Millions of Americans have enjoyed a reprieve from the squeeze of student debt during the pandemic. But, come fall, the student-debt crisis could pick up where it left off – or snowball into an even bigger problem.
The pause on student-loan payments and zero interest accrual that have been in place since March 2020 will lift at the end of September. When it does, borrowers will be paying 1% more in interest than they did in 2019. Although rates are still relatively low compared to previous years, Forbes reported that the new interest rates will cost borrowers as much as an additional $590 per $10,000 borrowed on a 10-year repayment term.
The impending lift on the payment pause, coupled with rising interest rates, doesn’t bode well for millions of borrowers, who have been able to stay financially afloat during the pandemic without the burden of paying off their student-loan debt. That’s especially true for millennials, for which student-loan debt has been one of many balls in a long-time juggling act of financial challenges.
Many have been hoping they wouldn’t have any student-loan debt at all come fall – or at least, a much lighter load.
Joe Biden campaigned on supporting $10,000 in student debt cancelation per person, but since becoming president, he’s given no clear timeline for doing so. He hasn’t included his campaign promise in his stimulus plan, infrastructure plan, or his budget, and has resisted calls from Democratic lawmakers to cancel up to $50,000 per person using his executive powers. While he released a regulatory agenda on Friday that plans to improve student-loan forgiveness programs by 2022, it’s not the immediate relief Democrats are looking for, and its details are vague.
And the generation has dealt with all of this while shouldering the lion’s share of student-loan debt. If Biden continues not to act on debt relief, the student-loan crisis has the potential to intensify, adding to the pile of millennial economic challenges.
Student debt has left a stain on millennials’ adulthood
Forty-three million borrowers currently share the $1.7 trillion of national student-loan debt. As of 2019, the 15.1 million borrowers ages 25 to 34 – a large chunk of the millennial population – owed an average of $33,000.
“I still haven’t been able to save enough to put a down payment on a house and commit to another 30-year loan,” Daniela Capparelli, who graduated with $150,000 debt, told Insider in the beginning of 2020, when she was 35. “I often feel like I already have a mortgage without the house.”
For the millennials who have found themselves at the bottom of the intragenerational millennial wealth gap that the pandemic has exacerbated, student debt is especially painful. This group was more likely to already have lower earnings pre-pandemic, and to burn through savings when hit by unemployment or pay cuts.
The pause in payments has been a temporary solution to the nation’s debt burden. Borrowers have saved $2,000 on average in interest during this time, per a report by travel research group Upgraded Points which also noted, “while those couple thousand dollars could have been imperative in keeping borrowers in the black during pandemic-related hardships, these borrowers are still far from climbing out of the holes they dug in college.”
When the pause lifts, it has the potential to leave struggling millennials feeling more slammed with student debt than before, after a year spent falling further financially behind on other areas.
Biden has canceled billions of student loans that are only 0.2% of the total
Now, Biden has taken some steps toward student-loan debt assistance. He extended the payment pause, which was set to end in January, through September 30. And, through the Department of Education, he cleared up billions of dollars in debt in just a few months for borrowers defrauded by for-profit schools and borrowers with disabilities.
But, as Insider’s Ayelet Sheffey reported, this still left trillions of outstanding debt. Alan Collinge, the founder of Student Loan Justice, told her that compared with the scale of the student-debt crisis, canceling debt for defrauded borrowers and borrowers with disabilities is “massively unimpressive.”
“We’re in a pandemic, and we’ve lost tens of millions of jobs,” he said. “The people who are hurt the worst tend to be the people who have student-loan debt.”
So far, $2.3 billion in student debt has been cancelled – only 0.2% of student loans swimming through the system.
In February, he effectively rejected a plan put forward by Sens. Elizabeth Warren and Chuck Schumer to wipe out $50,000 in student-loan debt per borrower.
“I will not make that happen,” he had said to a CNN town-hall audience, adding that he believed loan forgiveness depends on whether borrowers attended a private or public college. “I’m prepared to write off $10,000 in debt, but not 50. I don’t think I have the authority to do it.”
Both Democrats and cities have urged Biden to cancel $50,000 in student debt per borrower, arguing that it would provide immediate relief to borrowers if Biden used his executive authority to do so. But there’s a discrepancy among Biden and lawmakers on whether he can actually use his executive powers to cancel debt.
He told The Washington Post that it is “arguable” the president can use executive powers to cancel student debt, and he would be unlikely to do so. That means the status of the cancelation of a minimum of $10,000 of debt remains in Congress’ hands.
Student-loan forgiveness would be a ‘lifeline’ for millennials
Student-loan relief would benefit millions.
A Department of Education (DOE) analysis obtained by Yahoo Finance found that $50,000 in student-loan forgiveness per person would erase the entire debt for 84% of borrowers in the US with federal loans, while $10,000 in forgiveness would erase the entire debt for 35% of these borrowers.
That includes everyone from Gen Z to those over the age of 50. But millennials, facing one economic conundrum after another, have adopted new social norms to suit the times, hitting milestones like marriage and homeownership later than their parents, if they happen at all. The pandemic has created a whole new slew of crises for them that have exacerbated existing ones, student debt chief among them.
Student-loan forgiveness was a top priority for voters in the election. If Biden doesn’t fulfill his campaign promise to relieve $10,000 in student debt, he’d be leaving the generation, many of whom were banking on him to absolve at least a portion of their biggest burdens, screwed yet again.
“We need some help, and that forgiveness, for a lot of us, would just be a lifeline,” Alexander Cockerham, 38, who took out $42,000 in federal in private loans to attend school, previously told Insider.
But the resumption of student loan payments is drawing near, with little to no action in sight. In early April, Biden’s chief of staff, Ron Klain, told Politico that the White House was “looking into” its legal authority to cancel $50,000 per person. Shortly afterward, the White House press secretary, Jen Psaki, said that option wasn’t being ruled out.
An Education Dept. spokesperson told Insider that the agency remains “committed to delivering” targeted relief to borrowers and helping all of them manage repayment, and continues to closely review data related to return to repayment. It is also working with the Department of Justice and White House “as quickly as possible” to review all student debt cancellation options. (The White House did not respond to a request for comment).
