Progressives continue to push President Biden to cancel student loan debt for millions of borrowers.
Despite the party’s stalled reconciliation bill, progressives have not relented on this issue.
Sen. Chuck Schumer has pressed the president to cancel $50,000 in federal student debt per borrower.
Progressive Democrats are pushing President Joe Biden to take action on student loan forgiveness even as party leaders continue to forge a pathway to pass their stalled multitrillion-dollar reconciliation bill.
Many of the individuals who took on the burden, alongside progressive lawmakers and consumer advocates, want Biden to forgive up to $50,000 in federally-held student debt per borrower.
The president has so far resisted, questioning whether he has the unilateral authority to make such a move.
Biden said earlier this year that he was “prepared to write off $10,000 in debt,” but large-scale student loan debt overhauls were not included in either the $1.9 trillion COVID-19 relief package that passed last March or the “human” infrastructure bill that is focused on childcare, healthcare, and climate policy, among other priorities.
However, for Rep. Pramila Jayapal of Washington, the chair of the influential Congressional Progressive Caucus, the student loan issue remains front and center.
“Student debt relief is good for people and good for the economy. @POTUS can and must lift the burden of student debt for 43 million Americans,” she tweeted last Thursday.
While broad-based cancellation has gained steam among Democrats on Capitol Hill since the start of the coronavirus pandemic, Schumer has become more vocal about enacting loan forgiveness since Biden has been in the White House.
Advocates seeking the cancellation of student debt also point to the enthusiasm that it would create among younger voters for Democratic candidates in a year when the party is seeking to defend its slim congressional majorities.
“I think moderates who are running in tough races, this is going to be the difference for them, whether or not student debt gets canceled,” Thomas Gokey, the organizer and co-founder of the Debt Collective, told The Hill.
Jack, a 33-year-old federal government worker, has nearly $400,000 in credit card, mortgage, and student-loan debt.
He earns around $95,000 a year working multiple jobs – not enough to cover his $9,000 monthly payments.
He is studying for his PhD, and hopes to land a higher-paying job that will help him pay off his debt.
Some people know the daily grind a little too well.
That’s the case for Jack, whose name Insider has changed for privacy purposes. The 33-year-old, who lives in Texas, is a man of many titles. He’s a full-time federal government worker, an adjunct professor, a delivery food driver, and a soon-to-be substitute teacher.
He juggles all these jobs in an effort to pay off his nearly $400,000 debt tab, but his income falls short. Looking toward a better future, he’s also studying for his PhD.
“The reason I ‘hustle’ so hard is to develop multiple streams of income in hopes that it may be enough to gain attention for higher-paying positions,” he told Insider.
It’s an all-too-familiar story for millennials, many of whom find themselves saddled with both student-loan and credit card debt after spending years bouncing around the job market in the wake of the Great Recession. Unable to afford life because of his debt and years of low-paying jobs, Jack pursued an advanced degree, banking on the idea it would pay off in the long run by landing him a higher-paying job.
The math doesn’t add up
Until two years ago, Jack said, he was making less than minimum wage. Today, his pay stubs show that he makes about $80,000 a year in his day job and $15,000 a year adjuncting, plus raking in what he can with other side jobs.
None of it is enough to manage his debt, which includes credit cards and a mortgage totaling $119,129, according to documents reviewed by Insider. He pays $600 a month on his manufactured home and $390 a month for the lot it sits on. Plus, he has massive student debt, which make up the remaining $280,000 of his total debt.
That’s a monthly hole of nearly $9,000. Since his current payments likely go toward the accruing interest, he estimates he’d be able to start making a dent in his principal debt if he had an extra $30,000 per year.
On top of all of that, he’s still accruing debt. Because he doesn’t make enough money to pay toward his existing debts and cover his living expenses, he said, he ends up juggling an extra $1,000 a month in fees across maxed-out or near-maxed-out credit cards, accumulating at least $12,000 of additional debt a year.
“I barely breathe. I work more than I sleep,” he said, adding that he averages about four to five hours of sleep a night. “This is the country we are living in.”
The lifelong student debt burden
When Jack completes his PhD in education in August, his estimated monthly student loan payments will be nearly $2,500. He hopes his current degree will pay off in the long run, helping him replace his adjunct role for an evening professorship with better pay. Of course, he’ll still have to keep his day job.
