The Student Loan Scam: End Game

Since 2013, I have been writing on student loans. Just about then I ran into Alan Collinge who has a site on Facebook called Student Loan Justice. If you are not aware, student loans are the most unforgiving type of loan a person can have as a student, a parent, or an adult attempting to improve their lives through additional education. There is little or no forgiveness for student loans. Bankruptcy does not apply to these loans the same as one might have on a car loan of $thousand, a home loan of greater size, etc. For the latter, you can declare bankruptcy. There is no bankruptcy for student loans,

The Student Loan Scam: End Game . . . Alan Collinge @ Student Loan Justice

A brief history of how we got here and what can be done.

Since 2004, I’ve been researching and writing about the student loan problem. When I began this journey, the nation owed about $400 Billion in federal student loan debt. I wrote the first book to be critical of the federal student loan program in 2009, by which time the nation’s debt had nearly doubled. 

As I write this today, I am sorry to report that the country now holds close to $2 Trillion in debt, with about 90% owed directly to the federal government. About $110 Billion in interest now accrues to the Department of Education from these loans. At least 85% of borrowers will never be able to repay them, and two-thirds aren’t paying at all. Older people now outnumber younger people with the loans, and owe far more despite having borrowed far less, and many years ago. Distressed borrowers are literally fleeing the country, committing suicide, and even murder as a direct result of this debt, and these outcomes are likely increase greatly in the coming months.

The debt now exceeds the state budget in most states (particularly southern states), and the amount of interest being charged now rivals or exceeds major industries in most states, like all the lobster produced in the State of Maine, all the agricultural exports of North Carolina, and the combined annual revenue of all professional sports franchises of states like New York, Ohio, and California.

The lending system is, by all rational metrics, in catastrophic failure.

Unfortunately, the political dynamics that have taken hold of both Congress and the President’s office over the past couple of decades- including both parties- have only solidified against student loan borrowers, and for the perpetuation of this broken, dangerous loan program despite the truly overwhelming body of evidence that now screams out for drastic, immediate action.

It is important that the public understand the history of how we got here, the current political and other dynamics at play,and most importantly, how we can get down from the ledge we- as a nation- now find ourselves on. This problem truly has its roots in the founding of the country. So, let’s start there.

Shortly after the American Revolution, there was a debtor’s revolt in Western Massachusetts which was come to be called “Shays’ Rebellion”. It was led largely by disgruntled Continental Army soldiers and indebted farmers against Eastern Massachusetts creditors, who had greatly tightened lending, and set about repossessing farms and other property. The angry rebels mobilized, shut down courts, attacked collection agents, etc.

While the rebellion was eventually put down (by a militia funded by wealthy Boston interests), it is generally acknowledged (including by Founders like Thomas Jefferson), that it was this dark episode that compelled the drafting and ratification of the U.S. Constitution, where ahead of every right listed in the Bill of Rights, ahead of the power to raise an army, ahead of the power to declare war, is the Founders’ call for uniform bankruptcy laws. In the Bill of Rights, of course, the Founders also called for equal protection under the law.

Centuries later, the spirit- and likely the letter- of these critical, Constitutional laws were violated egregiously by the architects of the federal student loan program.

President Lyndon Johnson signed the Higher Education Act (HEA) into law in 1965. The HEA created the federal student loan program that we live under today. During the signing ceremony, he declared that the loans would be “free of interest”.

In 1972, a hybrid, public/private company, Sallie Mae, was created to serve as a re-purchaser/guarantor for federal student loans made by private banks. The company had all of the profit-making incentives of a private company but also had the full backing of the US Treasury, whose money it used for its operations. This created, essentially, a monopoly over the nascent student loan industry, where most all student loans were administered by the company, and the company was the de facto expert and driving force with Congress on legislative matters.

The company did not squander the opportunities for corporate profit that this unique role afforded them.