While cancellation doesn’t exactly need to happen before the pause lifts, it would be even more beneficial to borrowers if it did, helping them lower the amount they would pay interest on or even preventing them from ever having to pay again altogether. Education Secretary Miguel Cardona said in May he has not ruled out further extending the pause, but, again, no action has been taken yet to do so.
If Biden fails to cancel student debt, he’s sacrificing opportunities to help narrow the racial wealth gap, assist low-income borrowers, and boost the economy. For millennials, specifically, it would just be the latest way they can’t catch a break.
Forty-five million Americans have a $1.7 trillion student debt burden in the country. And many of them, alongside Democrats and advocates, want President Joe Biden to forgive $50,000 of their debt.
He hasn’t done that yet, but the president has taken steps to lessen the burden and provide relief during the pandemic.
As one of his first actions in office, Biden extended the pause on student loan payments through September, coupled with zero growth in interest, to ensure borrowers suffering financially would not have to worry about paying off their loans. And since then, Education Secretary Miguel Cardona has cancelled student debt for borrowers with disabilities and borrowers defrauded by for-profit schools. He’s also started conducting reviews of student loan forgiveness programs that don’t work as they should.
But Democrats want Biden to do more.
They have been keeping the pressure on the president to cancel $50,000 in student debt per person using his executive authority. And while Biden has expressed hesitancy to do so, Democrats remain adamant that he can, and should, cancel student debt immediately with the flick of a pen.
“Student loan cancellation could occur today,” Massachusetts Sen. Elizabeth Warren told Insider. “The president just needs to sign a piece of paper canceling that debt. It doesn’t take any act of Congress or any amendment to the budget.”
Detailed below is everything Biden has done to date to confront the student debt crisis:
Extended the pause on student loan payments through September
On his first day in office, Biden asked the Education Department to extend the pause on federal student loan payments through September 30, following Education Secretary Betsy DeVos’ extension on the pause on loan payments through the end of January.
This was accompanied by a 0% interest rate during that time period.
Director of the National Economic Council Brian Deese said at the time that the extension on loans would to alleviate some of the burdens many households were facing to pay basic expenses, and student debt is often a barrier to putting food on the table.
“In this moment of economic hardship, we want to reduce the burden of these financial trade-offs,” Deese said.
This extension, however did not apply to the more than seven million borrowers with loans held by private companies.
Asked the Justice Department to review his authority to cancel student debt
In February, White House Press Secretary Jen Psaki told reporters that Biden will ask the Justice Department to review his legal authority to cancel $50,000 in student debt.
At a CNN town hall in February, Biden said he doesn’t have the executive authority to cancel up to $50,000 in student debt per person, but said he is prepared to cancel $10,000 — something he campaigned on.
However, Insider reported that he has yet to deliver on that campaign promise, and while Biden said he would support legislation brought to him to cancel $10,000 in student debt, Democrats argue that legislation takes too long, and the president can cancel debt immediately using his executive authority.
“We have a lot on our plate, including moving to infrastructure and all kinds of other things,” Warren said in a February press call. “I have legislation to do it, but to me, that’s just not a reason to hold off. The president can do this, and I very much hope that he will.”
Biden’s administration has not yet commented on the status of Justice Department’s review.
Cancelled student debt for defrauded borrowers
In his first major move as Education Secretary, Cardona on March 18 reversed a Trump-era policy that gave only partial relief to defrauded students.
For-profit institutions that shut down years ago, like Corinthian Colleges and ITT Technical Institutes, were accused of violating federal law by persuading their students to take out loans, and Cardona’s new policy helped approximately 72,000 of those students receive $1 billion in loan cancellation.
“Borrowers deserve a simplified and fair path to relief when they have been harmed by their institution’s misconduct,” Cardona said in a statement. “A close review of these claims and the associated evidence showed these borrowers have been harmed and we will grant them a fresh start from their debt.”
The debt-cancellation methodology, known as the “borrower defense to repayment” — approved by Education Secretary Betsy DeVos — compared the median earnings of graduates with debt-relief claims to the median earnings of graduates in comparable programs. The bigger the difference, the more relief the applicant would receive.
But compared to a 99.2% approval rate for defrauded claims filed under President Barack Obama, DeVos had a 99.4% denial rate for borrowers and ran up a huge backlog of claims from eligible defrauded borrowers seeking student debt forgiveness.
Cardona said that process did not result in appropriate relief determination and needed to be reversed, and a judge recently ruled that DeVos must testify over why so few borrowers were approved for loan forgiveness.
Cancelled student debt for borrowers with disabilities
Two weeks after cancelling some debt for defrauded borrowers, Cardona on March 29 cancelled $1.3 billion of student debt for about 41,000 borrowers with disabilities.
He also waived an Obama-era requirement for those borrowers to submit documentation during a three-year monitoring period to verify that their incomes did not exceed the poverty line.
A 2016 report from the Government Accountability Office found that 98% of reinstated disability discharges occurred because borrowers did not submit the required documentation — not because their incomes were too high.
“Borrowers with total and permanent disabilities should focus on their well-being, not put their health on the line to submit earnings information during the COVID-19 emergency,” Cardona said in a statement. “Waiving these requirements will ensure no borrower who is totally and permanently disabled risks having to repay their loans simply because they could not submit paperwork.”
But experts said this action did not make up for the significant number of borrowers who never received loan forgiveness simply due to paperwork.
“Today’s announcement is not cause for celebration but rather for outrage,” Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said in a statement at the time. “It is scandalous that the Department revoked the loan discharges for 41,000 borrowers with total and permanent disabilities due to paperwork issues during a pandemic.”
Expanded the scope of the student loan payment pause
Biden’s payments pause on student loans initially only applied to borrowers with federal loans, meaning those with privately-held loans had to continue making payments during the pandemic.
But on March 29, Cardona expanded the scope of that pause to apply to loans under the Federal Family Education Loan (FFEL) Program, which are privately-held. This helped 1.14 million additional borrowers.
The FFEL Program ended in 2010, but according to Education Department data, 11.2 million borrowers still have outstanding FFEL loans totaling over $248 billion. And while the department acquired some of the outstanding FFEL loans, many are still privately owned and were not affected by the earlier pause on federally owned student loan payments.