“I am literally one emergency or unexpected event from being unable to pay my bills and default on everything,” he said. As a federal worker, Jack worries that a government shutdown would lead to a delayed paycheck, causing him to default on all his monthly debt obligations.
Jack’s student debt was one unexpected twist to his financial life.
He entered college on an ROTC scholarship, he said, only to have it taken away once he switched infantry positions. He wiped out his $8,000 pre-college savings to pay for tuition, housing, and books before turning to student loans.
He added that he had to pay back 1.5 years of his $60,000 ROTC scholarship, which forced him “to take out predatory loans and credit cards for survival.”
But Jack is hopeful that, as a public service employee, he may be able to benefit from the revamped Public Service Loan Forgiveness (PSLF) program. PSLF is supposed to wipe out student debt for public servants after 120 qualifying monthly payments, Insider’s Ayelet Sheffey reported, but flaws in the program have caused it to reject 98% of applicants. The Education Department announced major reforms to the program this month, including making it easier for payments to qualify.
Under PSLF, Jack’s student debt would be forgiven by 2033 at the age of 43, after 10 years of making income-based repayments, starting next year. But he said he’d still be very behind in building a retirement nest egg, with zero savings, which would require him to continue hustling for at least 20 years. If he has children, he may not see a “zero debt” balance until his 50s.
Regardless, Jack thinks becoming debt-free is still a realistic possibility for him. “But until then, I will live incredibly stressed, burned out, and not have the opportunity to enjoy life’s luxuries that many of my colleagues enjoy,” he said.
Kyle used to be a HENRY, short for “high earner, not rich yet.”
Now, the 34-year-old tech worker, who didn’t want to publish his last name for privacy reasons, is well on his way to building wealth thanks to the world of remote work.
He spent the last five years hopping around the tech scene as a big data specialist in California after finishing his PhD. He was earning $120,000 at his first job in 2016, according to a pay stub reviewed by Insider, and increased his salary at his next company after moving to the Bay Area.
“My personal anecdote is that some people are too ensconced in the patterns of their current lifestyles,” he said. “Sometimes, it has nothing to do with material cost.”
He said his money typically went to sky-high rent, $2,500 in student loans a month, and putting big-ticket items like furniture and kitchenware on his credit card. He was caught in a vicious debt cycle.
After spending a few years paying everything off, he said, the pandemic hit. It opened up a game-changing opportunity: He landed a new job with permanent remote work and a base salary of $175,000, per his pay stub. It enabled him to trade in the Bay Area for his hometown of Phoenix last September, shedding his HENRY lifestyle.
“I was able to more than halve my living costs,” he said. Whereas he typically saved of $5,000 to $10,000 a year while living in California, he added, he socked away $80,000 last year. “Work-from-home offers an unprecedented opportunity for young people to break out of the debt cycle.”
Confessions of a former HENRY
Kyle said he can’t imagine going back to work in the Bay Area after the pandemic.
“Looking back, I can’t believe how unreasonably expensive everything was,” he said. “The cost didn’t seem like much of an issue at the time since I was able to get by on a tech salary, but I was certainly priced out of upwardly mobile asset accumulation like homeownership.”
A friend of his, he added, has been struggling to a buy a home in the area for over a year, and recently lost a bid for a townhouse after putting in an offer at $60,000 over asking price.
Boxed out of the housing market, Kyle said he spent $4,300 a month renting a two-bedroom, two-bathroom condo in the Bay Area. He finally became a homeowner after moving to Phoenix, one of the pandemic’s migration hot spots, where he pays $1,043 a month for his mortgage on a three-bedroom, two-and-a-half bathroom house.
His other monthly costs have also dropped immensely since moving. Based on his bank statements, he estimated that he was spending $3,700 a month in addition to rent in the Bay Area, which now looks more like $1,500 a month in Phoenix.
Kyle said he still pines for California, missing the food and social activities, but doesn’t miss the cost of living and the traffic.
“For those with work flexibility, there is a huge financial opportunity to be had from migrating to lower-cost-of-living metros,” he said, adding that it’s still hard to convince people otherwise.
But Kyle points out that everyone views utility – an economics term referring to the degree of happiness that comes from consuming a product or service – differently.
“Measuring cost of living (or lack of savings) without measuring utility is telling only half the story,” he said. “I managed to increase both in the last year, but for others it is still a strict trade-off.”
