are doing what they have to do to survive and feed and care for their kids. How about a national child support system paid by the government.

  13. Bob Hertz

    Thanks Felix, this is absolutely true.

    Ex-convicts also use the student loan system to finance their lives.
    In general, you can get $9500 per semester in loans with zero questions asked, so that it almost $20,000 a year. If you stay with an inexpensive community college, you can use most of the $20,000 to live on.

    I am not blaming the borrowers. Taking on student debt is a lot less onerous than payday loans.

  14. ian

    A couple of questions:

    Ok, suppose you could waive a magic wand and forgive student debt. How would it change lending going forward?

    What about people who paid off their debt? Do they just get told “tough luck, you don’t get any rebate”?

    1. Dirk77

      If I infer correctly from Olenick‘s article, people who have already paid off their student debt, such as myself, are out of luck. But they don’t get saddled with the problems that bankruptcy can cause, which is why bankruptcy is preferred over just loan forgiveness. You want everyone to feel some pain. And it would change lending going forward because the lender would be much more cautious in giving out loans, students would be much less likely to receive them, and colleges would then be forced to lower tuition.

  15. Bob Hertz

    Good questions.

    1. We should stop all federal loans for liberal arts programs. And of course, we should stop guarantees on private loans.

    2. We should expand Pell Grants to at least $10,000 a year, and make them available to the entire middle class.

    This will pay the tuition at most vocational schools, where the graduates regularly get decent-paying jobs.

    3. We should pay something to ex-students who did pay off their loans. Looking at today’s figures, I wonder if there are very many of them around.

    Steps 2 and 3 will require new taxes. It’s about time.

    1. Lambert Strether

      > 1. We should stop all federal loans for liberal arts programs.

      Nonsense. Stephen King, from the much-maligned English Department, was the University of Maine’s most generous donor for many years. Not only that, if you think experts in narrative and rhetoric — and, dare I say it, critical thinking — have no social function, think again.

      1. Bob Hertz

        I certainly do not say there should be no liberal arts. I say there should be no loans for such majors.

        I graduated in history in 1969 and loved it. But tuition at the University of Minnesota was $198 a quarter and I lived at home. No Loansies!

        Let future students use their Pell Grants however they want at free public universities. If wealthy students want to major in liberal arts at private colleges, fine.

        Today’s liberal arts faculty are close to evil in the way that they recruit graduate students for non-existent positions (since full professors never have to retire, it seems). Barring loans is just consumer protection.

    2. Yves Smith Post author

      Humanities grads have unemployment rates comparable to college grads overall:

      According to Business Insider, humanities majors face an unemployment rate of 9%, which is on par with the rate for non-humanities majors like math (9.1% unemployment), and all majors overall (7.9% unemployment).


      Some humanities majors are very unlikely to lead to employment…like creative writing or an art history major at any place beyond the handful of schools that have the prestige to provide entre to jobs at art galleries, auction houses, and museums. But anthropology majors are very popular with big corps. If you use your humanities major to hone writing skills, there are a lot of places that can use them in marketing/advertising positions.

      And if you think you are going to get a law degree, it really doesn’t matter what you major in as long as your major at that school isn’t a “gut” and you get very good grades and get a good LSAT score. English and history at Harvard are guts, which art history is a tough field of concentration (as Harvard calls it). English is a tough major at Yale.

  16. Noone from Nowheresville

    @Michael Olenick question. Why is the debtor wage slave situation of a college student with loans more egregious than say the debtor wage slave situation of someone living in one of the US sacrifice zones as described by Hedges and Sacco?

    Part of arguments I’ve heard have included can’t start families, can’t purchase homes, can’t whatever. Don’t more people than former college students want these things? And aren’t these things also becoming out of reach for the many, perhaps even most as we move forward through the Covid tragedy?

    Beyond the loan financing bits and how ridiculous college expenses have become. Plus the law changes. I’ll grant you all of that for the moment.

    But why champion one situation and not the other? What are the outcomes you seek by wiping out the debt? How does this serve the public good?

    ie. Let’s say I’m at the bottom of society’s ladder. The lowest of the low living in one of Hedges sacrifice zones. Why should erasing debt peonage for a potential PMC or cog in one of The Machine’s wheels matter to me when they are fully versed in The Machine? What does freeing them do for society that deserves special political capital?

  17. run75441


    Thank you for answering Bob. I was hoping Alan would come as we talk back and forth. he has been pretty busy. I am much entangled in this quagmire.

    Alan’s petition now has ~840,000 signatures on it. They are working on a documentary using part of the town hall. There is much activity. I do not believe Biden has changed his opinion on student loan debt and the entrapment of students in which there is no escape.



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