CHAPTER 6, D. There's Trouble in River City, and It's Not a Pool Hall

• Jurisdiction: United States

D. There's Trouble in River City, and It's Not a Pool Hall

2019 Hon. Eugene R. Wedoff Seventh Circuit

Consumer Bankruptcy Conference

October 2019

Ronald R. Peterson

Jenner & Block

Chicago

Iwrite this essay from two perspectives. First, I have served as a bankruptcy trustee for more than 31 years and have seen the economy at tree-top level. Debtors with student debt have become a major portion of my caseload. Second, I serve as the chairman of the Board of Trustees of Ripon College and as a Regent of Loyola University. Higher education is in crisis.

How Big Is the Problem?

Student loan debt now stands at almost $1.6 trillion. It has more than tripled since 2006. The amount of student loan debt is now greater than car loans, credit card loans and small loans. Only home mortgage debt tries to remain at a higher level than student loans. Of all these consumer loan types, student loans have the highest default rate. The default rate measured at the third year of repayment is 11 percent, but if measured for the entire life of the loan, it is approaching 30 percent. Less than 40 percent of student loans are performing as originally contracted.¹

Why should we care? Because student loan debt is having a profound effect on the economy and society.

At $1.6 trillion, student loan debt is a major cause for:

1. lower earnings of college graduates;
2. lower levels of household formation, which in turn affects

a. home ownership; and
b. residential contraction;

3. fewer automobile purchases;
4. higher household financial distress;
5. lower probability of students choosing public service careers;
6. poorer psychological function;
7. delayed marriage;
8. decline in the birth rate;
9. increased losses to the credit card companies; and
10. lower probability of continuing education through graduate or professional school.²

I have analyzed my last eight 11 U.S.C. § 341 meetings, and 22 percent of my debtors had educational loans (compared to 29 percent nationally). The mean debt was $46,000, and in seven of my last eight § 341 meetings, there was at least one debtor who had educational debt of $100,000 or more. The grand champion was a Ph.D. in Music from Northwestern who had racked up $445,000. He is an adjunct professor. The highest in the master's degree competition goes to a sociology student at the University of Illinois at $245,000.

In juxtaposition to this crisis, economists predict that 25 percent of all nonprofit colleges and universities will not exist in 2030. Some will merge, and others will simply go out of business. The casualty rate among for-profit institutions will be much higher.

The Cause

How did we get in a mess like this? Making education loans is essentially idiot-proof lending. There is virtually no risk to the lender and no need for a credit check. The government for its part is concerned about generating reams of paper to make sure the students get their money, not on the prospect that the loan will ever be repaid. Why such a cavalier attitude toward lending? Most educational loans are guaranteed by the full faith and credit of the U.S., and almost all educational loans are not subject to discharge in bankruptcy.

How did Congress contribute? The popular press started it when they panicked the public and Congress by reporting on newly minted doctors and lawyers filing for bankruptcy on the way from their graduation ceremonies — often riding in chartered greyhound buses. Yet, there was no hard data to support these fears. Unfortunately, the perception of reality is more important than objective reality, and Congress excepted student loans from discharge in the educational amendments of 1976. A debtor in bankruptcy could discharge a student loan after five years had passed from final disbursement, assuming there was no suspension-of-payment period.

The original 1978 Bankruptcy Reform Act in 11 U.S.C. § 523(a)(8) continued this policy, making all educational loans dischargeable after five years unless there was an undue hardship during the first five years. The five years were not tolled by a suspension period. The original enactment expanded nondischargeable loans by deleting the requirement that the loan be guaranteed by the U.S. government. Non-guaranteed loans from nonprofit institutions were now protected from discharge. There was a subtle change. Unlike the Education Act, which provided that a loan could be discharged for hardship to the debtor or his or her dependents, the new law is conjunctive - the debtor and the debtor's dependents. Finally, and most importantly, an educational loan was part of the...