According to a press release, any FFEL borrower who made a payment in the past year will have the option to request a refund.
Asked the Education Department to review his authority to cancel student debt
White House Chief of Staff Ron Klain told Politico in April that Biden had asked Cardona to create a memo on the president’s legal authority to forgive $50,000 in student loans per person.
Biden will “look at that legal authority,” Klain said. “He’ll look at the policy issues around that, and he’ll make a decision. He hasn’t made a decision on that either way, and, in fact, he hasn’t yet gotten the memos that he needs to start to focus on that decision.”
The review appears to be ongoing, and the administration has not announced a timeline for when it will be completed.
Started a review of student loan forgiveness programs
On May 24, the Education Department announced it is beginning the process of issuing new higher education regulations, mainly concerning student debt-forgiveness programs.
The first step of the process will be through holding hearings in June to receive feedback on “regulations that would address gaps in postsecondary outcomes, such as retention, completion, student loan repayment, and loan default,” according to a press release.
The department will also seek comments on rules regarding student loan forgiveness for borrowers in public service and borrowers with disabilities, among other things.
The main topics the department plans to address concern the methods for forgiving debt for defrauded borrowers and borrowers with disabilities, along with looking into the Public Service Loan Forgiveness (PSLF) program, which has rejected 98% of eligible borrowers.
Forbes reported that the process to implement new rules could be lengthy, though. After the hearings in June, there will be “negotiated rulemaking,” during which stakeholders meet with the department to review proposed regulations, and it could take a year or longer until changes are implemented.
Richard Cordray, the head the Education Department’s Office of Federal Student Aid (FSA), is remaining committed to helping student loan borrowers through new issued guidance that would enhance oversight of student loan servicers.
On Friday, Cordray – former head of the Consumer Financial Protection Bureau (CFPB) and an ally of Sen. Elizabeth Warren – issued guidance that would expedite the process for states to receive data from student loan servicers, increasing oversight to protect student loan borrowers from potential violations of the law.
Cordray wrote in a blog post that, as former head of the CFPB, he “saw the importance of state regulation and oversight to identify problems and deliver relief when companies take advantage of people.” He also said the new guidance will make the information FSA holds more accessible to regulators.
“States and regulators need information when they think a loan servicing company might be violating a law or regulation,” Cordray wrote. “To know for sure, they need to look at the companies’ policies and procedures, their handbooks, complaints made by customers, and anything else that shows how the company operates. Getting information from us helps state officials better enforce their laws that protect [borrowers].”
In 2017, under President Donald Trump, the FSA published a memo that told loan servicers that if states came to them for information, they had to send a request to the FSA first before releasing anything. But Cordray wrote that the FSA usually rejected the requests, forcing states to file lawsuits that dragged out the process.
Cordray is rescinding that memo and replacing it with a new one that would make it easier for the FSA to work with states to quickly review requests and approve them whenever possible.
Insider reported last month that Cordray’s appointment could be game-changing for the student debt system given his former role at CFPB, which Warren – a leading advocate for student-debt cancelation – helped create.
During her time in the Senate, Warren worked with Cordray’s bureau to conduct investigations into predatory lending practices, and at the CFPB during the Obama years, Cordray made oversight of student loan servicers his priority.
The agency has returned more than $750 million to student loan borrowers since 2011 over debt collection complaints. Then, in early 2017, the bureau sued Navient – the largest student loan servicer in the US – in a lawsuit that is still ongoing, arguing that Navient misled students into taking on loans they cannot pay off.
And while Warren is pushing for Biden to cancel $50,000 in student debt per borrower, Cordray has not yet commented on doing so. But he said after his appointment to FSA that he was looking forward to creating “more pathways for students to graduate and get ahead, not be burdened by insurmountable debt.”
Cordray’s new guidance was not welcomed by some Republican lawmakers, however. Virginia Foxx, the top Republican on the House Education and Labor Committee, said in a statement it “bows to the whims of state-based Democrat politicians who are more interested in putting companies out of business than helping struggling student loan borrowers.”
But Cordray remains committed to reforming the federal student aid system to work for borrowers and hold loan servicers accountable.
“This is only a start,” he wrote. “As we move ahead, FSA has more work to do to establish strong relationships with state officials. We believe federal and state officials should be partners rather than adversaries.”
He concluded: “By working together more productively, we can build a stronger system of federal student aid to help people all over this country gain easier access to the American dream.”
When Lesley Campbell sued Citibank in March 2015 to get a portion of her law school debt forgiven in bankruptcy, everyone told her she was wasting her time. Conventional wisdom held that student debt is impossible to get rid of, even in bankruptcy.
Then, she got a text from an unknown number advising her that there was a legal way to discharge her debt – along with an offer to help do just that.
Campbell thought it was a joke.
It was Austin Smith, a newly-minted lawyer who had previously worked as a headline writer at The Onion. Except he wasn’t joking. Smith believed courts had systematically misinterpreted the federal bankruptcy code in favor of lenders over student borrowers. He was on the hunt for a client to test his legal theory.
A year later, Smith succeeded in convincing a federal judge that the unpaid portion of Campbell’s $15,900 bar exam study loan from Citibank could be cancelled in bankruptcy.
The victory marked the starting point for what’s become Smith’s raison d’être to help as many student loan borrowers as possible. At 39, Smith estimates that he has prevailed in about 75 cases, leading to the canceling of some portion of his clients’ student debts. Bankruptcy judges have cited the Campbell case at least 20 times, court records show.
Smith has also resorted to unconventional methods that blend hard-knuckle lawyering with public pressure campaigns, advocacy and a relentless stream of YouTube broadcasts that document his quest to help student loan borrowers find a lifeline. In the process, he’s borrowed hundreds of thousands of dollars to keep their legal fights alive while pursuing his own life-or-death struggle with cancer.
“This is not exactly a normal law firm,” Smith wrote in an email to his team last October. “We do not charge our clients an hourly rate, nor do we seek out the most profitable types of lawsuits such as medical malpractice or securities fraud. We seek out groups of people who are being tormented and we make it stop.”