In 1977, bipartisan legislation- pushed by Sallie Mae and other related financial interests in Washington- was enacted by Congress which made federal student loans uniquely non-dischargeable in bankruptcy for a period of 5 years after borrowers left school.

Interestingly, then-junior-senator Joe Biden (D-DE) was thanked- by name-by the legislation’s sponsor, Dennis Deconcini upon its passage (Deconcini would later nearly go to prison for his complicity in the Savings and Loan scandal of the 1980’s).

The reason given for this unprecedented removal of standard bankruptcy rights from student loans was that there was a crisis of recent graduates flocking to bankruptcy court in droves and expunging their debts. Instances of this happening were- in today’s terms- made to “go viral” in the national media of the day. In hindsight, however, we now know that these instances were extremely rare. The discharge rate of student loans in bankruptcy at that time turned out to be far less than 1%– lower than most all other debts in bankruptcy court. According to one Congressman who voiced constitutional concerns over this legislation at the time, “It was a crisis only in the imagination”.

This was the camel’s nose under the tent.

While a waiting period for bankruptcy discharged surely seemed pretty inconsequential to most in Congress at the time, Sallie Mae was just getting started. In the ensuing years, this unique exception to discharge was extended to include loans made or insured by non-profit companies. Then, the waiting period was extended to 7 years.

In 1991, the company (and the lending industry it essentially controlled) managed to convince Congress to also remove statutes of limitations from federal student loans, making it immortal.

In 1998, Sallie Mae and the student loan industry managed to extinguish any “waiting period” for bankruptcy discharge, so that federal student loans were made both immortal, and inescapable.

This opened the floodgates for reckless lending and hyperinflation in the price of college. In just the ten years since 1998, the nation’s student debt skyrocketed from well under $50 Billion to about $700 Billion. At the same time, Sallie Mae went on an acquisitional crusade, purchasing both the largest student loan collection companies in the nation, and the largest guarantors- companies that (disturbingly) make most, or all of their revenue from collecting on defaulted student loans.

But Sallie Mae and the student loan industry weren’t finished. In 2005, they managed to convince Congress to remove bankruptcy rights from all student loans- including those made by totally private lenders- as a part of the landmark bankruptcy bill of that year. At the time, they argued that removing this right from private loans would allow the industry to lend to more needy students. But this never happened. Instead, they began demanding cosigners (typically parents or grandparents) for nearly all of their private loans.

These were truly the “happy times” for the student loan industry. Sallie Mae’s stock price shot up far quicker than that of Microsoft (the hottest company on Wall Street during these years). The Sallie Mae CEO, Albert Lord was perennially selected as the “Highest paid CEO in Washington DC”. He built his own private, luxury, 18-hole golf course. He even attempted to purchase a major league baseball team, the DC Nationals.

By 2004, CEO Lord was even bragging to shareholders that the company was actually “writing checks” to the Treasury at the end of every year- a reference to the fact that the government was actually making a profit on defaulted student loans through Sallie Mae’s collection activities.

No lender makes a profit on defaulted student loans in any other lending industry. The fact that the federal government does, indeed, profit on defaulted loans is a defining hallmark of a predatory lending system. This became true for federal student loans as a direct result of the removal of bankruptcy rights and statutes of limitations. It is even more true today for the Department of Education, since it now owns the loans outright, rather than the old-style lending model where it only guaranteed the loans.

The non-governmental, student loan industry can make far more money on defaulted loans than on loans which remain in good stead. There is a government program called “student loan rehabilitation”, where a defaulted borrower is coerced into paying for ten months, and ultimately signs for a new, much larger loans. The private companies that facilitate these loans rehabilitations receive a payment from the government of 16% of the value of the new loans. On a $50,000 defaulted loan that is rehabilitated into a new, $100,000 loan (a typical example), a $16,000 payment is made by the taxpayer to these companies. This, of course, gives the industry a perverted incentive to want loans to default.

