Student loan law right now is kind of a mess,
to be perfectly honest. There is a lot of student loan debt out there. Total student loan debt right now is around
$1.5 trillion. 44 million borrowers have student loans, and
upwards of 70% of students graduating from college are graduating in debt. The loan program makes loans to all undergraduates,
regardless of the program that they study, regardless of their income background, and
regardless of whether or not they’re likely to complete their program, and at two-year
colleges, at community colleges, and at four-year colleges. So, it’s not surprising then that if you don’t
have any criteria on the front end to screen out people who are unlikely to pay, then you
end up with default rates that are somewhere around 20%, 25%. A four-year graduate would typically leave
college with around $30,000 in debt, depending on their circumstances. The federal government doesn’t charge you
late fees if you miss a payment on your student loan. They will continue to charge you interest
on the loan, and if you go long enough without making payments, several months, it can affect
your credit score. So, if you start falling behind on your payments,
you enter a type of status called delinquency. For federal student loans, borrowers can miss
up to nine payments or essentially be 270 days past due before the loan actually goes
into default status. It triggers something called acceleration
where the full balance of the loan becomes due all at once, and that then gives the federal
lenders more opportunities to pursue borrowers. About one in five are in default, and that
equates to … It’s about 8.3 million people who are in default on federal student loan. A 25% default rate, that sounds like a catastrophic
number. That’s the kind of number you would associate
with, uh, a severe economic recession. So, for borrowers who default on federal student
loans, the consequences can be pretty severe. For federal student loans that go into collections,
uh, federal law allows for massive collections cost and penalties that can be upwards of
25% of the outstanding principal and interest balance, meaning that if you have $40,000
in federal student loans and they go into default, that balance can go up to $50,000
as a result of the default. The federal government has additional collections
powers that private entities don’t have. So, the federal government can garnish your
wages without a court order. They tend to do this as a last resort, but
it’s actually done quite commonly. The federal government collects around $600
million a year through wage garnishing on defaulted federal student loans. It is difficult to discharge student loan
debt in bankruptcy because the bankruptcy code was rewritten to largely bar borrowers
with student loans from discharging those loans. It requires something called an adversary
proceeding, which is essentially like a trial in bankruptcy court, in order to show that
the borrower meets the undue hardship standard. A lot of borrowers are not able to meet that
standard. And the reason why Congress prevents you from
discharging your loans in bankruptcy is that there’s no underwriting on the front end for
the loans. So, the government makes loans to anybody
and everybody, and so if you combined it with, uh, easy discharge ability for bankruptcy
on the back end would be a program that’s rife for abuse. I think that, uh, that the system is unsustainable. We need to make reforms that allow borrowers,
uh … or I should say allow students to go to school without needing to borrow, or at
least not needing to borrow as much. I also think that we need to strengthen programs
for borrowers that are already in repayment so that they can have an easier time of dealing
with their loans without having to wade through a- a messy servicing and debt collection system. I think people need to be more careful in
the amount that they borrow, in the amount that they’re going to pay off. I think there are concerns about some of the
potential costs of these programs, particularly if the cost of education continues to go up
and borrowing is allowed to keep pace with the cost of education, uh, and more and more
borrowers are able to get their loans forgiven. At the same time, without some sort of reforms
on the other side, on the cost side, just eliminating these safety net programs might
cause a lot of lower-income borrowers to not be able to reasonably access higher education
at all. Is it worth it to go into debt to- to pay
for the education? I wouldn’t necessarily be turned off by having
to go $30,000 in debt. If that’s the difference between getting an
undergraduate degree and not getting an undergraduate degree, um, then generally $30,000 is definitely
worth it.