Joe Biden and His Controversial History With Student Loans
Under current law, federal student loans are generally not dischargeable in bankruptcy. Borrowers have Joe Biden to thank for that.
In contrast, most other forms of consumer debt can be discharged through the bankruptcy process. Only a limited number of debts, such as child support payments, alimony, overdue taxes, and criminal fines, are non-dischargeable. But going back to the 1970s, Senator and later Vice President Biden backed a number of measures that eventually made it nearly impossible to discharge student loan debt.
History of Student Loans and Bankruptcy Law
It wasn’t always this way. Prior to 1976, student loans were generally dischargeable in bankruptcy. You could list them right along with other forms of personal debt. However, a 1976 law required borrowers to wait at least five years from the date of the loan before filing for bankruptcy.
Why? The idea was to prevent students from going to school, racking up a lot of student loan debt and then declaring bankruptcy as soon as they graduated. They’d get the benefit of the education. You can’t repossess or foreclose on a brain, after all. But they would stick creditors and the taxpayer with the bill. Congress also considered that if a borrower had not found gainful employment after five years, things were not likely to change.
Congress later extended the waiting period to seven years.
Then, in 1998, Congress changed the standard again: This time, the law prohibited the discharge of federal student loans unless repayment presented an “undue hardship.” Biden was a key supporter of this change in the law.
Later, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 extended the undue hardship standard to private student loans, which proved to be extremely onerous. It was nearly impossible for borrowers to get relief from student loan debt, except in the event of total and complete disability.
Senator Biden Pushed to Tighten Bankruptcy Laws
Much of the credit or blame falls on former Vice President Joe Biden. In 2005, Biden was a major proponent of the bankruptcy reform act. At the time, the bill was actively promoted by the consumer banking and credit industry. One of Biden’s key corporate constituents, the Delaware-based credit card giant MBNA, wanted to make it more difficult for borrowers to escape debts by filing bankruptcy. And so Biden helped lead the effort to pass the BAPCPA law, which took effect in April of 2005.
The firm’s executives and employees, as a group, were among Biden’s biggest campaign contributors. Furthermore, according to the Consumer Bankers Association, MBNA also hired the Senator’s son Hunter, fresh out of law school. They continued to pay consulting fees to Hunter even as his father was pushing the bankruptcy reform bill in the Senate.
The banking and lending industry was alarmed about a 5-fold increase in the rate of bankruptcies. According to Federal Reserve data, the rate of consumer bankruptcy filings in the United States had climbed from 0.3 percent of households annually in the early 1980s to 1.5 percent in the early 2000s.
The credit card issuers and other lenders wanted to fix this, naturally. Biden and other more conservative voices argued that default and bankruptcy rates had to be ‘baked in’ to interest rates. If the rate of bankruptcy could be brought down, then not only would lenders based in key states like New York and Delaware benefit, but consumers would benefit, too, from lower interest rates on credit cards and other loans.
Bill opponents at the time argued that the consumer would see no such benefit and that the benefit would remain in the coffers of the lending companies.
“Joe Biden was on the side of the credit card companies,” said the Senator and presidential candidate Elizabeth Warren after an April rally in Iowa. “It’s all a matter of public record.”
Bankruptcy Law Provisions
Borrowers who want to file bankruptcy under Chapter 7 must pass a means test. If you make too much money relative to your debt payments, you can only get a reorganization under Chapter 13. You can’t get a full discharge under Chapter 7.
Prior to the law’s passage, borrowers filing bankruptcy got a reprieve from eviction proceedings. Once debtors filed, they generally got an “automatic stay” of all collection attempts, including wage garnishment and evictions.
The 2005 bankruptcy law revoked that provision. Bankruptcy filings no longer delay eviction proceedings. This made landlords happy, of course. But it made things harder on borrowers who were already facing severe financial hardship.
Additionally, under the old law, those who filed a Chapter 7 had to wait at least six years before filing another Chapter 7 bankruptcy. The new law increased the required waiting period to eight years.
Filers had to go through credit counseling and debtor education.
Warren vs. Biden
Going back to the 90s, Senator Elizabeth Warren (D-MA) was an energetic critic of the bankruptcy reforms that took effect with the 2005 law. She thought the bill was a massive exercise in rent-seeking from the powerful consumer credit industry. A Harvard professor and bankruptcy expert at the time, Warren met with then-First Lady Hillary Clinton and convinced her to bring her husband, Bill Clinton, into opposition to the measure, and the Administration successfully blocked this reform in the 2000s.
But in 2005, Biden continued to push the measure. Hillary Clinton – now the junior Senator from New York, reversed course and voted for it.
