Your student loan bill is due

0:00The U.S. is having a conversation about whether so many young people really need to be going to college. It means you are a far right authorization on you on ultra does it ultra ultra now let's it. Oh, my God. Or whether options like trade school and apprenticeships offer just as good a future with often much less debt. Unfortunately, we're having this conversation too late for the estimated 42 or 43 million people who hold student loan debt. more than 5 million of whom are in default, and who, as of next month, may see the federal government begin to garnish their wages while they're just trying to live.

0:45Thank goodness I don't have kids. I mean, I love kids, but there's no way. No way I could pay on my student loans, pay my rent, pay for groceries. No way. Coming up on Today Explained from Vox, what it means that your student loans are coming due.

1:25Thank you. wherever you get podcasts.

1:33This is Today Explained. I'm Noelle King with Chris Quintana. He's an investigative reporter at USA Today who writes about student loans and the way that debt affects borrowers' lives. All right, Chris, so we know that the federal government wants people to pay their student loans back, and it has a new plan to force them to do that. What's the plan? This is a continuation of something that the education department said that they were going to do in April. In case you missed it, we will restart collections of student loans in default. We will not force American taxpayers to take on the debts that are not theirs.

2:08And so as part of their desire to make borrowers pay their debts, they have a couple of tools available to them, right? They can seize your tax refund. They can seize Social Security benefits. They can also garnish your wages. And so what we're looking at now is the implementation of the federal government garnishing wages. That's up to 15 % of your disposable income. And this only applies to borrowers who haven't paid their debts in a long time. So to start, it's about 1 ,000 borrowers who've defaulted on their student loans will have their wages garnished. That number is expected to grow throughout the year.

2:43Like, we are working. Some of us have second jobs, and we want to pay our student loans. We're trying, and yet we're getting nowhere. That interest rate, it has to come down. It's impossible to pay that, like especially with a recession, inflation and all the other things, life expenses, you name it. Something got to get. My student loans are going to kick back in. In May, my payment will be$600 a month based on my income. So I will absolutely default on those loans. What I will say is that borrowers do have some timeline before this actually happens, right? They're supposed to get 30 days worth of notice before their wages actually start to get garnished.

3:25And they have options when that does happen, right? They can try to come up with a payment plan. They can try to settle their debts or they can request a hearing and try to tell the federal government why they can't pay these debts at this time or why they deserve more time to kind of get their accounts in order. How many people are behind on student loan payments? Do we know? Yes. And it's kind of tricky. There are degrees to this, right? So the federal government has like two broad buckets, I would say. You have delinquency, and that's where you've missed a payment, right? And so anyone who misses a payment on their federal student loan isn't considered delinquent.

3:59But default is like the next level. And that is kind of when you haven't paid for 270 days plus, roughly. 5.5 million people are in default. About 6 million more are delinquent. Yeah, I owe nearly$300 ,000 in student loans. So yeah, I totally am sweating it. I am drowning in student debt. I have over$75 ,000 in student debt. Just found out that my estimated student loan debt payoff is in the year 2049. 2049. And what starts to happen there is there's a variety of effects, right? But the biggest one that I think folks would see most immediately is the impact of their credit score, right? Your servicer, your student loan servicer can actually report to the credit agencies.

4:44So-and-so hasn't paid their student loan debts, right? And that can have a lot of cascading effects, right? Like when you think about your credit, that impacts your ability to take out a car loan. That impacts your ability to eventually take out a mortgage. And it can just squeeze what kind of life a person lives.

5:03All right. So we heard from listeners about this, Chris. And I want to play a call from one of them. Her name is Lexi in Michigan. Take a listen to this. I've got about$17 ,000 in student loans. And I actually don't even have a degree. I haven't even really thought about my student loans for the past, you know, I think since the pandemic, whenever I had last adjusted, they told me I didn't need to pay anything. And I haven't really, I've really looked at it since. Am I screwed? Oh, gosh, I feel for Lexi. And first, I want to say I don't think she's screwed. But her situation is not dissimilar to a lot of borrowers.

