Gambling Debt? No Problem. Student Loan Debt? You’re Screwed

March 2nd 2015

An estimated 40 million Americans are shouldering student debt, and the national student debt has hit a record $1.2 trillion in the last few years. If that doesn’t make you want to scream bloody murder and pummel a few pillows, listen to this: It’s easier to get gambling debt and credit card debt forgiven than it is to get your student loan debt eased. 

In fact, it’s extremely challenging to get your student loan debt forgiven in a bankruptcy because you have to sue your lender(s) within the bankruptcy, which is not cheap. At all. If you can’t afford to pay your loans, how are you supposed to afford legal fees? 

You can’t, which is just the way lenders like Navient and Sallie Mae like it. 

“Removing bankruptcy protection from student loans has only benefited the lenders,” says Kyle McCarthy, community manager of GenYize, an organization focused on finding solutions to issues impacting Millennials. McCarthy cites a leaked memo in which Sallie Mae officials cited preserving the inability to discharge education debt in bankruptcy as one of their top lobbying priorities.

Los Angeles bankruptcy attorney Eliza Ghanooni says she gets inquiries from people looking to get rid of their student debt “all the time. Then they find out how much it’s going to cost to sue. The people who need it the most can’t afford it.”

It's not just the legal fees that are the challenge, Ghanooni says. Most courts rely on something called the Brunner Test, which is a three-prong test to determine if a borrower should be able to discharge their student loans. “The debtor must show that (1) the debtor[s] cannot maintain, based on current income and expenses, a 'minimal' standard of living for [themselves and dependents] if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor[s have] made good faith efforts to repay the loans."

Like many others, she believes the student loan crisis will be the next bubble to burst, citing the mortgage crisis as an example of what could happen if private companies continue to toss out loans to people who might not be able to pay them back – without doing credit checks or counseling people on the reality of their financial situation. You could have credit card debt, no job, and still take out huge sums of money for school. It’s pretty similar to gambling at a casino, actually. If you walk up to a blackjack table with some cash, no one checks your credit or makes sure you have a history of paying off your debts. They just want your money. 

Students (and some parents) are becoming savvier about the realities of getting out of school, landing a great job, and paying off all those loans within a few years. Still, if it’s your dream to go to Juilliard and become an actor or attend Johns Hopkins and go into medicine, the possibility that you could be saddled with debt shouldn’t stop you from pursuing what you love. We shouldn’t have to strive for less because the cost of education is so prohibitive. But, sadly, the way tuition is skyrocketing, that choice could become more common.

“Law school applications are down because people are realizing that it’s not worth it to take out all these student loans,” Ghanooni says. “It’s a problem. There needs to be change with regards to the dischargeability of student loans in bankruptcy.”

Politicians like Sen. Elizabeth Warren (D-Mass.) and Rep. Mike Honda (D-Calif.) have pushed for student loan reform, but it hasn’t been an easy battle. Last summer, President Obama expanded the Pay As You Earn (PAYE) program, which has the potential to help people who took out loans between 2007 and 2011. For those that qualify, monthly payments for federal student loan borrowers cannot exceed 10 percent of the borrower’s disposable income, and the remaining balance is forgiven after 20 years of payments. Some politicians see programs like this as so-called handouts, which is part of the reason reform has been so slow going.

“Making the system more fair for students is not a handout,” McCarthy says. “It’s a hand-up, and making the system more fair would benefit the economy greatly. We are seeing Millennials delay starting families or making major purchases because so many are saddled with more debt than previous generations.”

Programs like PAYE might not eradicate everyone’s debt and fix the student debt problem immediately, but they’re a step in the right direction. There was a time when getting rid of student loans through bankruptcy was an option, but over the years the laws kept changing and becoming more stringent. When you file for bankruptcy to get rid of credit card debt and gambling debt, Ghanooni says, you don’t have to do anything but file for bankruptcy. With student loan debt, you have to file an Adversary Proceeding – basically, a costly lawsuit within your bankruptcy filing. 

If you’re buried in student debt, it might seem like a Sisyphean task to change the system and ease the current bankruptcy restrictions. You’re just focused on trying to make enough money to pay your loans back each month, with interest. But there are a few things you can do to try and change the current restrictions. “Write your Congressperson” sometimes sounds like a futile task, but it may help. It’s better than sitting around doing nothing, and cursing Sallie Mae once a month (or 5,000 times a month).

“There are a number of organizations working on this issue including Rebuild the Dream, Young Invincibles, Center for American Progress, Jobs With Justice, Higher Ed Not Debt,, and Equal Justice Works,” McCarthy says. 

In other words, it’s more productive to take action and write to politicians than it is to curse your student loan lender and wander around feeling helpless. It is more fun to curse your student loan lender, but it won’t make your loans go away, unfortunately.
“Most people can’t afford to do anything but work to pay off their student loans,” Ghanooni says. “It’s this vicious cycle. They can’t save money. It’s creating a generation that’s in debt forever.”

Let’s hope that’s not true. Being in debt shouldn’t be the norm. Until things like bankruptcy restrictions are reformed, though, it is.

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