August 19, 2021
The Honorable Richard J. Durbin – United States Senator for Illinois
The Honorable John Cornyn – United States Senator for Texas
Dear Senator Durbin and Senator Cornyn:
I have read with great interest the Committee on the Judiciary summary of the Fresh Start Through Bankruptcy Act of 2021 that you have co-sponsored. Here, I respectfully submit a few suggestions regarding the proposed act.
By way of background, I am a retired financial services industry professional. I have owned and run commercial finance companies, and served in an executive management capacity at community, regional and national banks.
To the point of the Fresh Start act, I have long advocated for the equitable treatment of higher education–related debts in bankruptcy, so your proposal resonates with me. I do, however, take exception to the proposed eligibility parameter.
Declaration of bankruptcy should always be viewed as a last resort. In this instance, I believe that discharge should be permitted only after the problem loan has first been restructured under the Department of Education’s readily available income-based repayment plans.
Although it is possible that the 10-year threshold proposed in the act takes restructure into account, I do not see how such a waiting period—equal to the originally agreed-to loan term—makes sense. Rather, I suggest a much shorter period, post-restructure. More than 80% of the loans that end up in default do so within the first 24 months (a Pew Charitable Trusts analysis of Texas-based student loan defaults reports similar results). Consequently, a period of 24 or 36 months from that point is more appropriate.
A related matter that deserves consideration concerns loans that have been successfully restructured (i.e., those that are paying as agreed).
A loan workout is a credit bureau derogatory—not as significant as a bankruptcy filing, given, but not as benign as a missed payment, either. This matter should be addressed for two reasons. First, because credit bureau data is harvested by the FICO score algorithm, and used for short-term credit and hiring determinations (indeed, my annual teaching contract with Rutgers incorporates this into the background check). Second, because the federal student loan program was improperly structured at the outset, at no fault of the borrowers.
According to the most recent Federal Reserve Bank of New York’s Household Debt and Credit Report, 10.75% of all student loans were 90 or more days past due in the quarter immediately preceding the declaration of the pandemic and the implementation of the CARES Act moratorium on student loan payments. But because payments on approximately half of all loans are deferred while the borrowers are still in school (see footnote 2, which I petitioned the FRBNY to insert, beginning in 2011), that 10.75% is understated by half. In other words, the true 90-plus day delinquency rate exceeds 20%.
Not only is that metric a multiple of all other forms of consumer credit delinquencies—including nearly three times that of unsecured credit card debt—but after factoring in loans that are 30 or more days past due (which is how the financial services industry measures delinquency) and adding to that those that are in temporary forbearance, restructured under the ED’s various relief plans and those that are in default, a more accurate estimate of the level of troubled student loan debts is likely closer to 40% or 50% of the aggregate. Any loan portfolio that displays anything remotely close to that abysmal payment performance, in which improvement is achieved after loan durations are extended to reduce installments, is one in which the underlying contracts were improperly structured at the outset.
Clearly, a wholesale restructure of the entire student loan portfolio is urgently needed, which leads to my last suggestion.
Trees don’t grow to the sky, the proverb goes. The ever-increasing level of student loan receivables that reside on the asset side of the ED’s balance sheet is funded, on a dollar-for-dollar basis, by government borrowings that are additive to the burgeoning federal deficit. If the Federal Direct loan portfolio is restructured to extend loan durations to a term that approximates the ED’s various income-based plans (about 20 years), two things would follow: loan administration costs should decrease because the need for dealing with distressed borrowers on a case-by-case basis would cease (as would the incidents of conflict between borrowers and the subcontracted loan administrators), and the ED could then consider divesting all or part of its holdings and use the proceeds to extinguish the match-funded debt.
Thank you for your consideration. Please do not hesitate to contact me if you have questions or need additional information.
Mitchell D. Weiss
M.D. Weiss LLC