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Drowning in Debt

This article was published in the Spring 2015 issue of The Baylor Line and written by Robert C. Cloud and Richard Fossey.

Student-loan default rates have gone up dramatically in recent years. Can the system be fixed to ensure program solvency and protect borrowers? 

The following story is an excerpt from Facing the Student-Debt Crisis: Restoring the Integrity of the Federal Student Loan Program.

ABOUT TWENTY-ONE MILLION Americans are enrolled in colleges, universities, and other postsecondary educational institutions, and a majority of these people are forced to take out student loans to pay for their postsecondary schooling. In 2012, 71 percent of graduates from all four-year institutions had student loans averaging $29,400. At public institutions, two-thirds of the graduates had federal loans, and their average debt was $25,500; at private, nonprofit colleges and universities, three-quarters of the graduates had borrowed and had an average debt of $32,300, while 88 percent of the graduates at proprietary (for-profit) institutions had student-loan debt averaging $39,950.

Currently, more than forty million people have outstanding college or university loans, and the total amount of student loan debt has reached $1.3 trillion. About $1 trillion of the total indebtedness represents outstanding loans in the federally funded student-loan program. Another estimated $165 billion is owed to private banks and financial institutions outside the federal student-loan program.

In recent years, it has become increasingly evident that a great many former students are having difficulty repaying their student loans. According to the Office of the Student Loan Ombudsman of the Consumer Financial Protection Bureau (a federal agency), more than fifteen million people have either defaulted on their student loans or are not making payments due to the fact that they obtained an economic hardship deferment or another federally approved forbearance. In fact, only 60 percent of student loan borrowers were making scheduled payments on their loans one year after beginning the loan-repayment period.

We may think of delinquent student-loan debtors as people in their twenties, but not everyone who is behind on a student-loan payment is young. Researchers for the Federal Reserve Bank of New York recently examined the loan status of thirty-seven million student-loan borrowers. Fourteen percent of these borrowers—approximately 5.4 mil-lion people—had at least one past-due student-loan account. Of $85 billion in total past due balances on student loans, only about 25 percent Of those past-due balances was owed by borrowers under the age of thirty; 40 percent was owed by borrowers at least forty years old; almost one sixth (16.9 percent) of the total outstanding debt was owed by borrowers fifty years old or older; borrowers at least sixty years old owed about 5 percent of the total outstanding debt.


Student-loan default rates have gone up relentlessly in strict standard for determining when the “undue hardship” recent years. In 2007, the United States Department of Education (DOE) reported a two-year default rate of just 4.6 percent on loans from the fiscal year 2005 cohort of students. In 2013, the DOE reported a two-year default rate for students who began paying back loans in October 2010 of 10 percent, more than double the rate reported in 2007. According to the DOE’s most recent report, 13.7 percent of student-loan debtors defaulted on their loans within three years after their repayment obligations began. For students who borrowed money to attend for-profit institutions, the rate is 19.1 percent. And, as this article later explains, the DOE’s official student-loan default rate dramatically understates the true number of student-loan debtors who are defaulting on their loans.

Many factors have contributed to the escalating student-loan default rate in recent years. Students are borrowing more money to attend colleges or universities than they did a few years ago, and many are finding it difficult to repay these larger loan obligations. A struggling economy has also contributed to the problem, as young people have struggled to find jobs that pay enough to service their student-loan obligations.

Indeed, a 2013 study by the Center for College Affordability and Productivity reported that nearly half of working college graduates held jobs that did not require a bachelor’s degree and 37 percent held jobs that required no more than a high school diploma. “Student-loan programs and federal assistance programs are based on some sort of implicit assumption that we’re training people for the jobs of the future,” a scholar associated with the Center observed, “[i]n reality, a lot of them are not.”

Some overburdened student-loan debtors have attempted to discharge their student loans in federal bankruptcy courts, but they have faced major obstacles. For one, Congress has passed a series of laws making it increasingly difficult for student-loan debtors to obtain bankruptcy relief. Unless they can show that their student loans constitute an “undue hardship,” student-loan obligations. The federal courts have adopted a strict standard for determining when the “undue hardship” requirement has been met, with most courts following the so-called Brunnertest.

Moreover, federal guarantee agencies – the entities charged with collecting student loans in default – have attempted to persuade federal bankruptcy courts to deny bankruptcy relief altogether to student-loan defaulters who file for bankruptcy. These agencies have argued that defaulters should enroll in income-based repayment plans rather than seek a discharge of their student loans. These plans require debtors to make monthly payments on their student loans based on a percentage of their income for an extended period of time – typically twenty to twenty-five years.

