In the late 1990s, the Clinton Administration spearheaded an effort to make it dramatically more difficult for Americans with student loans to obtain loan forgiveness in bankruptcy. With the recent jobs report indicating a tepid job market, employment prospects for recent college graduates with high levels of student debt would seem to be grim. It is perhaps time to revisit this mistaken Clinton-era policy.
To provide some context, it is worth noting that total there is more than $1 trillion dollars in student debt. There is some speculation that the student debt burden is so onerous that the housing market for first time homebuyers may not fully recover for an extended period of time. As a result of more recent changes to federal law, “the entire private student loan market is estimated to be $92.6 billion or 7.8 percent of the $1.18 trillion student loan market.”
Under bankruptcy law as it exists today, a borrower may “discharge” student loans if repayment would constitute “an undue hardship.” Prior to the legal change in 1998, student borrowers could also “discharge” student loans if the borrower had been in repayment for seven years, notwithstanding the undue hardship test. In 1998, without hearings and debate, Section 971 of the Higher Education Amendments of 1998, removed the seven-year legal test. When signing the bill 1998 bill into law, President Clinton issued a signing statement that asserted, “this bill represents a positive, bipartisan advancement for students, teachers, and the future of higher education.” In hindsight, the legislation appears to be less “positive” for students.In recent years, there have been several Congressional proposals to make it easier to wipe out student debt through bankruptcy. Because most student loans today are federally backed in some fashion, many of these proposals could increase the federal deficit, which is perhaps one reason the proposals have not been enacted.
Strikingly, there are no proposals to reinstate the seven-year standard eliminated in 1998. If Congress were to resurrect the seven-year standard, there would be student debt relief in bankruptcy while not stimulating abuse or “moral hazard.” The seven-year period is simply too long to encourage gaming of the bankruptcy system. As a result, any potential revenue loss to the federal treasury would be mitigated. It is time to reverse this Clinton-era decision. Maintaining the status quo does not serve the interests of American students, recent graduates or the American economy as a whole.
McMickle is a former counsel to the Senate Judiciary Committee for bankruptcy issues.
This blog article was originally posted at: http://thehill.com/blogs/congress-blog/economy-budget/283625-how-the-clinton-administration-made-it-harder-on-student