House Speaker Nancy Pelosi said Wednesday that President Joe Biden does not have the power to cancel student loan debt, though some of her Democratic colleagues, including Senate Majority Leader Chuck Schumer, disagree.
The California Democrat told reporters during a press briefing that student loan debt is “a policy discussion” and that cancelation has to be “an act of Congress.”
“Here’s the thing. People think that the president of the United States has the power for debt forgiveness. He does not,” Pelosi said. “He can postpone, he can delay, but he does not have the power.”
Pelosi stands in opposition to Schumer, as well as Sen. Elizabeth Warren of Massachusetts, the two congressional Democrats leading the call for Biden to cancel $50,000 in student loan debt per borrower.
They claim that Biden can use his “existing authority” under the Higher Education Act to “immediately” wipe out debt for millions of borrowers across the country.
“President Biden can cancel $50,000 of student loan debt with the stroke of a pen,” Warren told Insider in June. “He doesn’t need Congress to act, he can do it on his own, and I hope that’s what he’s going to do.”
“All President Biden has to do is flick his pen – sign it – make America a happier, better, more prosperous place,” Schumer said.
Warren compared student loan debt to a “sword hanging over” the heads of borrowers.
“Every day that goes by, that sword draws a little closer,” she said Tuesday. “This is a matter of economic justice. It is a matter of racial justice. The president of the United States can remove this sword. The president can prevent this pain.”
White House press secretary Jen Psaki reiterated Biden’s support to wipe out $10,000 per student loan debt borrower in February, but added that he wants to see the legislation first approved in Congress, believing that he did not have the ability to cancel it unilaterally.
Biden has started to rethink that position amid increasing pressure to cancel student loan debt from congressional Democrats, including Schumer and Warren, as well as civil rights groups and student organizations.
The White House has asked the Justice Department and Education Department to review whether Biden has the ability to cancel student loan debt via executive action. But neither the White House nor the federal departments have provided an update as to when that assessment will come.
The relief, however, is coming to an end soon: Borrowers must restart making payments after September 30.
Insider spoke with three people about how the end of COVID-19 student-loan forbearance will affect their lives and finances.
Camryn Hicks, 25, has $14,250 in student-loan debt and lives in rural Maine
I graduated from Boston College in 2018 with a degree in business and marketing. I’m part of the first generation of women in my family to go to college, and had some financial assistance in the form of loans and grants.
But I didn’t know what my student-loan payments would look like later when I was signing up for them.
When I graduated, I got a job working on a re-election campaign for Elizabeth Warren. I was able to start paying my loans off right away, and have never missed a payment. Warren dissolved her presidential campaign right around the time COVID-19 started to spread, so I ended up moving back in with my parents and starting a new job remotely.
During the forbearance, I’ve been able to make large lump-sum, principal-only payments on my student loans using my stimulus checks. Because of the forbearance, I’ve been able to start playing catch-up with my finances. When my car was stolen, I was able to replace it, and I also opened a retirement account.
For me, the forbearance period was a taste of what cancellation would feel like. The conversation around student loans, I think, focuses too much on the individual, and if that one person is going to be able to pay the debt they signed up for. But it’s an economic problem, not a personal one.
My parents took out hundreds of thousands of dollars in Parent PLUS loans to send both my sister and myself to school. Student-loan debt isn’t a personal burden, it’s a family burden.
In many ways, student loans perpetuate wealth inequality – where the people who don’t have to take them out get a head start. I think we need to stop splitting hairs over who’s worthy of relief.
Glenda Johnson, 32, has $36,693 in student-loan debt and lives in Charlotte, North Carolina
When I graduated from college in 2011, my student-loan balance was over $50,000, and I’m still paying back most of it.
I’m fortunate because throughout the pandemic, I’ve had a job. I make about $49,000 a year working in the sales department of a big tech company and also freelance on the side.
Most of my loans were in an income-based repayment plan before the forbearance. The forbearance has been able to keep me afloat, because for over a year I haven’t had to worry about being able to make my payments or not.
A few of my loans didn’t qualify for forbearance, so I’ve still been making payments on those.
With the forbearance ending, student-loan forgiveness is my best bet. The job market I graduated into isn’t what they told us it would be when I was in school, and it’s a lot of money to repay when I’m not seeing a rise in income.