Seth Frotman, former student loan ombudsman for the Consumer Financial Protection Bureau, says that Smith’s battle makes clear that America’s student loan system, in which obtaining relief for borrowers is difficult even when the law is on their side, is broken. “When you talk to Austin, you see the culmination of hearing from these borrowers day-in and day-out and the predatory practices they’ve been forced to endure,” Frotman says.
Smith’s legal victories upended years of case law that had steadily built up in lenders’ favor; one lawyer who has worked with Smith credits him with providing the “intellectual genesis” behind a whole line of cases that are now undoing that case law.
Yet even after five years of non-stop litigation, Smith’s goal seems as distant as ever. The niche area of bankruptcy law that he’s identified can only help some borrowers who took out privately-issued student loans – a small chunk of the total $1.7 trillion owed by Americans. And even for them, getting relief can sometimes take years. That hasn’t deterred Smith, who was once called the “Don Quixote of student debt,” by a federal bankruptcy judge, according to an attorney who witnessed the exchange.
It’s a moniker Smith readily accepts; he bought a Don Quixote print to hang over his desk, which he calls a “good reminder that you never know if what you’re about to do it quite stupid.”
Lenders have had more choice words for him. Lawyers for Navient Corp., the giant student loan servicer, have accused Smith of running a “media crusade riddled with falsehoods” and recently sought about $600,000 in costs and attorneys’ fees, a figure that could have potentially crushed his fledgling legal practice. A federal judge awarded Navient about one-tenth of the sum after it successfully fought off a bold attempt by Smith to push its loan-servicing arm into bankruptcy through an involuntary bankruptcy petition.
In mid-March, after confessing to his YouTube followers that the gambit had amounted to an “epic failure,” Smith decided to change tack: He filed paperwork to run for Congress in New York’s first House district, which includes the posh Hamptons getaways of the rich and famous, where he moved during the pandemic.
“If we are unsuccessful in the judicial branch then maybe there is a solution in the legislative branch,” Smith said in an interview, adding a touch of bravado that colors much of his legal briefs: “I can get that done.”
In some ways, Austin Connell Smith was an unlikely candidate to champion the cause of America’s overly-indebted student borrowers. Smith grew up in an affluent Chicago suburb, where his father worked as a corporate lawyer for Brunswick Corp. and other large companies. A trust fund worth around $100,000 awaited him should he ever decide to go to law school.
When Smith first turned his attention to law school in 2006, he wondered if then-FBI director Robert Mueller might write a letter of recommendation for him, according to an email exchange with his father. Smith’s father had gone to law school with Mueller and Mueller’s wife is godmother to one of Smith’s sisters. His dad wrote back that Mueller was not the right person to ask for a recommendation. Mueller didn’t respond to a request for comment.
When Smith got passed up for a full-time job at The Onion, he finally turned to law school. He enrolled at the University of Maine Law School, where he often spent his mornings at a coffee shop near campus writing a satirical novel and searching for a topic to dig into for a law review article. A chance encounter with another regular at the coffee shop, Bill Wilson, provided the spark he was looking for.
Wilson was the byproduct of a different era. A retired litigator, he attended Maine Law some 35 years before Smith, when tuition was so cheap that he could easily pay for law school by working a union job at a paper mill during the summers. By the time they met in 2014, tuition was so high that Smith still owes about $170,000 for his law degree.
Wilson was in the midst of examining bankruptcy rules surrounding student loans. He was surprised to learn that educational debt was exempt from discharge unless it met certain exceptions. He encouraged Smith to research them and see if they were as ironclad as everyone believed they were.
“Austin took it and ran with it,” Wilson recalls.
Thicket of confusion
Each year, about a quarter million student loan debtors file for bankruptcy. Of those, fewer than three hundred get their educational debt discharged in bankruptcy. That’s a success rate of 0.1%, according to calculations by Jason Iuliano, law professor at Villanova University who specializes in bankruptcy and student loan issues.
But those figures don’t tell the whole story. In 2017, for instance, only 447 out of the 241,000 student loan borrowers who filed for bankruptcy actually sought to have their educational loans discharged. The remaining 99.8% didn’t bother trying. But of those who did, around 60% managed to get a discharge of some portion of their student debt, Iuliano found.
“When you look at the people who bring these cases, they’re by and large very successful,” Iuliano says. But few borrowers bother trying to cancel their student loans when they file for bankruptcy because doing so requires an extra step – a lawsuit petitioning a judge to discharge the loans. And thanks to a widely-held belief that student debt is categorically exempt from discharge, few are willing to take that chance.
Until recently, a presentation titled “Bankruptcy Mythbusters” posted on the website of one of the nation’s most prominent bankruptcy courts, the Southern District of New York, said that student loans are not dischargeable in bankruptcy along with the mea culpa, “yeah, sorry about that.” But in Jan. 2020, the court’s chief judge, Cecelia Morris, made headlines when she canceled about $220,000 of student loans owed by a U.S. Navy veteran named Kevin Rosenberg.
“Most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans,” Judge Morris wrote in her decision. “This Court will not participate in perpetuating these myths.”
The court updated the incorrect language in its presentation after Business Insider asked Morris about it. The truth is that there are exceptions. Borrowers can have their student debts canceled in bankruptcy if they can show that paying them off would impose an “undue hardship,” which is what Rosenberg proved in his case. Typically, that requires a borrower to demonstrate that they cannot maintain a minimal living standard, that their circumstances are unlikely to change, and that they’ve made good-faith efforts to repay their loans.
Rosenberg had kept current on his undergrad and law school loans even as the balance swelled from less than $200,000 to nearly $400,000 over the course of 14 years. After his camping and hiking gear store collapsed in 2017, he researched bankruptcy rules and decided to seek discharge of his private and federal student debts. His lenders either settled or lost in court; when one of them appealed, Smith stepped in to handle the appeal for free. Meanwhile, Rosenberg, freed from his debts, is getting ready to start a new life in Norway as a tour guide for Arctic and sub-Arctic expeditions. “I want people to know that this is a viable option,” he says.