Clearly, Wall Street and Washington had found a way to make extreme profits on a lending instrument: Remove all standard consumer protections, hyperinflate loan balances- including and especially through defaulting loans-, and use collection powers that would “make the mafia envious” (Elizabeth Warren’s words) to extract the money from the borrowers and their families.

This is precisely the sort of lending tyranny that the Founders wanted to avoid when they called for uniform bankruptcy rights and equal protection under the law. A few of example of borrowers from that era:

The Financial Crisis of 2008, where 20% of all sub-prime mortgages went into default triggered major, structural changes in the federal student loan program.

Beyond massive taxpayer subsidies that were provided both to private lending companies and colleges, President Obama nationalized the lending program to where the Department of Education would make- and own- all new loans after 2010. While the private companies like Sallie Mae-who wanted to make the then-$50-Billion in interest that the portfolio generated every year- did not like this change, they remained in the mix by both servicing healthy loans, and collecting on defaulted student loans.

Disturbingly: because the lending companies could now only make revenue through servicing healthy loans, and collecting on defaulted loans, where rehabilitating defaults would be far more profitable for them than servicing loans- this only strengthened the perverted incentives these companies already had to frustrate, baffle and bamboozle the borrowers into default.

This change was clearly a boon for the Department of Education, which now stood to make all the interest on the loans. Some of the profit that was predicted to be made was even used as an offset to pay for the Affordable Care Act. The federal government clearly loved this new arrangement, as lending skyrocketed, and this interest accrued.

Disturbingly, it also became apparent during Obama’s terms that the Department of Education had no intentions of fairly administering the lending program. The various Income Driven Repayment (IDR) plans that were in place were run in such a way as to disqualify the overwhelming majority of borrowers out. In one year alone, the Department was found to have disqualified an astonishing 57% of borrowers out of these programs for failing to verify their incomes- just one of many hurdles’ borrowers must get through to receive the promised loan cancellation after 10–25 years of paying.

The Department of Education also fought tooth and nail behind the scenes to keep bankruptcy rights away from student loans on Obama’s watch. They regularly submitted testimony to judges in bankruptcy cases, and even micromanaged such cases directly or through contracted attorneys, including opposing a discharge for a woman because she took her kid to MacDonald’s on Sundays, and opposing a discharge for another woman on the grounds that her 14-year old son would soon be able to work to help his mom repay her student loans.

Despite the Democrat’s long standing promise to return bankruptcy rights to federal student loans (they failed to do so in 2008), the best we saw from President Obama was an order to “study” the feasibility of returning bankruptcy rights to the loans. There was no meaningful action on this front. During Obama’s two terms in office, nearly $1 Trillion was added to the nation’s student debt tab.

President Trump’s first term in office was- with a couple of notable exceptions- a horror show. He hired Betsy DeVos- who held stock in student loan collection companies- to be his Secretary of Education. The “success” rate for Public Service Loan Forgiveness applications, which began coming in in 2017, was about one-tenth of one percent. DeVos ran the Department in even worse faith than what we saw during Obama’s term. She was even threatened with prison time by a federal judge at one point for refusing to cancel the loans of defrauded students.

There were, however, a couple of surprising bright spots from Trump’s first term. First, he became the first President to cancel student loans broadly, and by executive order. He first did this in August, 2019 when he cancelled student loans for 25,000 disabled veterans. He did it a second time for everyone when he first enacted the repayment pause at the onset of the Covid Pandemic. This proved that the President can, indeed, cancel federal student loans by executive order. There were no lawsuits or controversy surrounding either of these actions.

Interestingly: it was these actions which compelled my group to start the petition in March 2020, which ignited the public conversation about cancelling student loans by executive order. The petition quickly grew to hundreds of thousands of signatures, went viral in the mainstream media, and within 6 months, leading Senators including Elizabeth Warren and Chuck Schumer began making a similar call. This all started with Donald Trump.

