How A Private Company Stacked The Deck Against Student Loan Debtors

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"How A Private Company Stacked The Deck Against Student Loan Debtors"

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After two decades of work, the company tasked with collecting payments on government-financed student loans from borrowers who declare bankruptcy has helped create a system that treats student debt far more harshly than other borrowing. The company’s zeal for the task has led it to hound cancer survivors and other unfortunate, hard-working souls, and has reshaped the relationship between student loans and bankruptcy law in ways that exacerbate the country’s trillion-dollar student loan problem.

Congress created the Educational Credit Management Corporation (ECMC) indirectly in the early 1990s when it sought to tackle the high rate of default on student debt by giving the Department of Education (DOE) “a set of unprecedented collection tools” such as garnishing wages and tax rebates, the New York Times explains. ECMC, founded in 1994, is the largest of the private companies that the DOE uses to exercise those collection tools during bankruptcy proceedings.

Unlike most forms of debt, student loans are very difficult to discharge in bankruptcy court, in many ways thanks to ECMC. The bankrupt borrower must prove that her case represents an “undue hardship,” and lawyers from ECMC will be there to push back hard. The concept of undue hardship began as a somewhat malleable one, with bankruptcy judges free to exercise their discretion in determining whether borrowers faced sufficient hardship to justify discharging student loan debt. But after almost 20 years of ECMC efforts, judges have lost that freedom. A 2009 victory for ECMC in a federal appeals court curtailed the definition of “undue hardship” for student debts, making it much much harder for put-upon borrowers to get out from under the cost of their degrees.

In some of those court cases, ECMC has also made alarming arguments. In 2012, the company fought for the right to demand repayment from a woman who tightened her belt and charged her son rent when her husband fell so ill that he couldn’t work. The company told a judge that Karen Schaffer was spending an awful lot of money dining out for someone who was bankrupt, and cited her McDonald’s receipts. “I was taking care of Ron and working a full-time job, so lots of times I didn’t have time to fix dinner,” she told the Times, “or I was just too darn tired.” In another case, ECMC began garnishing the Social Security checks of a woman who had already proven in court six years earlier that their records were wrong and she had repaid her student loans in full, earning multiple sanctions from multiple judges. In a third, ECMC lawyers told a judge that a cancer survivor with massive unexpected medical bills shouldn’t be eligible to have her student debt discharged in bankruptcy because she was young and “survival rates for younger patients tend to be higher.”

Today, default rates for student loans are triple what they were in the years before the Great Recession. One in every eight student borrowers is in default. The trillion-dollar student loan overhang undermines economic growth for everyone in the country and reduces the earnings power of the indebted borrowers by $4 trillion. Students are as likely to default as they are to enroll in an income-based repayment plan.

One elegant approach to the problem would be to roll back some of ECMC’s successes at making bankruptcy court inhospitable for struggling student debtors. By making student debt dischargable in bankruptcy and tying student loan access to school performance metrics, Center for American Progress experts Joe Valenti and David Bergeron argue, Congress could both reduce the harmful effects of the current debt overhang and improve the future outlook of the student loan system.

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