Refinancing the American Dream

For generations, a college degree has been considered a path to the middle class. Millions of Americans have attended college with increasing frequency, making a down payment on their future with the promises of higher education.

The average cost of college has surged by 1,120% over the past 30 years, dramatically outpacing inflation. Despite the rising price tag, higher education remains as important an investment as ever, forcing more students to rely on scholarships, aid and student loans to finance their degree. This has created a massive debt burden that reached historic milestones this summer and continues to grow. The average student from the class of 2013 graduated with nearly $30,000 of debt, and former students and their families now shoulder a collective $1.2 trillion burden.

This month, the U.S. Department of Education released a report that makes the student debt issue even more concerning. The department found student loan defaults have risen to a 20-year high and that 14.7% of borrowers defaulted on their debt in 2010. Clearly struggling to make payments at the height of the recession, these former students entered the workforce at a time of decreasing wages, high youth unemployment and general economic uncertainty. Finding a well-paying job to support student loan payments at a time when many try to establish their independence is challenging and increasingly difficult.

The fear of additional debt is also preventing many millennials from pursuing post-secondary education, forgoing the many benefits that come from the additional training. “Traditional” college enrollments—recent high school graduates enrolling in four-year colleges or universities—are not increasing as rapidly as in the recent past, as an increasing number of young students choose to attend more affordable and more flexible community college programs.

Exacerbating this crisis, Congress has trapped former students in their education debt, legislating that student loans cannot be dismissed in bankruptcy unless the borrower has no possibility of future earnings, similar to child support, alimony and criminal fines. Unlike mortgages, car loans or credit card debt, until bankrupt former students pay back their student loans, debt collectors and the government can seize their Social Security payments, their wages, their tax credits and their refunds or place liens on their bank accounts and property.

Making matters worse, many bankrupted borrowers end up “owing even more on their student borrowing at the end of the [bankruptcy] process.” This is because, as The Wall Street Journal reported, Chapter 13 of the bankruptcy code “restricts these borrowers from making full payments on student loans during the three- to five-year bankruptcy period. That allows lenders to add interest, late fees and other penalties to the student-loan balances during that time.” Talk about a rough deal.

At the 2013 AFL-CIO Convention, delegates passed Resolution 36, sponsored by the AFT, to address the burden of student debt and ensure college remains a possibility for all. In the coming months, our organization will be taking part in a campaign to change federal and states laws so that student debt can be refinanced or discharged in bankruptcy. According to AFL-CIO National Young Worker Coordinator Tahir Duckett, “Education debt isn’t just an issue that faces students. It’s strangling the finances of millions of workers of all ages, and it’s time we do something to provide real relief for these families.”

Asking a divided, dysfunctional Congress to enact new legislation will not be easy, particularly with elements of Wall Street and the financial industry opposing bankruptcy reform. After all, the student loan industry is enormously profitable for both public and private lenders and servicers and many fear student loan fairness would eat into those profits.

When the House Republican shutdown ends and Congress gets back to work, families concerned about the rising debt bubble in America will have the opportunity to weigh in with their representatives and support a campaign for education debt reform. We hope you join us.

By, Sean Savett