Student loan debt has become a popular topic of discussion on the Democratic campaign trail.
Candidates are competing to position themselves as having the most pragmatic solution to the student loan crisis, which now holds more than one in three young adults in its grasp as well as 3 million Americans beyond the age of 60 still laboring to pay off college loans they took out decades ago.
How big is the student loan problem?
More than 1 million people default on their student loans every year. By 2023, it’s expected that the proportion of borrowers falling behind with repayments will top over 40%.
What is troubling is that very little discussion has been devoted to what contributed to this colossal disaster and how it came about.
What led to the sum of outstanding educational loans borrowed from private financial entities to shoot up from $56bn in 2005 to $150bn in just 10 years?
Until 2005, private student loans were eligible for bankruptcy protections, just like other forms of private credit. But in that year, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, a law that made it nearly impossible for former students burdened with student loan debt to rebuild their lives by abdicating the debts and starting over.
Joe Biden’s vote aided the student loan problem
Earlier this year, Vice President Joe Biden tried to justify his backing of the 2005 act.
His campaign spokesman told Politico that “knowing that the bill was likely to make it through the Republican-led Congress, he worked to moderate the bankruptcy bill and protect middle-class families. He believed that if you have income and consumer debts you can pay, you should agree to a repayment plan that you can afford.”
However, if you peel back the layers of the onion, you will find a more complicated story that puts Biden in a less flattering posture.
Joe Biden voted for the provision in 2005. Now, it seems, he wants to reverse his decision.
Despite his latest statements, Biden was an enthusiastic supporter of the 2005 bill. He knew that by tightening up the bankruptcy code, which would benefit lenders, it would make it harder for distressed families to file for bankruptcy protection.
As a US Senator from the state of Delaware, Biden has had a friendly relationship with the financial services industry. Delaware host many of the largest financial corporations in the US.
So friendly were his links with the Delaware-incorporated MBNA, a major credit card company since taken over by Bank of America, that back in 1999, he felt it necessary to declare: “I’m not the senator from MBNA.”
Campaign finance watchdogs acknowledge Biden’s close relationship with financial services companies. In the 2003-2008 senatorial election cycle, Biden received more than $500,000 in help from credit card companies, financial services, and banks, the Open Secrets database shows.
In the lead up to the 2005 bankruptcy act, Biden tried to justify his support for the legislation by pointing to abuse of the bankruptcy system by people who should at least pay back some of their debts. By requiring better-off borrowers to repay what they could afford, private lenders would be able to reduce their interest rates to the benefit of all consumers.
“Biden was one of the most powerful people who could have said no, who could have changed this. Instead, he used his leadership role to limit the ability of other Democrats who had concerns and who wanted the bill softened,” said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill specializing in bankruptcy.
At the time, Ted Kennedy and other leading Democrats in the Senate did no.
“This legislation breaks the bond that unites America, it sacrifices Americans to the rampant greed of the credit card industry,” he said. Kennedy warned that even before the new provision kicked in young people were dropping out of college “because of the costs of student loans – they can’t pay them.”
Joe Biden’s latest stance
In Joe’s Vision, Biden points to an attempt in 2015 by the Obama administration, in which he was the vice-president, to allow at least some private student loans to be discharged in bankruptcy. He promises that a Biden presidency would enact that legislation – effectively reversing his earlier 2005 vote.
But other than that, Biden has remained largely silent on the subject and has not offered a retraction of his earlier voting record.
Elizabeth Warren warns how the 2005 Act would impact women
When an earlier version of the bill was introduced to Congress, in 2002, Elizabeth Warren, a respected law professor at Harvard law school, wrote an entire paper criticizing Biden’s forceful support of it. Warren said the changes would be to the detriment of one group above all others: women.
“Senator Biden supports legislation that will fall hardest on women,” she wrote. “Why? The answer will have to come from him … He is a zealous advocate on behalf of one of his biggest contributors – the financial services industry.”
Warren goes on to note in her essay that Biden’s “energetic work on behalf of the credit card companies has earned him the affection of the banking industry and protected him from any well-funded challengers for his Senate seat.”
Warren’s suspicion that Biden’s enthusiasm for toughening bankruptcy laws came from his close ties to the credit card companies persists to this day. Professor Jacoby said: “I don’t know how else to explain his stance on bankruptcy policy for financially distressed families other than his relationship with the consumer credit industry. There really isn’t another plausible explanation.”
Warren – no longer a Harvard law school professor, and who is also running for president – made a passing reference to his record on bankruptcy on the day Biden launched his presidential bid in April. “At a time when the biggest financial institutions in this country were trying to put the squeeze on millions of hard-working families, Joe Biden was on the side of the credit card companies,” she said.
Did the 2005 Act benefit borrowers?
“The evidence is not there – making bankruptcy laws more protective of lenders did not lead to more access and cheaper credit,” Jacoby said.
Instead of helping to alleviate the pressure of student loan debt, the 2005 act caused an explosion in private student loans. Lenders, knowing that it has become much more difficult for debts to be discharged, gave out loans to new borrowers like penny candy.
Higher interest rates
Most outstanding student loans are owed to the federal government. Discharging federal student loans in bankruptcy is equally as difficult. However, the pain of those restrictions is heavily medicated by schemes that help borrowers who fall into trouble, including loan forgiveness.
Private student loans, by contrast, offer no similar relief.
The only hope for a borrower falling behind in repayments is if they can prove “undue hardship” – a standard that is almost impossible to meet and often involves high litigation costs.
“Private student loans tend to have higher interest rates than federal loans, are far less flexible when borrowers are struggling, and are not eligible for programs like income-driven repayment or loan forgiveness,” said Adam Minsky, a bankruptcy attorney who takes on student loans cases.