Iuliano estimates that, of the more than 2.6 million student loan debtors who filed for bankruptcy between 2011 and 2019, at least 29% would have been able to prove “undue hardship” if they sought to do so in court. It’s the only way for bankruptcy filers to get rid of any student loans owned or backed by the federal government, which are projected to nearly double to $3 trillion by 2030.
But borrowers who owe privately-issued loans have even more exceptions they can rely on. That’s because “private” student debt isn’t defined anywhere in the U.S. bankruptcy code. Instead, the law refers to “qualified education loans” – those made for direct education expenses like tuition, books, room and board at accredited colleges and universities. Private student loans meeting that definition – such as a $20,000 loan that’s used to pay tuition at a four-year state university – can’t be cancelled in bankruptcy, absent a showing of “undue hardship.”
Smith noticed that over the last 20 years, banks originated various loans which resembled student debt but didn’t fit the qualified loan definition – like Campbell’s Citibank loan, which she used to cover rent and groceries while studying for her bar exam in 2009 (A spokeswoman said Citi has since exited the student loan business and declined further comment).
Even after Smith succeeded in getting Campbell’s bar exam loan cancelled, she still owes about $360,000 in federal student debt for her Pace University law degree. The amount has more than doubled over the years even as she continued to make payments since the interest is accruing faster than the payments she’s making – a phenomenon known as negative amortization. Some 60% of student loans owed by millennials are experiencing negative amortization, according to a recent study.
Campbell didn’t seek to have her federal loans discharged when she filed for bankruptcy. “I did not know about this case!!!!!!!” she said in a text message when informed of Judge Morris’s ruling.
A life’s cause
Smith noticed these discrepancies when he dug into the bankruptcy code at Wilson’s behest. Once he graduated law school and joined a corporate law firm, he published his findings in an article, arguing that “the common belief that all student loans are protected from discharge in bankruptcy is based on a misunderstanding” of federal bankruptcy law. The article helped him convince his higher-ups to let him test his legal theory by litigating the issue pro-bono, at no cost to his clients.
The permission slip set Smith off on a search for the perfect plaintiff. Smith often worked late into the night, digging through internet chat forums and court records for several months before finally stumbling across Campbell in May 2015. After prevailing in her case in the spring of 2016, Smith left his corporate law job to start representing borrowers like Campbell full-time. The search began for others like her.
Instead, prospective clients were soon finding him. Smith’s inbox filled up with emails from borrowers whose lives had been crushed by student debt. “I was so despondent that I considered suicide as the only viable way of getting out from under these loans,” one email reads. “I have $50k student debt, no degree, was a victim of attempted murder, out of work, and homeless,” reads another. “I’m so desperate. Please help. I make $65K a year. I can’t even afford the monthly interest that accrues on my loans (all federal),” reads a third from a borrower who owed about $225,000. Another borrower who owed $598,000 wrote about seeing no viable future for herself.
Such emails hit a nerve with Smith. Despite his upper-class upbringing, he had grown up with a sense of empathy for those less fortunate than him. When he was in junior high school, his mom got a call from another parent thanking Smith for helping her son when he saw him being bullied by older kids after school. Without being prompted, Smith had intervened to help put an end to it, she recalls.
But helping student loan borrowers is tricky – and costly. The best plaintiffs are often the ones least able to pay legal fees. Class-action lawsuits, while often more lucrative for lawyers, are hard to organize due to the intricacies of bankruptcy courts and student loan plaintiffs’ unique circumstances.
To help run the firm, Smith borrowed $100,000 from a bank, and another $125,000 from his father. He turned to litigation finance firms – which specialize in funding cases that hold out the promise of large payouts – to cover the rest.
As his practice grew, Smith won acclaim for making novel legal arguments to help borrowers discharge their student debts. Meredith Jury, a former California bankruptcy judge who has provided pro bono assistance to Smith in one of his cases, said Smith began making legal arguments that judges hadn’t heard before. “Very few lawyers understand the loans well enough to even raise them,” she said.
Then, life took an unexpected turn: In Jan. 2017, Smith was diagnosed with stage two testicular cancer. One doctor said he might have six months to live, though others gave him better odds. “I felt so ashamed at that moment,” he recalls, “like I had an expiration date.” He signed up for chemotherapy and lost all his hair. As he laid in bed, he said that he would often occupy his mind thinking about what he would do if he had a chance to live longer.
Eventually, he says, he vowed to make it his life’s cause to help the student loan borrowers. “The calls, the emails, the stories. I felt so responsible for it,” he thought. “You have to finish this or at least die trying.”
Navient provided Smith the challenge he was looking for.
While he was receiving treatment for cancer in 2017, Smith and his co-counsel sought class-action certification in a lawsuit against Navient centered on a Texas borrower in similar circumstances to Campbell. The complaint alleged that Navient had sought to collect on the borrower’s bar exam study loan even though the debt had been discharged in bankruptcy and was no longer owed. Navient countered that the borrower hadn’t been harmed by its collection efforts and couldn’t pursue a nationwide class action.
The case wended its way through the legal system for years, until it finally landed in court-approved mediation in late 2020. By then, Smith had Boies Schiller Flexner LLP, the powerhouse law firm led by David Boies, at his side. Even so, Smith saw little possibility of a quick resolution.
“We’ve just been going and going and going and going,” he told his potential class action clients in a December Zoom call streamed from the garage of the home he was renting in East Hampton, N.Y.
In February, Smith filed a new petition to try to force Navient’s loan collection arm into bankruptcy. He alleged the company should be considered insolvent and placed in bankruptcy. That would protect the interests of three plaintiffs who alleged that Navient had wrongfully collected $45,684 in debt that had been discharged in bankruptcy. If Smith prevailed, the move would have flipped the calculus in his student loan litigation, turning his clients from borrowers who owed Navient money into creditors in a bankruptcy proceeding.
It was by far the biggest gamble of Smith’s career. It meant withdrawing as counsel from the Texas case since other attorneys in that litigation didn’t back the move. Within hours of filing the petition, Smith resigned from the case and six others, waiving all rights to compensation in legal battles that held out the promise of a big potential payday even as he racked up debts to run his law practice.
