The History of Student Loan Litigation
For about 30 years as an attorney, I have sat back and watched or litigated student loan lawsuits. Most Kentucky Student Loan Litigation is simple. Someone was sued for a student loan. Then they filed for bankruptcy. That was the end of the lawsuit. Congress got an idea in the 1980s that people should wait 3 years after the student loan became due before they could discharge a student loan in bankruptcy. Then this was extended to a 7- year waiting period. At least make some effort to repay it and have the ink dry on it before you file bankruptcy and then discharge it.
At first, there were very few lawsuits to collect student loans. Most attorneys didn’t know how to defend the lawsuits. With the private loans. we handle them no differently than if a client had been sued for a credit card. With a government student loan lawsuit we lose many of the defenses but we gain programs to make the loan repayment affordable if we can get the loan back out of default.
The rise of Student loan non-dischargeability
Then in about October of 1998, Congress had what they thought was a better idea. In order to balance the budget and make the books look good let’s make student loans non-dischargeable. Then we won’t have to account for the loans which are not being paid back. That allowed Congress that year to spend more money. Private loans continued to be dischargeable. Just government loans were protected. Then in 2005 when the bankruptcy code was amended, enough banks lobbied Congress to change the bankruptcy code again and make private student loans non-dischargeable.
Current status for Kentucky Student Loan Litigation
You can still file Bankruptcy today and discharge a student loan if you can get the undue hardship discharge. The undue hardship discharge is hard to obtain and only about 500 to 600 people qualify every year. Most people rehabilitate their loan, or consolidate federal loans out of default. When a private lender sues a debtor your choices become to litigate in state court, negotiate a settlement or file a Chapter 13 and have the lawsuit expire for lack of prosecution. Often the private student loans held by Navient or National collegiate student loan trust are mere negotiable instruments that have a seven-year statute of limitations.
The internal problem of the student loan system
What happened along with this was that schools could cash checks from the government and raise tuition at for-profit and public schools regardless of whether the degrees were able to repay the loans. Many people graduated but with degrees that failed to repay student loans. Income-based repayment options were proposed to help. However, when DOE hired servicers (debt collectors) these debt collectors applied the payments to penalties and interest first. Since the debt collectors worked for DOE and their shareholders their first duty was to make a profit. Their last consideration was to place the student into a reasonable repayment program.
All of this contributed to the problem we have in 2021 with student loan debt now approaching 2 trillion dollars and with little of it being fully repaid by students and largely funded by taxpayers. What is lacking is any responsibility on the part of debt collectors who make their maximum profits by steering students into loans that will go into default. Default is where debt collectors and credit cards make their maximum profits.
The problems students face with student loans
For-profit schools also maximize their profits by offering degrees that are easy (cheap) to teach, uses little resources but have little ability to pay these loans. Schools that have a high default rate within the first three years are penalized. But they merely apply forbearances and deferments which keep the loan from going into default. A federal student loan is not normally in default until it is 270 days old. Then a 25% penalty is applied and the debt collector is hired by DOE and then makes every effort to keep it in default. Default is where debt collectors collect the maximum profit from students.
The effect of default means that many people delay marriage, careers, having children, and purchasing homes. These students become discouraged after being defrauded and lied to. Many people who have obtained the best degrees leave for other countries. Other people choose careers where they are paid cash instead of traceable and taxable income. What we see is the need to have an end to irresponsible lending and scam of the taxpayers and students by the schools and debt collectors.
The Solution to Kentucky Student Loan Litigation
Built into this system are factors that perpetuate it. It is profitable so it continues. What most students have to do is simply make the income-based payments for 20 to 25 years and survive. Servicers often try to make these payments higher than the proper amount. They apply it to penalties first because that is where they earn part of the payments. If you have student loan litigation like this in Kentucky come see us we litigate it, negotiate it and manage it. Although some loans such as those with Navient may have some small part of the balance lowered there is currently no substantial forgiveness for private an most loans.