Having to make payments again will weigh heavy on me, but I’m staying positive that there will be a solution somewhere – whether it’s me getting a promotion, or getting more money from my side gig.
I remain hopeful because the conversation around student loans is changing, but for whatever reason, we can’t push the needle, and people like me with student loans will have to keep waiting for change.
Dylan Cawley, 32, has $185,682 in student-loan debt and lives in northeastern Pennsylvania
I graduated with a master’s in public health from the University of Pittsburgh in 2013. For my undergraduate degree, I went to a state school, but for my master’s program I had to take out extra loans to pay for my rent and living expenses, which totaled in over $50,000 a year.
With the exception of the six-month grace period after graduation, I’ve been making monthly payments on my loans for over eight years. My federal loans are on income-driven payment, and I’ve been making regular payments on my private loans.
The forbearance has given me room to breathe. I’ve always wanted an emergency fund, and thanks to the CARES Act I’ve been able to start one. Once it ends, I’ll have to readjust my budget to include an additional $260 payment.
I think a lot of people who don’t have student loans don’t realize just how stressful it is. We aren’t complaining for no reason.
I’m not holding my breath for student-debt forgiveness. You can’t just forgive all existing student loans. If we forgive all student loans now, we’re going to be in the same situation 15 years from now. We have to start looking at student loans as a whole problem within itself.
The resumption of student-loan payments on October 1 is quickly approaching as borrowers, lawmakers, and advocates continue to sound the alarm on the risks with restarting payments too early.
As it turns out, the companies that collect the payments aren’t ready, either.
Last month, Sens. Elizabeth Warren of Massachusetts, Ed Markey of Massachusetts, and Tina Smith of Minnesota sent a letter to the CEOs of all student-loan servicers, requesting information on how each of them were preparing to transition borrowers back into repayment.
On Tuesday, the senators released the responses from those servicers, and the overarching theme was that servicers, along with borrowers, have concerns with restarting student-debt payments in just three months.
“The responses to our inquiry indicate that neither student loan borrowers nor student loan servicers are prepared for payments to resume, and servicers will need significant time to ensure that staffing and procedures are ready to provide borrowers with a high level of support,” the senators wrote in a letter to President Joe Biden.
One servicer even noted in its response that attempting to move over 43 million borrowers back into repayment at once is “unprecedented.”
Other main findings from the responses include:
The payment pause has provided significant relief to borrowers, with 2.5 million borrowers having fully repaid their loans during the pandemic;
Most borrowers had very little contact with their servicers during the pandemic, suggesting they will not be adequately prepared to restart payments;
Servicers need more time to ensure staffing is sufficient to support borrowers;
And transitioning borrowers from FedLoan Servicing, which recently announced it is not extending its contract, will require additional time to ensure borrowers are not harmed in the process.
Last week, the Pennsylvania Higher Education Assistance Agency (PHEAA) notified the Education Department that it would not extend its 12-year-old contract for FedLoan Servicing – which handles the loans of 8.5 million borrowers – beyond December 14. The senators wrote in their letter that attempting to restart payments only weeks after transferring servicers would “overwhelm an already broken student loan system.”
The fight to extend the payment pause continues to grow. On June 21, 64 Democrats, led by Senate Majority Leader Chuck Schumer and Warren, urged Biden in a letter to extend the payment pause until March 31, 2022, or until the economy returns to pre-pandemic employment levels, whichever is longer.
A few days later, 128 organizations, including the American Civil Liberties Union (ACLU) and Service Employees International Union (SEIU), sent a letter to the president, urging him to extend the payment pause until the administration has followed through on its promises to fix the student-loan system and cancel federal student debt.
And on June 30, Patty Murray and Bobby Scott, chairs of the Senate and House Education Committees, respectively, sent a letter to Biden urging him to extend the payment pause until early 2022 to ensure borrowers have the information they need to restart payments.
Education Department officials have also reportedly urged Biden to extend the payment pause, and while Education Secretary Miguel Cardona has not confirmed or denied whether such an extension will happen, he has hinted at the possibility of doing so.
“As the economy recovers from this unprecedented crisis, borrowers should not be faced with an administrative and financial catastrophe just as they are beginning to regain their footing,” the senators wrote. “We strongly urge you to extend the pause on student loan interest and payments in order to allow time to begin to repair the broken student loan system.”
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.
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.
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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.”