“Navient may well dismiss this as the desperate act of a small-time plaintiff’s lawyer. In that they would not be entirely wrong; but it is desperation born of years of battling an adversary who . . . refuses to acknowledge the psychological toll its actions are having on people,” Smith wrote in the bankruptcy petition against Navient.
Navient’s attorneys logged over 630 hours on the case, according to a court filing. Meanwhile, Smith didn’t file a response to their motion to dismiss. And when the hearing on the dismissal started-on Feb. 25, he was nowhere to be found.
A petitioner who joined the hearing on Smith’s behalf explained that Smith had experienced a recurrence of his cancer and had flown to Chicago for treatment.
About thirty minutes after that exchange, the boldest case Smith had ever filed collapsed.
U.S. Bankruptcy Judge Martin Glenn dismissed the case, which he called an “ill informed” attempt by Smith to jump the queue in his other litigation. He also ruled that Smith had acted in bad faith and awarded Navient a small share of its attorney’s fees and costs after determining that its defense was “overstaffed with too many lawyers and paralegals from two law firms.”
Smith disputes filing the petition out of dishonest motives. A Navient spokesman said Smith “brought baseless but extremely serious claims against our company, so we mounted a serious defense” and “will continue to defend ourselves against any bad faith and baseless accusations in the future.”
When Smith re-emerged from his treatment a few weeks later, he apologized to his clients for getting their hopes up of winning relief from their debts.
“I had heard increasing irritation, I believed, from a number of judges that led me to believe that this was potentially, or likely, a sort of novel way to approach this problem. And I got it wrong. I got it very wrong,” he said in a March 12 YouTube video he labeled as a “somewhat overly bleak explanation of the events.”
Smith vowed to fight on, but admitted that he wasn’t quite sure how. “I still am trying to figure out exactly how to get this done in a way that doesn’t leave three-fourths or half of you out in the cold,” he added.
The same day, he launched his bid to run for Congress in 2022. He’s seeking to represent Long Island’s Eastern half as a Democrat, running on a platform of reforming student loan bankruptcy rules, increasing judicial oversight and demanding accountability for the January 6 attack on the Capitol.
The district has been in Republican hands since 2014. But its current congressman, Lee Zeldin, who voted to overturn the results of the last presidential election, announced last month that he plans to challenge Gov. Andrew Cuomo in 2022, opening up the seat.
When members of a Long Island Democratic group asked during a recent Zoom call why Smith wanted to go to Washington, he said one thing which no one should doubt: “I just want to be a footsoldier. I want to work twenty hours a day.”
Cezary Podkul is an award-winning freelance journalist. He was previously a reporter at the Wall Street Journal, ProPublica, and Reuters.
Do you have a story or a news tip about student debt? We’d like to hear from you. Studentdebt@insider.com
President Joe Biden’s first budget request will officially be unveiled on Friday, and the New York Times found that it will propose $6 trillion to help fund his major infrastructure spending plans.
On Thursday, the Times reported that the $6 trillion budget proposal for fiscal year 2022 will be accompanied by deficits of $1.3 trillion over the next decade, and it will also call for total spending to increase to $8.2 billion by 2031, according to obtained documents.
This would take the US to its highest federal spending levels since World War II, and it comes as Biden is lobbying for his $4 trillion infrastructure plan, which not only includes rebuilding physical infrastructure, but climate change initiatives and efforts to boost the middle class, as well. This budget proposal will help him do that.
The Times added that under Biden’s budget proposal, the federal deficit would hit $1.8 trillion in 2022, and it would recede slightly after that before growing to nearly $1.6 trillion by 2031. But his plans to fund infrastructure by corporate tax hikes and wealthy people would help shrink those deficits, despite Republicans firmly opposing those hikes.
Last week, Insider reported that issues that Biden campaigned on – like student debt forgiveness – will not be included in Friday’s budget proposal, based on information sources told The Washington Post, and health care promises, like lowering prescription drug costs, won’t be making the cut, either.
“The President’s budget will focus on advancing the historic legislative agenda he’s already put forward for this year,” Rob Friedlander, spokesman for the White House budget office, told the Post. “The budget won’t propose other new initiatives but will put together the full picture of how these proposals would advance economic growth and shared prosperity while also putting our country on a sound fiscal course.”
Biden also pledged to reform the unemployment insurance system when unveiling his American Families Plan, but that will reportedly not be in the budget, either. It will mainly focus on already proposed infrastructure investments, like education and climate change, and will likely not go too far beyond that for the time being.
However, this budget proposal requires congressional approval, so its fate rests at the hands of lawmakers. But given the course the infrastructure bill has taken so far, there will likely be disagreements on what will end up in the budget. For example, Democrats have been urging Biden to ditch negotiations with the GOP on infrastructure and pass a big spending bill while Republicans continue to counter Biden’s plan with a lower scope and size.
But Biden is still committed to bipartisanship, and whether his budget proposal gets bipartisan support remains to be seen.
White House Press Secretary Jen Psaki said last week that the negotiations were an art of a “different kind of a deal – a deal for the working people.”
As Education Secretary under President Donald Trump, Betsy DeVos was tasked with overseeing the loan forgiveness program for students defrauded by for-profit schools. But thousands of those students claim they didn’t get the relief they deserved and have sued DeVos for her mishandling of the program.
A judge just ruled that DeVos has to testify in court about it.
The Biden administration didn’t want this to happen. In February, it joined DeVos in fighting a subpoena to testify in the lawsuit filed by about 160,000 defrauded students, arguing it was an “extraordinary request.” But on Wednesday, Judge William Alsup wrote in a 12-page ruling that her testimony was warranted given the “sparse” documentation of DeVos’ reasoning for rejecting borrowers’ claims.
“Even assuming Secretary DeVos retains some measure of executive prerogative, she must answer an appropriately issued subpoena,” Alsup wrote in the ruling. “Judicial process runs even to unwilling executives.”
Over the past decade, several for-profit schools have shut down over investigations claiming the schools engaged in fraudulent behavior related to federal loans. Corinthian Colleges and ITT Technical Institutes were two of the biggest schools accused of violating federal law by persuading their students to take out loans they could not pay back. They both shut down, as did other for-profit companies, such as Education Corporation of America.