Very Interestingly: Trump’s student loan chief, A. Wayne Johnson, became one of the rare “truthtellers” in government on this issue. After running the federal student loan program for less than a year, Johnson resigned his position at the Department of Education, and began calling for both the return of bankruptcy rights to the loans, and also for widespread loan cancellation. An interview he did with Tucker Carlson stands as the most significant interview to be conducted on the student loan topic in the past decade. Mr. Johnson disclosed to me, and publicly, that in fact 85% of all federal student loan borrowers were never going to be able to repay their loans, even before the pandemic.

As the 2020 presidential election campaign got into full swing, we were approached by a speechwriter for President Trump, Professor Frank Buckley (George Mason University), and engaged in a lengthy conversation about loan cancellation. I believe Dr. Buckley was interacting mainly with Jared Kushner on his end of the conversation. They were keenly interested in both returning bankruptcy rights to student loans, student loan cancellation, and ways in which the colleges could be held accountable for their part in this crisis. While unfortunately, nothing ever came of the conversation, it was interesting to know that they were, apparently, strongly considering both options.

Joe Biden, of course, won that election, promising to both “eliminate” the student debt of people who when to public colleges and Historically Black Colleges and Universities (HBCU’s), and also committing to returning standard bankruptcy rights to student loans.

In 2020- before the election- we suggested to Biden’s campaign manager, Greg Murphy, that- without Congress- Biden could simply stop opposing student loan borrowers in bankruptcy court. He responded positively/affirmatively to this suggestion.

After the election, however, President Biden and the Democrats disappointed and even betrayed us on both of these fronts.

On student loan cancellation?

The (feeble) attempt that Biden made in 2023 was struck down by the Supreme Court. While most point to the obvious- republican Attorneys General and their lawsuits- as being the reason the effort failed, a key (probably the key) reason was because of opposition to it from leading Democrats.

Shortly after the election of 2020, Steven and Mary Swig, a billionaire, San Francisco “Power Couple” credited with launching Kamala Harris’ career, quietly circulated a memo within Democratic circles declaring that the President could not cancel student loans by executive order.

Soon after, Democratic leaders like Nancy Pelosi, Susan Rice, and others were parroting this memo, declaring that the President could not cancel the loans administratively. When the Supreme Court handed down its verdict, Chief Justice John Roberts actually quoted Pelosi in the majority opinion.

Frankly, I suspect that Biden, himself, never actually wanted to cancel loans by executive order. He reversed himself publicly on the issue shortly after the election, and the law that he attempted to use to justify the cancellation was ill-fitting. It wasn’t the law that we had originally suggested to the Administration that they used. The fix may have well been in for the failure of this attempt before it even happened.

The loans that were cancelled during Biden’s term weren’t because of anything that Biden did or didn’t do. Rather, these were loans that were, by and large, supposed to have been cancelled through existing rule or law years or even decades ago. While he and The Democrats pointed to them often as evidence that they cared about student loan borrowers, the fact is that these cancellations were very small compared to the growth of the loan portfolio over 4 years.

On returning bankruptcy rights to student loans, President Biden did, indeed, stop “opposing” student loan borrowers in bankruptcy court, but the “New Bankruptcy Process” they put in it’s place effectively transferred the power to determine the case from the judges to the Departments of Education and Justice. The process has proven to be a cruel, expensive joke on the borrowers, where still, vanishingly few borrowers are getting discharges.

The Democrats in Congress viciously betrayed student loan borrowers during the first two years of the Biden Administration, where they controlled both the House and Senate. Dick Durbin, Judiciary Chairman, had a very good, bipartisan bill (S.9110) that would have returned bankruptcy rights to borrowers who had been out of school for ten years. The bill had bipartisan support, with Republican Senators Josh Hawley and John Cornyn both cosponsoring the bill.

Leading Democrats like Elizabeth Warren, however, refused to endorse the bill, and even had a hand in scuttling an important hearing for the bill minutes before it was supposed to happen. While Senator Durbin had publicly promised to get the bill up for a vote, he ultimately abandoned this legislation at the end of 2022.

