America's Emerging Second Class: Student Loan Borrowers

There’s been a lot of talk about citizenship so far during this presidential campaign season: specifically, the rights, responsibilities and privileges that inure to those who are naturally born or otherwise enjoy documented legal status, versus those who have taken up residency unlawfully.

What has to this point gone unmentioned, however, is the extent to which the former are compelled to subvert or surrender certain rights in exchange for things they need and become, for all practical purposes, second-class citizens.

Case in point is the manner in which we finance our higher educational pursuits.

There is no other mode of consumer financing in the U.S. that aggregately requires borrowers to forgo:

Protections to which they are legally entitled under the Truth in Lending Act;
The ability to discharge in bankruptcy obligations that cannot be repaid;
Equal tax treatment for loan balances that are forgiven by lenders;
The potential to refinance existing debts at lower rates and more favorable terms;
Their constitutional right to a trial by jury;
A predetermined methodology for releasing loan co-signers and guarantors.

The individual arguments in favor of these limitations are well known.

Federally sponsored education loans are exempted from TILA so that taxpayers, who back the government’s obligations, are not mistreated. The same goes for the prohibition against discharge in bankruptcy, although the tipping point for federal student loans came in the mid-1970s amid allegations of abuses on the part of student borrowers — assertions that were later proved false — and in the mid-2000s for private student loans because, well, the financial services industry did a good job of convincing lawmakers it deserved comparable consideration.

Get matched with a personal loan that’s right for you today.

Learn more

Speaking of equal treatment, when the economy collapsed in 2008, Congress passed (and subsequently extended) the Mortgage Forgiveness Debt Relief Act so homeowners would not be taxed on the waivered portions of their financial obligations. Yet no such consideration has been extended to student loan borrowers whose balances are discharged under various government relief programs — programs that are destined to remain in place for decades to come.

As for the inability to refinance existing debts at will, the reason why roughly half of all student loans currently in repayment are past due, in forbearance, in default or have otherwise been funneled into one of many government relief programs is because these loans were improperly structured at the outset, a fundamental error that is continually compounded by education-related borrowers’ inability to preemptively refinance their federal loans for longer durations at lower prevailing rates without giving up later access to the aforementioned relief programs. I suspect that one of the things standing in the way of enacting a wholesale restructuring of the nation’s student loan portfolio is the program’s substantial profitability — the same profits that are both noisily decried and quietly applied to offset the federal deficit.

Finally, with regard to the matters of borrowers forced to subvert or surrender their constitutional rights, and the absence of an agreed-to formula for the release of co-signers and guarantors, education-related loans join certain other forms of consumer finance that require borrowers to accept mandatory arbitration as a means for settling disputes (and to forgo class-action suits as well), and to request that lenders release from obligation the parents, partners and spouses who were obliged to co-sign or guarantee debts that were initiated before the borrower established his or her creditworthiness — requests that lenders are often slow to grant, if at all.

Taken one issue at a time, the arguments against reforming these injustices have, to this point, prevailed. Perhaps we can look forward to a different outcome if these quality-of-life-diminishing issues are grouped together under the heading of “restoring first-class citizenship to America’s second-class borrowers” and debated with equal enthusiasm in the course of this election cycle.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.