A Morally Bankrupt System: Student Loans Post-BAPCPA

By Jon Burkart (PO ’24)

“A $1.5 trillion crisis” 

“…exceeds accumulated car loans and even credit card debt” 

“…43 million Americans held federal student loans” 

“…roughly seven million borrowers are in default”

            Year after year, these punchy phrases populate news headlines, underscoring the unending specter of student loans in America. The crisis continues to grow — economists project student loan costs will grow by 7% annually — and so, too, will the litany of student loan horror-stories. Abundant are tales of students struggling to buy groceries in college while donating plasma and participating in psychological studies, only to graduate with $53,000 in debt, to bouts of depression and anxiety that continue far after repaying loans. The economic ramifications are similarly grim: in 2019, the Federal Reserve released a report attributing a 20% decline in home ownership to the growing burden of student loans, and Pew Charitable Trusts found that student loan default can amount to a 50-90% decrease in credit score. This only leaves one question: how did it get to this point? Many are quick to blame rising tuition costs. Very few look to a massive 2005 overhaul to US bankruptcy code.

Rocky, Regulatory Road

         In response to a myriad special-interest exceptions carved into the 1978 Bankruptcy Code, Congress created a National Bankruptcy Review Commission in 1994 to recommend revisions to the Code. The first bill of revisions they brought forth failed in 1997, only to be resurrected and subsequently pocket-vetoed in 2000. After the 2004 election solidified Republican control of both chambers of Congress, a slightly altered version of the 2000 bill was passed by both the House and the Senate. And so, on April 20th, 2005, President George W. Bush signed into law the Bankruptcy Abuse and Consumer Protection Act (heretofore referred to as BAPCPA), the culmination of an effort spanning more than a decade. 

            At its very core, the BAPCPA intended to make declaring Chapter 7 personal bankruptcy much more difficult for debtors. Chapter 7 bankruptcy forgives or discharges most debt by letting debtors liquidate their debt, whereby their property is sold off to repay creditors. The BAPCPA was Congress’s effort to induce more debtors to instead file for Chapter 13 bankruptcy which allows debtors to formulate a wage-based repayment plan that dedicates a fixed percentage of their income to repaying their lender. Two main provisions were to achieve this: extending the time for filing of a Chapter 7 case from 6 to 8 years and setting a standard for a presumption of abuse. If a debtor is presumed to be abusing bankruptcy, i.e. they could feasibly repay their debts without, their case can be dismissed. BAPCPA set a standard for this presumption by establishing a “means test” that compared a debtor’s income to their states’ median income to determine whether they could viably repay their debts.

            But more noteworthy, and less advertised, the BAPCPA designated a particular debt to be non-dischargeable: private student loans. Prior to the 2005 law, Congress had already designated public student loans to be non-dischargeable through Section 439(A) of the 1976 amendments of the Higher Education Opportunity Act — save for when such debt would impose an “undue hardship” on debtors. These provisions were codified into the aforementioned 1978 Bankruptcy Code, and finally amended through BAPCPA to include private loans under §523(8)(B). The “undue hardship” clause would prove to be debtors’ only reprise — one that was an “undue hardship” to prove. 

Disastrously Successful

            At the most surface level analysis, creating a unique status for private student loans amplified key differences between public and private student loans. Among them, public loans have subsidies for paying interest, loan repayment plans, and most importantly, loan forgiveness programs. On the other hand, private student loans typically lack at least some, or all, of these important features. Bankruptcy was private student loan borrowers’ sole option for forgiveness being, and with BAPCPA making it nearly impossible, debtors were left helpless. The effects of this compound when factoring in cosigners. A student needs a cosigner for a loan if they lack a comprehensive credit history, which they frequently do: in 2011, more than 90% of new student loans had a cosigner. But since a cosigner agrees to share in the financial responsibility, debtors and their cosigners are both dragged into the trap of student debt. BAPCPA made it nearly impossible to escape.

           Recall that student loans are non-dischargeable except when borrowers can prove an “undue hardship” imposed by their debts. So how often do debtors try and seek relief through proving “undue hardship”? Not very often. Jason Iuliano, a researcher at Villanova University found that while a quarter-million individuals with student loan debt file for bankruptcy each year for other debts, around 99% of debtors don’t even try to go through the bankruptcy process for their student loan debt. Even Cecelia Morris, chief judge for the U.S. Bankruptcy Court of the Southern District of New York agrees courts have set impossibly high bars for establishing “undue hardship”. Clearly, lack of forgiveness is not out of borrowers’ unwillingness, but rather from the gears of BAPCPA working as the well-oiled machine it was designed to be. 

            On the supply side, Researchers at the Consumer Financial Protection Bureau and UC Irvine applied a variety of statistical methods to private student loans that originated both before and after the law’s passage. The results were less-than-shocking. By essentially guaranteeing repayment in some form, BAPCPA moderately increased lending to riskier and less creditworthy student loan borrowers. Even more stark, their analysis revealed a three-time increase in the volume of private student loans, 60% of which were deduced to be directly from the passage of the law. And while more availability of credit is not inherently problematic, by 2010-2011, capital supply was back to levels pre-BAPCPA. But perhaps most damning, the average cost of private student loans was found to have increased in the years after the passage of BAPCPA.   

A Generation of Borrowers

            During and after its passage, Senators like Illinois’s Dick Durbin maintained that the credit card industry had bought BAPCPA to tip the odds in lenders’ favor; time has only confirmed his suspicion. Unsurprisingly, calls for reform began almost instantly after the passage of BAPCPA. Just two years after the passage of BAPCPA, the 110th Congress introduced two bills to address borrowers’ relative inability to discharge student loans. One would revert student loan debt to its status pre-BAPCPA, while another would make both public and private student loans dischargeable. Unfortunately, both bills failed, allowing the bill for America’s student loan crisis to climb higher and higher.

            Fortunately, the 2016 and 2020 Presidential elections saw the issues of college affordability and the student loan crisis take center stage, especially among Democrats. In 2020, big progressive names like Senators Elizabeth Warren and Bernie Sanders brought forth large-scale student debt cancellation programs. Senator Sanders proposed forgiving all student debt, while Senator Warren’s plan would have cancelled all debt up to $50,000. Despite their best intentions, analysis found that plans like Sen. Warren’s would primarily benefit the top 40% of households

            Prospects for getting out of this crisis understandably look grim, but there is still reason to be hopeful. While Senator Warren’s dream for debt forgiveness may have ended with her campaign, another one of her plans may in fact come to fruition. The “Fixing Our Bankruptcy System to Give People a Second Chance” policy she outlined in her platform  has since been adopted by a certain Senator that once reluctantly voted in favor of BAPCPA. Democratic nominee Former-Vice President Joe Biden’s policy proposal contains specific language to “end the absurd rules that make it nearly impossible to discharge student loan debt in bankruptcy”. It’s a welcome nod to a commonly overlooked component of the crisis, and one that couldn’t come sooner. 

            At the end of the day, future generations will be held financially liable for this crisis. It’s long overdue that elected officials are held liable for creating such a morally bankrupt system. 

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