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© Frank


Buyer Beware: Student Debt

by Julia Barnard
September 6, 2020

This interview with Julia Barnard, a researcher at the Center for Responsible Lending focusing on student lending and debt collection, was conducted and condensed by franknews

Julia | At the Center for Responsible Lending, we fight predatory lending in all of its forms. I think the form of predatory lending most familiar to people is payday loans, which we certainly fight - and we also advocate for fairness around other debt products such as mortgages, student loan debt, and more. My work focuses on student loan debt repayment and canceling student loan debt. 

frank | How did we get here? 

Unfortunately, higher education today exacerbates and reinforces inequality and the racial wealth gap. It is important to acknowledge that higher education in the U.S. has never been “the great equalizer” due to systemic racism. Historically-black colleges and universities (HBCUs), for example, have been chronically and profoundly underfunded and underappreciated. These problems are still with us. Now, student loan debt also plays a major role in undermining some of the benefits of higher education. 

In the past, federal and state commitments provided more funding and support to public institutions than they do today. This public support has been going on for decades but accelerated after the Great Recession. As states have pulled back on their budgets, institutions made up losses by charging higher tuition, and most students and families pay for this higher tuition by taking on some student loan debt. 

Federal grant sources such as the Pell Grant also haven’t kept up with inflation. So, it has simply been a policy failure at all levels. We fear that the COVID-19 pandemic could also exacerbate and accelerate these trends.

It seems odd to me that student loans are the only loans you cannot discharge. Why is that the case? 

A change in 2005 excluded private student loans from being discharged in bankruptcy. Federal student loans, which comprise about 90% of student loans, have a bit of a different situation.

It is possible, but rare, to discharge student debt in bankruptcy. Student loans are presumed to be nondischargeable, creating substantial barriers to discharge. 

This report explains that “a debtor can only overcome that presumption by proving that they would suffer undue hardship if the loans were not discharged,” and that has typically been an extremely difficult thing to prove in court.

However, courts are beginning to push back on this and some jurisdictions are starting to allow more bankruptcies to go through. We may even see the Supreme Court weigh in at some point on this issue. And there are other forms of discharge outside of bankruptcy that are available, namely Total and Permanent Disability Discharge (TPD), Public Service Loan Forgiveness (PSLF), and Closed School Discharge.

At the Center for Responsible Lending, we want to restore bankruptcy and a statute of limitations on the collection of defaulted student loan debt. And of course, we are working to protect existing options for discharge. We don’t want people who took out a loan as a 20-year-old to have their Social Security garnished as an adult because they haven’t been able to afford their loan payments.

When did the government take over as the primary lender of student loans? 

It’s a long story. The short version is that student loans began in earnest with the Higher Education Act in 1965, which had the stated goal of expanding access to higher education. In that program (called the Federal Family Education Loan program, or FFEL), the federal government guaranteed loans that were made by private banks or nonprofit lenders. The accounting for such an arrangement was complicated and made it difficult to estimate and plan for costs over time, and in some ways, it was more simple for the federal government to lend directly to students for this reason. Others pointed out that the government spent a lot on subsidies to private lenders under the program and that guaranteed lending was more expensive than direct lending. So, direct lending began in 1992 as a pilot program but became the only type of federal student lending in 2010 with the Health Care and Education Reconciliation Act (which eliminated the FFEL program) after the Great Recession exposed the weaknesses in private credit markets. It saved over $65 billion, and the savings were used to increase the Pell Grant.

So, if there must be student debt, the fact that it is held by the federal government instead of private banks is not a concern for us. In fact, we actually think that's better because the government is meant to provide for the public good and we don't believe that there should be a profit motive associated with student loan debt. As we can see in some private loan products today, a profit motive can lead a banker to refuse a loan or charge a higher rate to a teacher or a social worker, and can even lock out certain borrowers who are not seen as creditworthy because of race, gender, or family background. Additionally, income share agreements(ISAs) and other private student loan products generally have worse terms. They don't have the same protections during repayment, such as income-driven repayment, that federal loans have.

And at the federal level, there are conversations about lowering or eliminating interest on student loans, forgiving debt altogether and making repayment terms less burdensome. These conversations are unlikely to happen in private markets that are focused on profit.

Why do student loans matter? 

Education is supposed to lead to higher wages and better life outcomes overall, but student debt threatens to undermine that possibility for millions of borrowers. It's one of many issues that feed into widespread financial insecurity in the US.

We can’t have a healthy, well-functioning democracy without financial security, in my opinion. 

Since it's a relatively new shift towards this increase in borrowing, how do you see student loan debt affecting millennials? 

The research on that is really bleak. Anecdotally, I'm sure we've all heard stories of people not having children, not buying houses, not going back to graduate school, or not starting a small business. I've done a lot of interviews with borrowers on the subject of student loans, and the thing that sticks out to me the most is the mental health impact. People report a lot of stress. The research is bleak, and the anecdotes can also be bleak. 

If people were relieved of their debt burden, they could be free for any number of life-affirming activities like having children, starting a business, or going to graduate school.

It would give people the freedom to pursue the opportunities that they want to pursue. That's the most important thing, in my opinion.

The opportunity to engage in life-affirming activities is so depressing.

It's a bleak landscape. We know that student loans can be a real and profound burden for many borrowers. It is also causing a drag on the entire economy because it depresses spending. Freeing up the dollars is actually going to pump life into the economy in a time when we actually really need it. And I think that's true prior to COVID, and is it more true now.