5:46And, you know, the federal government under both administrations likely has a role in this, right? I mean, the pandemic pause started in March 2020, and that was when President Trump was in office for the first time, right? Today, Secretary DeVos has directed federal lenders to allow borrowers to suspend their student loans and loan payments without penalty for at least the next 60 days. And if we need more, we'll extend that period of time. Over his administration, the tail end of that administration, and through the Biden administration, the pause was extended multiple times, right? That all came to a head finally, finally ended in October 2023.

6:25But the Biden administration gave borrowers about a one-year period. It was an on-ramp period to kind of help them get back up to speed with paying their loans, right? So it wasn't that your loans weren't due. It was just that the consequences for not paying those loans weren't in effect, right? So if you missed a payment at that point, it wouldn't be reported to a credit agency. The federal government hadn't started its collections process. And so it's understandable that borrowers had received all this information and didn't know actually where things stand for now. And so all that said, I feel for Lexi and say that the first step to figure out kind of where she is and what she owes is to get either if she knows her servicer, get in touch with her servicer.

7:10And if not, you can always go to studentaid.gov. That is the kind of the central housing for federal student loans. It's unlikely that the federal government is her direct servicer, but her account through the federal government would tell her who her servicer is, how much she owes, and like the last time she had made a payment, right? Also, through that, she can request, depending on how far behind she is, an attempt to get onto an income-based repayment program or something else to kind of get up to speed with her loan. So she's not screwed, but I would say that there's not a lot of benefit in waiting to take action.

7:51Yeah, I appreciate your optimism here. Telling Lexi she's not screwed is good, but actually Lexi's call made me think about something, which is that this is a young woman who is already navigating financial complexity, like tens of millions of other young Americans and not so young Americans, right? People these days are having trouble affording their rent. They're having trouble paying the mortgage. They're having trouble with car loans. They're having trouble buying food. The Trump administration says, hey, millions of you are behind, and now we're going to ask your employers to take some money out of your paycheck.

8:31What does this actually mean for the American economy more broadly? There are millions of Lexis, right? And when you think of millions of young people whose credit scores are being devastated by the fact that they haven't paid their student loans, who may, in fact, then on top of this credit score devastation, see the federal government reaching into their paycheck to take up to 15 percent of their post-tax income. it's not hard to think what impact that will have in the economy. That affects people's ability to spend recreationally. It affects their ability to spend on things that they need in their lives.

9:04And so, I don't know, it's hard to say exactly what the effect is, but it's going to be substantial. The business of student loans has been called out for years now as kind of a dirty business, right? You sign a piece of paper when you're 18 years old. You don't know what the hell you're signing. You don't know what you're committing to. And then you find yourself 22, 25, 27, 35, and you are deep, deep in debt. And often the interest keeps growing, right? Has the Trump administration, which seems to want in some ways really to put an end to this, has the Trump administration said anything about changing things on the front end, not allowing lenders to loan hundreds of thousands of dollars to young people, stopping this before it starts?

9:52Yeah, you know, I'm glad you asked that because I've written about this recently. And actually, the federal government is planning to institute new limits for graduate programs. And I know this seems kind of niche, but graduate loans, they've jumped in recent years. They make up nearly half of new loans dispersed. And so limiting grad programs is going to have a big impact both on students' ability to pay for college and on college operations. Prior to this, you could borrow up to the cost of a graduate program, which a lot of people have argued let schools kind of set their own price. with the knowledge that the federal government would loan students however much money they needed to get through their program, right?

10:27The federal government is now saying, we're not going to do that anymore. For graduate programs, the total amount that you can borrow is$100 ,000. For professional programs, this is like law degrees, this is medical degrees. That cap is now set at $200 ,000 in total and about$50 ,000 annually. There is a lot of concern that this will limit people's ability to attend school, and it may also drive up private lending, which doesn't have the same protections that federal lending has, right? You can get generally lower interest rates through the federal government, and you also have protections through a federal loan that you don't have through private loans, right?

11:01Like the pandemic pause, that only applied to federal student loans. Private borrowers still had to pay on those loans. They got a little bit of reprieve, but they were paying when federal student loan borrowers generally were not. I think the Trump administration is trying to address debt in its own ways, right? They're also trying to get people to go to short-term programs, right? So they, for the first time, have opened up Pell Grants, which are awards generally geared towards low-income students. But they had been kind of for longer programs generally. Now they're saying you can do programs that are 16 weeks or so.

