Fed Created Student Debtor Prison

Posted on | June 11, 2010 | 1 Comment

By Xelan Bonn (June X, 2010) www.xelanbonn.com

You thought you were doing the right thing when you signed up for college and took on student loans. The thinking was, you would get a higher paying job and thus be able to pay your student loans easily. What you did not know is that you just signed up for a modern day debtor’s prison.

When a person runs into financial problems, they used to have a chance at redemption–a way to clear off their debts and thus be given a chance to become a productive member of society again.

The government devised the bankruptcy tool for America because under the Constitution, debtor’s prisons are outlawed. Yet the federal government has found a modern way to circumvent the law.

Private loans and other private debts are generally dischargable in bankruptcy. However, student loans cannot be discharged (as a practical matter). Both private and federal student loans are protected from being discharged, thus bankruptcy no longer offers equal treatment to all debtors and often has little or no effect of assistance to those with student loans.

Like the IRS, the federal government refuses to take its lumps like everyone else when it comes to bankruptcy and aspects such as taxes or student loans. The effect is, take out a student loan through the federal government, and the debt and its interest and/or penalities, like taxes owed, never go away until repaid in full.

Therefore, bankruptcy is near meaningless for students who typically find themselves forced into a modern-day version of debtor’s prison.

The student who defaults thus becomes a burden on society for decades, often through no fault of their own.

Their credit rating is permanently damaged, their opportunities reduced to near nill, their income highly limited–the effect is virtually permanent economic debtor’s prison from which there is no escape–and all because they took the gamble to try and improve their lives by getting a higher education.

Without the escape bankruptcy provides, students who default or otherwise are unable to repay their student loans, are thus omitted from becoming productive members of society or the real ability to secure self-redemption. Instead, they become permanent slaves to the federal government and credit bureaus that label them “unfit for society” by applying highly discriminatory “point system” rating practices that employers, landlords, and others use to apply against them—employment and housing opportunities are just two aspects of many where their lives are often ruined.

Making matters worse, private educational lenders have essentially the same rights as Uncle Sam—such private student loans never go away until paid. Bank of America, Chase, Sallie Mae, and many more student loan lenders or administrators have the very same indentured servant clause attached to their loans as the federal government—bankruptcy discharge is all but forbidden except in the rarest of cases.

Note: In order to have either a federal or private student loan discharged in bankruptcy, a separate court proceeding is needed and the legal costs are often astronomical for the student. And because the success rate is less than 1% for those who apply for relief, (and the laws and procedures so complex) attorneys rarely take on such cases and are often difficult to find. Thus, it is realistically impossible for most students to even attempt to have their student loans discharged.

As wages drop across the board for average US workers forced to compete with Third World labor under the pressures of globalism, today’s students are not getting the pay-off from their education they once did. Coupled with inflation and the devaluation of the US dollar, it is making it much tougher for students to repay loans after graduation even when they do secure good jobs.

Compounding the problem, educational costs have skyrocketed. Now, the average student pays more than twice as much to be educated only to earn half as much (in comparative spending power) after graduation as compared to students just 30 years ago (calculating for inflation, devaluation, etc.).

Sadly, in today’s society, many people without any education are earning much more than those who are college educated. For example, bartenders, waiters, valets, and others who are routinely tipped as part of their income can earn between $45k, $70k, and $100k or more per year–far exceeding the college graduate. And they have no student loans to repay. Such relalities are a magnet for many potential students deciding on their career paths and is ultimately undermining the collective brain-trust of America.

And having made the choice to enter college, many student are finding it much more difficult to afford to stay in school altogether. Many are being forced to drop out for a variety of reasons, from skyrocketing educational costs or cost-of-living expenses, or because student loan funding or grants are not within reach (and increasingly, because loans and grants are being given to non US citizens instead).

As students drop out, the chances of student loan defaults dramatically rise because students often lack the higher education needed to secure a solid job or enough wages that would allow them to repay their loans (and not everyone is suited to jobs where consumers overtip, such as being a bartender or waiter).

Thus being unable to discharge their debts in bankruptcy and buried in debt that appears insurmountable, students are no longer incentivized to become productive members of society—effectively de-motivated.

The reality is, tens of thousands of students each year are becoming indentured servants to the federal government or private student loan lenders because they can never discharge their student debts and repayment is all but impossible.

Think you can beat the system? Think again.
The federal government tracks where you work like a rattlesnake hunting a mouse so as soon as you are hired, your exact income is known. And if you owe on a student loan, your wages will be levied, count on it! Thus students often seek out “cash” jobs where incomes are low and unreported to the federal government. And thus the federal and state government are denied tax revenues, effectively shooting themselves in the foot.

If you are living hand to mouth, federal student loans can become a nightmare. Unable to live off the small wages you’re paid, you will have to cough up a portion of your income anyway to the federal government. However, recent new laws restricted the amount to 10% of gross wages. And if you are in or near the poverty classes, that 10% gross wage garnishment can mean the difference between buying food or paying rent.

