If Student Loan Debt Is Going To Be Nondischargeable, We Need A Creditworthiness Mechanism
I have many colleagues who are still paying off student loan debts decades after law school. While lawyers having to pay off student loans into their 30s, 40s, and even 50s is certainly annoying for those so indebted, stymieing to people's legal careers, and problematic for the legal system in general, this is nonetheless pretty much how the student debt system is supposed to work: students get a high level of education that they otherwise would not have been able to afford and use it to obtain well-paying positions.
However, I also have many friends who have a tremendous amount of student loan debt who are not going to be able to pay it all off. In all likelihood, they are never going to work in highly compensated positions. A 2020 report estimated that approximately 7% of borrowers who then had an outstanding balance were never going to be able to pay off their student loans. I'd wager that percentage is going to end up even higher as we all roll forward into the future.
Unlike other forms of unsecured debt, student loan debt is virtually impossible to discharge in bankruptcy. In coordination with the Department of Education, the Department of Justice did recently release some new guidance to supposedly simplify the process for student loan debtors to secure a discharge. But since the main problem with getting student loan debt discharged in bankruptcy is the punitive legal definition of "undue hardship," which is not changing, my guess is that a procedural tweak won't ultimately help all that many borrowers. I wouldn't hold my breath on Biden's already modest $10,000 student loan forgiveness program either.
My credit score is 841 at the moment. If I wanted to go on a shopping spree tomorrow and rack up tens of thousands of dollars of unsecured credit card debt, my only problem in doing so would be finding tens of thousands of dollars' worth of products and services I actually wanted in this shallow material culture of ours.
In my early 20s, though, I couldn't get a credit card with even a very modest credit limit. I had no credit history. When I did eventually obtain my first credit card, I had to demonstrate a reasonable amount of income as well as a history of paying off other financial obligations. The credit limit was tiny.
You see, according to the National Institute of Mental Health, "[t]he brain finishes developing and maturing in the mid-to-late 20s." Credit card companies do not like throwing their money away, so they tend not to lend a whole lot of it to people who are still biologically incapable of good longer term decision-making, especially when these people have also not yet demonstrated a willingness and ability to pay back debts.
Yet, we let teens and twentysomethings take out tens of thousands of dollars' worth of student loan debt that will follow them around for the rest of their lives all the time. We leave pretty much all oversight as to whether the money is going to be well spent to the youths themselves.
If we, as a society, are going to make it essentially impossible to discharge student loan debts later in life, then we need to implement some sort of creditworthiness safeguards on the front end. Unlike in the private sector, this would not be solely for the protection of the lender; it would be saving very young people from the lifelong consequences of big decisions that they are not yet adequately equipped to make.
Doing a sort of educational credit check would not even be very difficult. We already have good data on which degrees are going to pay off monetarily in the long run. So go ahead and continue to take out as much student loan debt as you feel you need for that professional pharmacy degree, but maybe you have a student loan debt credit limit of zero if your heart is set on a liberal arts and sciences program. Given that we're not doing any favors to those who are likely to drop out anyway by saddling them with debt first, a requirement that someone's personal history demonstrate an aptitude for follow-through may also be in order before making their purse overfloweth with student loan proceeds. As a bonus, a preloan student credit assessment would help steer more people into underpopulated areas of the workforce.
I am a big believer in the value of education for its own sake, and in the value of education in maintaining a functional democracy. That being said, unless we're going to join the rest of the developed world in making higher education free for our citizens, we need to stop allowing young adults to accumulate unlimited nondischargeable debt with almost no safeguards in place to ensure that they will be capable of paying it off. Talk about poor long-term decision-making.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn't want to share the credit anyway. He can be reached at [email protected].