Astoundingly, Durbin’s staff told me that this was due to opposition to the bill from Historically Black Colleges and Universities (HBCU’s), who didn’t like a very modest “claw back” provision that almost certainly would never have been enforced (The Department of Education rarely, if ever, enforces such penalties he colleges).

Make no mistake: The Democrats had been promising to return bankruptcy legislatively for decades. In fact, they had begun including it in their Party Platform going back to 2016.

For the 2024 election, however, the Democratic Party took all of this language out of their platform. This was an obvious abandonment. To this day neither I nor anyone in my group can find anyone within the Democratic Party willing to explain this.

Kamala Harris put out an “issues” section on her campaign website. Her agenda for student loans consisted of exactly one sentence. Comparing this with Joe Biden’s policy agenda, it became obvious that -There was virtually no chance that Kamala and the Democrats in Congress were ever going to pursue either student loan cancellation, or the return of bankruptcy rights to student loans seriously.

There were (and are) nearly 40 million of the 43 million federal student loan borrowers who are distressed on their loans. They vote. Clearly this abandonment of them did not help the Democrats in the 2024 election.

Today, we are stuck, again, with President Trump and the Republicans controlling the White House, the House, and the Senate. They have promised to “eliminate” the Department of Education, and “return student loans to the states” (which is incredibly ambiguous). Trump has even issued at least one directive calling for the former. In reality, however, the Department of Education has not- and will not- be closed.

In fact, the Budget Bill that is currently winding its way through Congress actually increases the Department of Education’s administrative funding by $1 Billion and increases their lending authority by nearly $20,000 per undergraduate student. This could increase the student loan debt of the incoming undergraduate class of 2026 (and every class thereafter) by hundreds of billions.

The bill also makes student loans far more predatory and far harder to repay. The bill is really a wishlist for the student loan industry, the colleges, and the Department of Education, who think that they can perpetuate this loan scam for another 4 years.

It appears both parties in Washington have, astonishingly, decided to capitulate to the student loan “swamp”, and join its efforts to keep this failed loan scam going. At this point, this is not just massively unwise, but also horribly immoral.

In just the past few years, we have seen a large number of shocking, horrifying acts committed by distressed student loan borrowers. A couple of examples:

The Nelson Family (Broken Arrow, Oklahoma):

This family attempted to expunge their student loans in bankruptcy court. The loans were 94% of their debts. They found out the hard way. Student loans are uniquely non-dischargeable. They got all of the shame of a bankruptcy, and no relief. I will leave it to the reader to see the details of the heartbreaking tragedy that ensued.

Justin Mohn sued the Department of Education over his student loans. Predictably, his lawsuit failed, and Mr. Mohn then, literally, declared war on the federal government, attempted to attack a federal government facility, and ultimately murder his own father in a most disturbing and grisly manner.

We are truly in uncharted territory, here. I estimate that going forward, we can easily expect half of all student loan borrowers to wind up in default in the next few years, and only a small fraction of borrowers will even be able to make payments on their loans at all, and around 90% will have increasing balances. This is precisely what the Founders wanted to avoid when they called for uniform bankruptcy rights.  The real, human toll that this is likely to have on millions of people will be the sort of oppressive tyranny that we thought could only happen in third world countries.

I urge anyone and everyone who sees the dark places that this is taking the country to do everything possible to, at a minimum, compel Congress and the President to return the constitutional bankruptcy rights that the Founders so strongly called for. This begins, of course, with pressuring Congress to fix what they broke.

Donald Trump, being a wildcard, may be the person who will finally shake off the student loan swamp, go with his gut, and do the right thing, at long last.  But this will take major effort on the part of the people being affected.  They have no political party who will fight for them.  They are on their own.  It’s the Wild West.

As a final warning, I would urge people to not trust the existing advocacy groups who claim to be fighting for student loan borrowers. Most have proven to be aligned- and even be business partners- with the student loan industry. These groups are not what they seem, and will only serve to confuse, beguile, distract borrowers, and perpetuate this loan scam.