In her book, “The Two-Income Trap: Why Middle-Class Parents Are Going Broke,” Warren ferociously attacked Biden for his support for the law, and for doing the bidding of the big banks and credit card lenders headquartered in his state of Delaware, just as Senator Clinton was doing the bidding of the financial giants headquartered in New York.
The Outcome of the 2005 Bankruptcy Law
Biden’s effort to reduce the overall rate of bankruptcy filings was ultimately successful. After a short spike as people rushed to file before the deadline, the 12-month bankruptcy risk at any given credit score level fell by about half.
In just two years, BAPCPA prevented about 1 million bankruptcy filings.
Conservatives (and Biden!) were also correct about a reduced bankruptcy rate lowering interest rates: An MIT Economics paper found that for each one percentage point decline in the risk of filing for bankruptcy within a credit score segment, interest rate spreads fell by 67 basis points.
But those improvements came at a cost – which fell heaviest on lower-income families and people who were struggling.
Those trying to file bankruptcy had to jump through more administrative hoops – passing the means test for a Chapter 7 filing, for example, and undergoing financial counseling and education on alternatives to bankruptcy. The problem: By the time consumers got to this point, they were frequently facing foreclosure or garnishment or their financial situation was already so hopeless that the alternatives to bankruptcy weren’t relevant for these people anymore. The mandatory counseling was coming years too late – and adding cost to the process for people who could least afford it.
The Cost to Consumers
“Today, in most cases it means paying $50 for 20 minutes of ‘counseling’ by phone and listening to someone tell you to make a budget and stick to it,” said Herbert Karp, a bankruptcy attorney in Northern Virginia. “People in debt already know that; they just can’t do it. That’s why they’re filing for bankruptcy, and it’s not because they were living high on the hog. In the great majority of cases, they’re in financial trouble because of medical bills, divorce or job loss. They need to be helped, not punished,” he said.
The out-of-pocket cost for bankruptcy filing also skyrocketed, from $868 to $1,309 for Chapter 7 filings and from $2,260 to $2,861 for Chapter 13.
Another hidden cost of bankruptcy reform came as middle-class filers deliberately reduced or concealed income in order to pass the means test so they could file bankruptcy under Chapter 7.
An MIT report found evidence that the deterrence effect of the new bankruptcy law was not limited to abusive filings. There appear to have been a lot of filers with medical debts or other costs beyond their control who probably should have been in Chapter 7 who were steered into an onerous Chapter 13 reorganization, or who were deterred from filing a much-needed bankruptcy at all.
Some consumers barred from bankruptcy may have been forced into foreclosure instead – Especially during the Great Recession, when many of them were upside down on their homes and highly leveraged. This phenomena, of course, left banks holding the bag, taking big losses on mortgages that could have been headed off with a smaller bankruptcy earlier in the process that allowed consumers to stay in their homes.
Other congressional representatives from both parties are working to change the law. Senators Elizabeth Warren (D-MA) and Dick Durbin (D-IL), together with Representatives Jarrold Nadler (D-NY-01) and John Katko (R-NY-24) introduced the Student Borrower Bankruptcy Relief Act of 2019. If passed, this law would make both federal and private student loans dischargeable in bankruptcy. Student loan debt would be treated the same way other consumer debts are treated in bankruptcy proceedings.
“Filing for bankruptcy should be a last resort, but for those student borrowers who have no realistic path to pay back their crushing student loan debt, it should be available as an option to help them get back on their feet,” said Senator Durbin in a statement supporting the bill.
The Senate bill has picked up the following co-sponsors:
- Tammy Baldwin (D-WI)
- Richard Blumenthal (D-CT)
- Sherrod Brown (D-OH)
- Kamala Harris (D-CA)
- Maggie Hassan (D-NH)
- Mazie Hirono (D-HI)
- Amy Klobuchar (D-MN)
- Patrick Leahy (D-VT)
- Ed Markey (D-MA)
- Jeff Merkley (D-OR)
- Jack Reed (D-RI)
- Bernie Sanders (I-VT)
- Jeanne Shaheen (D-NH)
- Chris Van Hollen (D-MD)
- Sheldon Whitehouse (D-RI)
- Jacky Rosen (D-NV)
- Catherine Cortez Masto (D-NV)
There are currently no Republican co-sponsors in the Senate.
The bill is currently before the Senate Judiciary Committee.
The Student Borrower Bankruptcy Relief Act of 2019 has also picked up support from a number of consumer organizations, including Americans for Financial Reform, the Center for Responsible Lending, Consumer Federation of America, Consumer Reports, the National Association of Consumer Advocates, the National Association of Consumer Bankruptcy Attorneys, the National Consumer Law Center (on behalf of its low income clients), National Student Legal Defense Network, Public Citizen, U.S. PIRG, and Young Invincibles.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.