Conclusion and Recommendations

The federal student-loan program was implemented in 1965 for the purpose of “keeping the college door open to all students of ability” regardless of socio-economic background. Consequently, student loans have been easy to obtain and have featured low interest rates, minimum monthly payments, economic hardship deferments, and, more recently, income-based repayment plans. Because the student-loan program lends money to applicants without assessing their risk of default, students who are poor credit risks have received federal loans to pursue postsecondary educational opportunities. The consequences of these altruistic and well-intentioned policies were predictable – heavy student debt and unacceptable high default rates. Clearly, there is now a troubling disconnect between the original purpose of the student-loan program to democratize American higher education and the fiscal policies that are necessary to ensure program solvency and protect borrowers from enslaving debt and inevitable default.

Several higher-education policy institutions have made comprehensive proposals for reforming the federal student-loan program. One proposal, which has been endorsed by several higher-education policy groups, is to extend the student-loan repayment period from ten years to twenty or twenty-five years, with loan payments based on a percentage of the borrower’s income. The Brookings Institute recently made a similar recommendation and further recommended that income-based repayment plans with twenty-five-year repayment periods be the default option for all students participating in the federal student-loan program.

A discussion of these policy initiatives is beyond the scope of this article, although we are skeptical of proposals that contemplate a future in which millions of former postsecondary students make student-loan payments over twenty-five years-the majority of most people’s working careers. Instead, we make several modest proposals that are designed to give a clearer picture of the student-loan crisis and to provide some relief for the millions of people who have become over-whelmed by staggering levels of student-loan debt.

First, we recommend that the DOE develop and publicize a student-loan default rate that provides a clearer indication of just how many people have defaulted on their student loans. As we argued earlier in this article, the DOE’s three-year window for measuring defaults fails to capture the number of people who default after the three-year measurement period ends and fails to take into account the number of people who are not making loan payments due to economic hardship deferments or other loan forbearance options. We believe the true student-loan default rate, when measured over the lifetime of students’ loan repayment periods, is at least double the DOE’s most recently reported three-year default rate, which is 13.7 percent. We believe the student-loan default rate for the for-profit college sector is alarmingly high-4o percent or even higher.

In our view, a more transparent student-loan default rate would highlight the fact that the federal student-loan program is in crisis and threatens to undermine the national economy. Moreover, a more accurate student-loan default rate would underscore the fact that millions of people are burdened by unmanageable student-loan debt levels. The current reported rate may be lulling Congress and higher education leaders into believing the student loan program is basically healthy, which it is not.

Second, we believe Congress and the Executive Branch should take affirmative steps to relieve the suffering of mil-lions of Americans who are struggling with high levels of student-loan debt-debt that many will never be able to repay.

What should be done? First and foremost, we believe the “undue hardship” provision in the Bankruptcy Code should be repealed, which would allow insolvent student-loan debtors to discharge their student loans in bankruptcy like any other non-secured debt. This is by no means a radical proposal. The National Bankruptcy Review Commission made this recommendation more than fifteen years ago. No evidence has been presented that indicates that student-loan debtors would abuse the bankruptcy process if the “undue hardship” provision were eliminated. Moreover, bankruptcy courts have the authority to deny discharge if they conclude that a student-loan debtor is using the bankruptcy process for fraudulent purposes.

To its credit, the DOE passed program integrity regulations intended to cut down on fraud and abuse in the for-profit college and university industry, and the department also passed a gainful employment rule intended to remove institutions from the federal student-loan program whose graduates did not get jobs that paid well enough to allow them reasonably to pay back their student loans. Although federal courts invalidated important parts of those regulations, the DOE issued revised regulations in March 2014.

Clearly, the federal student-loan program requires major reforms if it is going to continue fulfilling its original purpose of providing Americans with the opportunity to acquire postsecondary education regardless of their economic circumstances. In our view, three major reforms are imperative: a more transparent measurement of student-loan default rates by the DOE, bankruptcy relief for insolvent and over-burdened student-loan debtors, and better regulation of the for-profit college and university industry.


Robert C. Cloud, MS ’66, EdD ’69, served as president of Lee College in Texas for ten years and as vice-president and Dean for two other Texas colleges before joining the Baylor graduate faculty in 1988. He serves as a professor of higher education and as chair of the Department of Educational Administration. Richard Fossey, who has his JD for the University of Texas School of Law and his EdD from Harvard, is a Paul Burdin Endowed Professor of Education at the University of Louisiana at Lafayette.



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