Meanwhile, should repayment at the 10% rate occur, the amount paid to toward the student loan will go to mostly interests and penalities, as well as garnishment administration costs. Thus, the student debt will likely remain the same even after years of payments!

Opposite Effect Of Intentions
Therefore, the concept of offering student loans to help US citizens rise out of poverty is creating the opposite effect—it’s shoving many into a financial hole from which they may never climb out. Therefore, the message from the federal government in reality is, take a student loan and become the government’s indentured servant—thus the real message is, don’t go to college unless you can pay for it yourself without student loans!

In 2005, US federal bankruptcy laws were made stricter in an effort to curb alledged abuses. However, after many studies, no proof of abuse was ever discovered or placed into factual record. This is because there remains a strong stigma and disincentive system to file for bankruptcy in the US, even when it may seem like a way out. In other words, students do not abuse the system, and neither does anyone else—those who truly need bankruptcy are the only ones that typically apply for its relief.

Today, student loan default rates are skyrocking. Sallie Mae, the largest private lender, estimates over $6 billion in student loans will default within the next year or so. And many more are said to be on the horizon.

In contrast, bankruptcy filings are now dropping drastically in comparison. Why? Because bankruptcy is much more difficult to file and more expensive to pursue since the 2005 law was installed—and moreover, does not offer any real relief from student loan or over-all debt burdens, whether private or federal.

Making Bankruptcy More Reasonable
Not only should the 2005 reforms be removed from the bankruptcy laws, but student loans, both private and federal, should be made to be completely dischargeable after a sufficient time of financial hardship—for the federal government should not be entitled to anything more than the private sector—for if the private sector can lose it’s capital to bankruptcy, why should the federal government be exempt?

And why should the student not be afforded a complete fresh start as intended by our bankruptcy laws to begin with? Why should students be burdened for life with loans that may ultimately never be paid back when they need help?

Where is the incentive to go to college, given the risks? Where is the incentive to become a productive member of society again should things turn sour? What is the reason for keeping the bankruptcy law intact if it only provides relief for some citizens and not others?

What should be done to reduce default rates is to put in place more workfare programs that reduce the need for student loan debts and give students an opportunity to earn while they learn. For example, the federal government should provide tax incentives to business to hire interns as they start their last two years of undergrad education. Thus the student learns on the job and at school, earns money, and can pay down their educational obligations as they attend college.

Another approach might be to offer all students government paid education for the first two years of college (at government operated colleges). For example, any US citizen can attend government college and earn a two year Associate degree at no cost before moving on to another college system to earn an undergraduate degree (2 more years of education).

The US Labor Department should also calculate shortfalls in labor in certain sectors, such as science, and offer greater incentives (such as scholarships, job guarantees, etc.) to help students gravitate toward needed professions in order to fill projected shortfalls.

Competing business could also offer tuition reimbursement programs in order to attract potential top candidates. And the government could provide major tax incentives for business that do such, effectively making business a partner once again in student education.

Of course, working to eliminate administration top heavy university overhead that leads to dramatic cost spikes in education should also be a major goal.

And government limiting maximum educational loan per degree programs would also help curb university and college system abuses that thrive on pushing government to increase such limits so they can arbitrarily escalate college costs to take advantage, would help stem systemic abuses that inflate costs unneccesarily.

Additionally, making loans available directly from the federal government at zero or ½% interest rates (and zero penalty or interest suspension during hardships) for the life of the loan would also greatly aid students to not only complete college, but repay their loans in good standing. Government and private lenders should not be in the business of profiting from 4-year undergraduate students but in helping students become productive members of society by completing a basic college education program—thus America’s brain-trust and ability to compete on the world level is aided instead of diminished.

What is for certain is that as this economy worsens, and globalization excels, we can expect more students to drop out or otherwise not attend college while student loan default rates continue to rise. Therefore, we should expect to create millions of US citizens who will be stuck in debtor’s prison for a good portion of their adult liives. And if the trend continues, we should also expect to digress America into a Third World nation of uneducated, low wage earners.

For much more on this story, here is an excellent article from USA Today. (1)

About The Author
Xelan Bonn, MBA, is a highly seasoned freelance journalist and past president of nonpartisan Patriot Union of America (and past Editor-in-Chief of PUA News), as well as past contributor to one time White House and Congressional think tank, Patriot Society. He has numerous original breaking news stories to his credit that have later been followed extensively by the mainstream press. His political news and analysis blog (www.XelanBonn.Com) is among the fastest growing in the US and draws loyal readers from around the world, including many members of the US Congress and politicians in top positions in dozens of foreign governments.

References
(1) USA Today: “Bankruptcy’s No Help For Many” (June 9, 2010)
http://www.usatoday.com/MONEY/usaedition/2010-06-09-bankruptcy09_CV_U.htm?csp=34

(2) WBTV: “Student loans – the next ‘mortgage meltdown’ crisis?” (Aug 2, 2010)
http://www.wbtv.com/global/story.asp?s=12909902

Subscribe To Site:

Full Post Feed | Summary Feed | Comments Feed

Comments