11:34And the hope there is that a Pell Grant, you don't have to repay it, right? And so maybe the idea is like you do a short program, you get into the trades and you just bypass like the higher ed system altogether. Whether or not that's effective remains to be seen. Like a degree really opens a lot of doors for people. Generally, the earnings for a degree holder compared to someone who went to high school are higher. And so it'll be interesting to see how they address this and how they keep the doors open to higher education while also trying to address the ever growing student loan portfolio.

12:11That was Chris Quintana. He's an investigative reporter at USA Today. Coming up, we are going to bust a myth about student loan debt that has been around for decades. And in fact, I believed it myself. Stay tuned. Thank you.

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14:59I declare today it's plane! We're back with Jason Giuliano. He's a law professor at the University of Utah's S.J. Quinney College of Law. Jason is the author of a new study, stay with me, that found something very, very surprising. A majority, a large majority of people who try to wipe out their student loans via bankruptcy are actually succeeding. Jason, let's start this way. We asked our listeners to tell us about their student loan debt, and we heard some real horror stories. I have around$150 ,000 of debt from an undergraduate degree. I have$161 ,000 in student loans that I started accruing 20 years ago.

15:44I walked out of school about eight years ago with$120 ,000 in debt. People just buried in six figures of debt, not sure how they're going to get out of it. And so this inevitably opens up a question, which is, could they just declare bankruptcy? Yeah. And so that's an option that's on the table that historically I like to think of is the myth of non-dischargeability of student loans. And so historically, it's been thought that you can't get out of your student loans by declaring bankruptcy. But factually on the ground, the empirics paint a very, very different picture. The most recent data I have is that 87 % of the student loan debtors who are following this new process that the government adopted successfully discharged their student loans.

16:32So a very, very different story than the historical myth, again, that's been out there and what a lot of bankruptcy attorneys have been telling their clients that it's just impossible, that's not true anymore. I have actually heard this a thousand times in my life. Your student loans are not bankruptable, and therefore you just got to pay them off. So if you're telling me 87 % of people who are trying this are succeeding, something happened here, first go back in time and tell me, why weren't student loans bankruptable once upon a time? So it's a long, winding history through Congress, but the short of it is, in the 1970s, Student loans were completely dischargeable, just like credit card debt, mortgage debt, any other type of consumer debt you can imagine.

17:16File bankruptcy or student loans get wiped out. And then there was this very empirically unfounded but colorful attack that painted student loan debtors as out to game the system. There is a tendency when the student leaves school for repayment of the loan to slip down the priority scale to number three, four, five, or even lower. To behind the payments on a new car, stereo, a television, appliances, and or a personal loan. New York Times, October 19th, 1980. It was a really compelling narrative of the student loan debtor walking across the graduation stage with their diploma in one hand and the bankruptcy petition in the other, just out to sort of fleece Uncle Sam and steal from the taxpayers and get out of the student loan debt.

18:04Empirically, that was never happening, but it was a powerful image that led Congress to step in and start chipping away and putting these hurdles to student loan debt discharge through bankruptcy. Congress has passed legislation that beginning in October will bar discharge of the loan through bankruptcy proceedings during the first five years following a student's graduation. The New York Times, April 29th, 1977. Then you couldn't do it for seven years. And then you couldn't do it ultimately indefinitely unless you met what's called the undue hardship standard that's in the bankruptcy code. And so the student loan debtors who now want to get out from under their student loan debt have to go before the judge and prove that they qualify for an undue hardship discharge.

18:52And the short of that is there's three different prongs to meet. The first is that you can't currently repay your student loans, that you don't have the funds currently somewhere sitting in the bank or through your income to pay off your debts. The second is that the situation is likely to persist into the future, that it doesn't look like you're up for a big promotion or have earning capacity that's untapped, but you're pretty sort of set in your financial situation and it's not going to improve. And the last prong is going back in time. Did you make a good faith effort in the past to actually repay any of your student loan debt?

19:24And so it has these three different temporal prongs, past, present, and future, to determine whether you're eligible for a student loan bankruptcy discharge. And that makes it very difficult. And that's where I and hundreds of thousands of other people get the idea that student loans are not bankruptable. At what point does that start to change? Yeah, so I've been collecting data for the past 15 years at this point. And if we go back to 2007, the success rate was 40%. And I'll emphasize still very different than the perception that no one can ever do it, but 40 % isn't a great success rate. And if we go forward to the latest data where the cases are actually resolved, it's again that 87 % success rate.