DeVos, an heir to the AmWay fortune and member of one of America’s richest families, per Forbes, oversaw the “borrower defense to repayment” program to forgive debt for eligible defrauded borrowers, but the program massively failed. Compared to a 99.2% approval rate for claims filed under President Barack Obama, DeVos had a 99.4% denial rate for borrowers, and ran up a huge backlog of claims from eligible defrauded borrowers seeking student debt forgiveness.
Under DeVos, the program began to compare the median earnings of graduates with debt-relief claims to the median earnings of graduates in comparable programs, and the bigger the difference, the more relief the applicant would receive.
The high denial rate alarmed lawmakers, advocates, and borrowers who wanted student debt relief but weren’t getting any, and as Alsup said in his ruling, DeVos did not provide a sufficient explanation as to why so few claims were processed.
In March, Biden’s Education Secretary Miguel Cardona canceled $1 billion in student debt for about 72,000 defrauded borrowers and said in a statement that DeVos’ methodology for giving defrauded students debt relief had been ineffective and needed to be reversed.
“Borrowers deserve a simplified and fair path to relief when they have been harmed by their institution’s misconduct,” Cardona said in a statement. “A close review of these claims and the associated evidence showed these borrowers have been harmed and we will grant them a fresh start from their debt.”
Critics of DeVos’ appointment had argued that her financial ties were a conflict of interest, as she never sold her multimillion-dollar stake in Neurocore, a “brain training” program for children. She is also a longtime advocate of “school choice,” or vouchers that enable parents to send their children to private schools instead of public ones.
DeVos has separately asked the Georgia-based 11th Circuit Court of Appeals to block the subpoena. Alsup has scheduled a hearing for June 3.
Students of color bear a significant burden of the country’s $1.7 trillion student debt crisis, and today, a major technology company announced an investment to help lift the burden off of those students.
The Student Freedom Initiative – a nonprofit dedicated to helping students at minority serving institutions (MSIs) – announced a partnership with Cisco and AVC Technologies on Thursday, with Cisco investing $150 million to help strengthen Historically Black Colleges and Universities (HBCUs). Specifically, the multinational technology company is investing $100 million in modern technology for HBCUs, along with $50 million to help lessen student debt for HBCU students.
“Their expertise and generosity will ensure that HBCUs are secure and robust institutions that empower Black students,” Robert F. Smith, Chairman of SFI, said in a statement. “And Cisco’s added financial commitment to students, making them the first anchor corporate partner of SFI, will help liberate students from crushing debt and allow them to make their own life choices.”
SFI’s press release added that Cisco’s $50 million investment is the first step to helping SFI reach its goal of a $450 million endowment supporting 4,500 students in perpetuity.
To help students financially at HBCUs and MSIs, the Student Freedom Initiative offers an “income-contingent funding option” for education costs, meaning that in exchange for funding, students agree to make payments to SFI based on what they earn after leaving college.
According to its website, the program, called the Student Freedom Agreement, is available to cover a student’s remaining costs after federal aid is taken into account, and it could serve as an alternative to private student loans. Funding for each student is capped at $20,000 a year, and there is no obligation to pay back the full amount of funding received.
Cisco’s $50 million will go toward this program, ensuring students do not have to borrow more student debt than they can pay off.
Insider reported last month that Black borrowers typically owe 50% more student debt than white borrowers, and four years later, Black borrowers owe 100% more. That’s why 36 civil rights organizations called on President Joe Biden to cancel $50,000 in student debt per borrower to help close racial disparities that have put those borrowers “on the brink of financial devastation.”
“Student debt cancellation will help Black and brown borrowers build wealth and enable our economy to move forward as millions of Americans are able to start families, buy homes, and set up small businesses,” the organizations, including the National Association for the Advancement of Colored People (NAACP), said.
Biden has not yet committed to canceling $50,000 in student debt – he is having the Education and Justice Departments review his authority to do so – but in his $4 trillion infrastructure proposal, he did include a $39 billion program that provides two years of subsidized tuition for those earning less than $125,000 enrolled in a four-year HBCU or MSI.
SFI is planning to launch its programs in the fall, and Cisco’s investment is critical in furthering the initiative’s goal of ensuring success for students at HBCUs and MSIs.
“This partnership is an investment in our future workforce, empowering AA/Black STEM students and equipping them with the financial and technology tools to be resilient and successful long term,” Maria Martinez, Cisco’s chief operating officer, said in a statement. “We remain committed to this community – to be seen, heard, valued, and invested in.”
Education Secretary Miguel Cardona issued guidance in March allowing colleges and universities to use funds from President Joe Biden’s $1.9 trillion stimulus plan for a variety of student needs, including grants and scholarships.
Delaware State University (DSU) has decided to use those funds to cancel student debt.
On Wednesday, DSU officials announced they would be canceling up to $730,655 in student debt for recently graduated students who faced financial hardships during the pandemic. Antonio Boyle, Vice President for Strategic Enrollment Management, estimated that the average eligible student would qualify for about $3,276 in student debt relief.
“Too many graduates across the country will leave their schools burdened by debt, making it difficult for them to rent an apartment, cover moving costs, or otherwise prepare for their new careers or graduate school,” Boyle said in a statement. “While we know our efforts won’t help with all of their obligations, we all felt it was essential to do our part.”
The university’s president, Tony Allen, noted in the announcement that DSU hasn’t raised its tuition in over six years, it gives every incoming student an iPad or a Macbook, and it’s transitioning its textbooks to less expensive online versions, showing how debt cancelation aligns with the university’s efforts to keep college affordable.
Cardona’s March guidance said that higher education institutions can use stimulus funding for “financial aid grants to dual enrollment, continuing education, non-degree seeking, or non-credit students, as well as to a broad range of students with exceptional needs, such as certain refugees or persons granted asylum,” along with discharging unpaid institutional student debt.
“Many students have had their postsecondary careers turned upside down as they manage their schoolwork while also protecting themselves from this virus,” Cardona said in a statement. “We hope every eligible student takes advantage of these benefits while continuing to focus on their studies.”