How has COVID shifted the conversation? 

We know that the American economy has really not been working for many people for many years and that student debt burdens were already unmanageable for the majority of borrowers.

Even prior to COVID, 70% of Black Americans were projected to default on their student loans by 2020.

COVID has only exacerbated the financial crisis that families, especially families of color, were already in, and it has also pushed millions of other families into dire financial circumstances. 

The conversation has come so far in a year - it has really been incredible to see. Joe Biden’s plan includes $10,000 in cancellation for some borrowers. The HEROES Act included $10,000 dollars in cancellation for some student borrowers - and others have even proposed canceling higher dollar amounts. And while that conversation is still ongoing, the political support for cancellation has grown incredibly in a year's time. 

We have been polling the question, “Do you support reducing student loan debt by $20,000 for all borrowers?” And in a recent state poll in Pennsylvania we found 81% support among student borrowers. In another national poll of adults, not just those with student loan debt, we also found strong support for the policy.

Is that between both Republicans and Democrats? 

We have Democrat and Republican numbers. There is net support in both parties, so more people support it than oppose it. In the Pennsylvania poll I mentioned, 68% of Republican student loan borrowers support reducing student loan debt. Even prior to COVID people of all political persuasions have been feeling economic, financial pressure.

The generational effects of debt are not limited to one political party.

I think people are hurting. And canceling debt is a pretty common-sense solution. 

What is the legal authority that would allow the government to cancel student debt?

The type of legal authority that allows you to cancel debt is a really exciting policy conversation today. Congress can pass a law and cancel student debt and the legal mechanism is fairly straightforward. It is slightly more complicated for the President or their administration to do so. One example of this is President Trump's executive order, which extends the payment moratorium on student loans until the end of the year, as basically an extension of the CARES Act payment moratorium. This executive order used Settlement and Compromise Authority, which is just a specific type of authority that the Department of Education has. This could provide a blueprint going forward for how a President can suspend payments or interest using the power of the executive branch.

Is this financially feasible? 

I mean, it's not the government's job to be profitable. It's the government's job to promote and invest in the public good. 

How can you quantify the benefits of education for our society and the tragedy of low-income students forgoing higher education because of the cost? It’s really a dream deferred for many people, which is impossible to shrink into an economic analysis.

However, there are economic analyses that also make the point that fully canceling student debt would release money into the economy through increased spending in the amount of around $100 billion per year over a 10-year period. The report I’m referring to also predicted increased employment as a result of total student loan cancellation.

I think when people think that this is not feasible, they are thinking that it is going to cost more than it actually costs. It’s kind of counterintuitive to most people, but over half of the debt in default is under $10,000. Anecdotally, most people think about a student borrower as a very highly paid professional with a mountain of debt, a medical student for example, but that's not actually the reality. For example, we are advocating for at least $20,000 of debt cancellation. That forgives the debt of 60% of student loan borrowers.

It is interesting to hear you say that we have such a misconception about what the reality of student debt looks like. Why do you think that is? 

Right. So again, intuitively most people wouldn't think that relatively low student debt burdens like $5,000 would be the hardest amount to repay but, in fact, the students who have that amount of debt typically are students who started college but did not graduate. In those cases, the students aren’t really provided with any wage increase as a result of their education and so the loan burdens are often really unmanageable.

The stories you hear about people with $200,000 worth of debt are actually not representative at all. And the median student loan payment, in reality, is just over $200 a month. The problem with that language is that it diminishes the real burden that we know that $200 a month imposes on many people. For example, we know that only about one in three borrowers is actually successful in paying down even $1 of the principal of their loans over time. The other two in three borrowers are either not able to pay at all or are not paying enough to cover both interest and principal and so they are, in effect, just treading water.

The idea that 17, 18, 19-year-old people are taking out these loans as predatory in itself to me. You have no idea what it means to try and accumulate wealth or what it means to save or what the choke-hold of what debt really feels like. 

I remember we had a day when we were conducting interviews on student debt, and every single person said, “I was young and dumb.” Those exact words.

And that sentiment also relates back to the policy conversation around “buyer beware”, which is the mindset that a lot of current policies are centered around. It means that it’s on the student to select the institution, and if the student selects an institution that's fraudulent, then that's really too bad. They didn’t do their research. 

Whereas, we think that the federal government should have guardrails. They should signal to buyers that there are some investments that are bad. If an institution has been found to be fraudulent, that institution should no longer be doing business, and the federal government should not imply that that institution has a stamp of approval by giving you a student loan for that institution.

One disclosure mechanism that has been at the forefront recently is called the College Scorecard. It is considered to be the information source that students will consult when making their college decision. And it has things like the cohort default rate, which is how many students in a given graduating class have defaulted on their loans, how many people graduate, and data points like that. That's the information source that you consult before picking the school, according to the federal government.

Do you think the political will to embrace debt relief requires a larger cultural change? 

Investing in education is not a new idea. If we look at the historical context, investing in education is something we as a nation have done, imperfectly, before.

The New Deal and the GI Bill were meant to provide access to a college education at low or no cost - though we know that these programs did not provide benefits for all students, they excluded students of color, particularly Black students. The Pell Grant has also been a critical source of grant aid for generations of students. 

We need to correct our past mistakes while also holding on to the shared belief that education should be, and is for many, a way to access a good job, a fair wage, expand your horizons, and become a better citizen. It should not be the source of financial pain for a serious portion of a person’s adult life. And it also should not be the only way for a person to access a fair wage, but that is for another conversation.