20:05The debtors who are pursuing the new process successfully get out from under their student loan debt. Why? How? What happened? Yeah, so there was a recent change in 2022 where the Department of Justice came out in conjunction with the Department of Education and issued new guidance stipulating to how debtors should proceed under the bankruptcy process to prove undue hardship. Today we have breaking news out of the Department of Justice. It appears that they're going to be more lenient when it comes to opposing or recommending discharge of federal student loans in bankruptcy. Previously, it had been set up where it would be very litigious between the Department of Justice and the student loan debtor.

20:50And so you as the debtor would file your bankruptcy. Then you would have to file what's called an adversary proceeding, which is basically suing the federal government saying, I meet undue hardship. Then the federal government would respond. So you're basically engaged with litigation as this individual student debtor against the federal government. and it goes through this entire litigation process where the judge then ultimately determines, did you or didn't you qualify for an undue hardship discharge? That's all been revamped under the new system. And so now you still file your bankruptcy, you still make the formal request and the complaint to the court, but you sort of take this parallel side approach by filing certain documentation with the Department of Justice that gives them all the information they need to make this preliminary determination whether you do or don't meet that undue hardship discharge requirement.

21:36So they look at all of your financial information that you provide to them, and up front they'll tell you, we're not going to contest your discharge, or we think you don't meet the undue hardship standard, so we will challenge it.

21:51Who manages to do this successfully? If we have people listening and they're like, I wonder if I might fit the bill, who are you seeing gets the loans discharged? So it's pretty much everyone who's applying at this point, everyone who's going through the process. And I'll clarify, the folks who are going through this, though, are already in bankruptcy. And so it's not the fact that every student loan debtor who just has student loan debts, if they follow this, would get out from under their debts and receive the student loan bankruptcy discharge. But folks who otherwise have a need to be in bankruptcy and are filing a Chapter 7 because there's debts that they can't repay, all of those folks are qualifying at this point under the Department of Justice's determination.

22:32And so a very, very high success rate for folks who have just moderate financial distress that has pushed them into bankruptcy. All right. So I want to ask you, does it wreck your credit? But what I think I hear you saying is quite obviously, you are already declaring bankruptcy. Bankruptcy wrecks your credit. So filing to discharge your student loans doesn't particularly add anything into the mix. It doesn't add anything different. It's just another aspect of the bankruptcy. Yeah, that's exactly right. And I think there's this common misconception and a very unfortunate moral condemnation of folks who file bankruptcy.

23:06And one of the things that I would want to leave your listeners with is that that shouldn't be the case at all. Bankruptcy is a tool that's there to help you get out from crippling debts that are otherwise impeding your ability to succeed. And so it's this very, very useful tool. And I'll emphasize the Supreme Court has said for the past hundred years repeatedly that it's designed to give honest but unfortunate debtors a fresh start at life. And so it shouldn't be viewed in this morally blameworthy way. There's all sorts of reasons that people end up in situations, financial situations, they can't get out from under that aren't morally blameworthy for them.

23:40And so it's a very useful tool when circumstances end up in a way where the debtor just can't repay their debts. I appreciate what you're saying, but I want you to wrestle with an argument that I've heard. I heard it a lot during the Biden administration, which you won't be surprised by. Student loans are different than a credit card loan. The lender is the federal government oftentimes, which means it's the American taxpayer that lent you the money. And, you know, if you went off and went to college and ended up in debt, well, you know, somebody you went to high school with didn't get the chance to go to college, didn't end up in debt, but also doesn't have a college degree.

24:18You, person who went to college, you should be responsible for yourself because America put you through school. What do you think about that point of view? Yeah, so I understand the point of view. And to add to it, there's tons of folks who did and then paid off their complete student loan debt and sort of struggled through that. And so this isn't, this certainly isn't something to be taken lightly. And I'm not advocating, there's 40 million student loan debtors out there today. I'm not advocating that they all rush to the bankruptcy courts and discharge their student loans. It truly is for people where bankruptcy is the best step for them to get out from underneath their debts because there's no other plausible pathway.