While DSU is exercising its authority to forgive institutional debt – debt owed directly to the university, rather than to the government or a private lender – federal student loan debt currently amounts to $1.7 trillion in the US. The Education and Justice Departments are reviewing Biden’s authority to cancel federal debt, but the president has not yet announced a timeline for doing so.
President Joe Biden campaigned on reforming the Public Service Loan Forgiveness (PSLF) program, which he – along with many lawmakers in past years – said is failing borrowers due to its low approval rate.
His campaign website said: “Biden will see to it that the existing Public Service Loan Forgiveness Program is fixed, simplified, and actually helps teachers.”
On Wednesday, 56 Democratic lawmakers urged Biden to follow through on his promise.
Senate and House Democrats, led by Sens. Tim Kaine of Virginia, Kirsten Gillibrand of New York, and Rep. John Sarbanes of Maryland, wrote a letter to Biden’s Education Secretary Miguel Cardona stressing the need to improve the PSLF program to give public servants the loan forgiveness they deserve.
The PSLF program allows government and nonprofit employees with federally backed student loans to apply for loan forgiveness after proof of 120 monthly payments under a qualifying repayment plan, but 98% of all borrowers from the general public have been rejected from the program.
“After the first round of forgiveness initially became available to PSLF borrowers more than three years ago, approval rates for the program have remained below 2.5%,” the letter said. “The program has been beset by numerous ‘donut holes’ that disqualify certain types of loans, repayment plans and the payments themselves, leading to extraordinary confusion and distrust of the PSLF program and, by extension, the federal government.”
The lawmakers urged Cardona to waive barriers in PSLF, including to:
Expand the definition of an “eligible loan” to include all federal student loans;
Make all repayment plans eligible for PSLF;
Waive the restriction that requires a borrower to be in public service at the time of loan forgiveness;
And establish data-sharing agreements with the Dept. of Defense and Office of Personnel management to automatically identify public service workers with outstanding student debt.
The letter also called for extensive communication from the Education Department to borrowers to ensure they are aware of any changes that might impact loan forgiveness.
This followed a a Government Accountability Office report that found that 287 Dept. of Defense personnel had received loan forgiveness as of January 2020, while 5,180, or 94% of DOD borrowers, were denied. Sen. Elizabeth Warren released a statement calling the findings, and PSLF, “nothing short of a disaster.”
Education Secretary Betsy DeVos was sued multiple times over the program’s high denial rate.
Sarbanes said on Twitter: “We must ensure that America’s teachers, social workers, public defenders, service members and community health care workers – along with many other public servants – receive the student loan forgiveness they have earned.”
Since she was elected to the Senate almost a decade ago, Elizabeth Warren has been fighting to cancel student debt and hold loan servicers accountable. Now one of her closest allies is in charge of the federal student debt pile, and that could be a big deal.
Richard Cordray, the former head of the Consumer Financial Protection Bureau (CFPB), was selected to head the Education Department’s Office of Federal Student Aid (FSA) on Monday. Few people in Washington DC are better placed to carry out Warren’s vision of mass student-debt relief. That’s because Cordray took the job Democrats wanted Warren to have.
When Warren was a Harvard professor (and occasional blogger), she frequently cited problems within the student-loan system and the need to create something like the CFPB, which would protect consumers financially and ensures they are being treated fairly. That turned into a new federal agency created under President Barack Obama, who wanted Warren to lead it, but in 2011, Senate Republicans blocked her appointment. She ran for Senate instead, becoming a national figure, while Cordray became a close ally as the first head of the CFPB.
During her time in the Senate, Warren worked with Cordray’s bureau to conduct investigations into predatory lending practices. Now as head of the FSA, Cordray will be tasked with overseeing the government’s $1.5 trillion student loan portfolio through disbursing loans and grants, along with monitoring student-loan servicers and implementing relief and repayment programs.
“@RichCordray was a fearless @CFPB leader who forced big financial institutions to return $12 billion to people they cheated,” Warren wrote on Twitter on Monday. “I’m very glad he’ll be protecting student borrowers and bringing much-needed accountability to the federal student loan program.”
What Cordray could do on student debt
In a statement after his appointment was announced, Cordray said he was looking forward to creating “more pathways for students to graduate and get ahead, not be burdened by insurmountable debt.”
He will be tasked with sorting through claims from thousands of defrauded borrowers who filed for debt relief, along with ensuring the smooth implementation of loan collections once the pause on student loan payments through September is lifted – although Cardona said on Monday that extending the payment pause is “not out of the question.“
While Cordray has not yet commented on wiping out $50,000 in student debt for each borrower, which Democrats continue to call for, he told MarketWatch last year that under the Biden administration, he expected the CFPB and the Education Department to work more closely on student-loan issues.
At the CFPB during the Obama years, Cordray made oversight of student loan servicers his priority. The agency has returned more than $75o million to student loan borrowers since 2011 over debt collection complaints, and in early 2017, the bureau sued Navient, the largest student loan servicer in the US, in a lawsuit that is still ongoing, arguing that Navient misled students into taking on loans they cannot pay off.
At a late April hearing, Warren called for the government to fire Navient, and for Navient to fire its chief executive officer, after accusing Navient for over a decade of abusing the student loan system.
In 2019, Cordray wrote a guest essay in The Plain Dealer, an Ohio newspaper, speaking out against for-profit colleges. “I hate how these hollowed-out businesses and subpar colleges are cheating consumers, employees and whole communities,” Cordray wrote.
Education Secretary Miguel Cardona has already canceled some debt for borrowers defrauded by for-profit schools, and Warren has conducted numerous investigations into the failures of the for-profits Corinthian Colleges and ITT Technical Institutes.
The FSA head’s seat has been vacant since March, when Mark Brown, former head of the office appointed by Education Secretary Betsy DeVos in 2019, resigned amid pressure from labor groups and lawmakers. Warren wrote in a tweet that his resignation was “good for student borrowers.”
Cordray told Marketwatch in November that, as CFPB head, his approach with the Education Department had been one of “close cooperation” but “that was all nixed when Betsy DeVos came into office.” Speaking of the outlook for a Biden administration, he said he thought the CFPB and Education Department would likely go back to working closely together.