Student Loans Now Greater Than Credit Card Debt
Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of FinAid.org. Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion.
The Federal Reserve does not separately report student loan debt–and why not? Instead, the Federal Reserve rolls student loan debt into nonrevolving debt along with auto loans and other installment loans. Thus, Kantrowitz has to rely on other sources. For public student loan debt, Kantrowitz does his calculations off an analysis of the federal budget, and for private student loan, Kantrowitz relies on a model he has developed. He estimates there is $605.6 billion outstanding in federal student loans and $167.8 billion outstanding in private student loans.
Credit card debt actually has been declining, an unprecedented fact historically, and is off almost 14% from its 2008 high of $958 billion. Other forms of credit have been tight and hard to obtain. In contrast, Kantrowitz’s numbers suggest student loan debt has been increasing.
All of these facts suggest more questions than answers for me. Should we be concerned as a policy matter about rising levels of student debt, or is this just an indication of a populace investing in human capital during a financial downturn? Are growing levels of student loan debt sustainable? If not, what are the implications for universities (and, gasp, law schools)? Did the 2005 changes to the bankruptcy laws that made most private student loan debt nondischargeable contribute to growing student debt (in that private lenders were more willing to lend with the belief that student borrowers would not discharge their debt)? Among the facts to consider is another recent post of mine about a report on high student loan default rates.
Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan
On March 23, 2010, the United States Supreme Court issued its unanimous opinion affirming the Ninth Circuit’s finding for the debtor in the case of United Student Aid Funds, Inc. v. Espinosa, 559 U.S. ___ (2010).
In that case Espinosa, a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).
The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”
The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
Student Loans and Bankruptcy
Student loans are becoming more and more troublesome for college graduates as the struggling economy as left fewer jobs for those just graduating from college and graduate school. Additionally, most students graduating college have student loans because of the rising college tuition rates and other costs associated with college such as fees, books, computers, and room and board. However, unlike other unmanageable debt, both government and private student loans are not dischargeable in bankruptcy unless you can prove substantial hardship under the very difficult Brunner test.
The Brunner test requires you to prove a substantial hardship and you need to file a law suit against the lender who made your student loan. In that suit, you must prove:
- If required to repay the loans, you could not maintain a minimal standard of living for yourself and your dependents.
- Circumstances show that this state of affairs is likely to continue for a very long time.
- You have made good faith efforts to repay the loan.
This is a very difficult standard. You may have a better chance to manage your student loans in a chapter 13 bankruptcy. A chapter 13 bankruptcy gives you the opportunity to include your student loans within a Chapter 13 payment plan. Another advantage to a chapter 13 bankruptcy is that you may be allowed to concentrate on paying the student loans by paying relatively little on your other debt.
If you have government student loans, another repayment option available to you is called the Income Based Repayment plan. This is a relatively new program offered by the Department of Education and is only available for government student loans. Information about this repayment plan is available at http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp. In general your payment for your student loan under an income based repayment plan is based on your actual income and has some other advantages if you work for a non-profit or a government agency.
If you have private student loans there is little that can be done outside a chapter 13 bankruptcy. However, there is a bright glimmer of hope. Last month, the House Judiciary Subcommittee on Commercial and Administrative Law took the first steps in reversing language in the 2005 bankruptcy law related to private student loan debt by approving the Private Student Loan Bankruptcy Fairness Act. This legislation will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. Under the bill, privately issued student loans will once again be dischargeable in bankruptcy.
