This is the second installment of Chris Maisano's "Soul of Student Debt."
Modern student lending practices date from the 1950s, when Cold War competition with the Soviet Union spurred Congress to establish the Perkins Loan Program in 1958. Perkins expanded student loan lending through need-based loans at low interest rates. But this program was relatively modest. Federal student loan lending expanded further during the Johnson administration with the passage of the Higher Education Act of 1965 and the establishment of the Guaranteed Student Loan program (known today as the Stafford Loan Program). With the onset of the fiscal crisis of the 1970s, states began their long-term disinvestment from public higher education, driving up the cost of tuition and necessitating the expansion of federal student loan lending. In 1978, federal spending on student lending was $500 million. In fiscal year 2012, the federal government lent $115.6 billion in new student loans. Today, the average student graduates college or university with over $25,000 in educational loan debt.
For Americans in dire financial straits, bankruptcy offers perhaps the only realistic avenue for relief. As Elizabeth Warren observed in Law and Class in America, the bankruptcy courts are a strategic vantage point from which to survey the social wreckage of contemporary capitalism:
Eventually virtually every social and economic problem in the United States threads its way through the bankruptcy courts. For families, bankruptcy is the place to deal with lost jobs, erratic incomes, inadequate health insurance, no disability insurance, and the financial impact of divorce. The bankruptcy courts deal indirectly from the fallout from stagnant wages and a part-time or “consulting” workforce, with the high cost of housing and daycare that chews through a parent’s take-home pay.
Article I, Section 8 of the Constitution authorized Congress to enact uniform bankruptcy laws under federal jurisdiction to offer a “fresh start” to those who simply could not keep up with their debts. In 1970, Congress appointed a Bankruptcy Act Commission to assess the effectiveness of the nation’s bankruptcy laws, which hadn’t been significantly altered in almost a century. The Commission released its recommendations in 1973, and they generally accorded with the relatively pro-debtor bias of the fresh start principle. Crucially, however, the Commission decided to make an exemption in regard to educational debt. Until 1976, all student loans were eligible for discharge, just like most other forms of consumer debt. But the Commission argued that this provision was necessary to prevent unscrupulous borrowers from financing their education through easily-accessible federal loans and then declaring bankruptcy after graduation.
Even though there was little evidence to suggest that students were running up huge debts simply to dump them back on the taxpayers, Congress included the exemption of student debts from discharge in the Bankruptcy Reform Act of 1978. The Act, however, contained one crucial caveat: such debts could be discharged through separate proceedings if borrowers could demonstrate conclusively that repayment of the debt would bring “undue hardship” on themselves.
But Congress neither defined exactly what constitutes “undue hardship” nor did it recommend a uniform standard for determining how and when a debtor’s personal financial situation meets that threshold. Bankruptcy courts have employed a number of tests for determining whether plaintiffs have adequately demonstrated undue hardship, but the most commonly used is the “Brunner test,” established by the Second Circuit bankruptcy court in 1985’s In re Brunner. The court’s decision in this case employed a three-pronged test to find whether debtors have shown sufficient evidence to support their claim of undue hardship. First, debtors must show that they cannot maintain a “minimal” standard of living if forced to repay the loans. Second, the available evidence must show that this sorry state of affairs will likely persist over the course of the repayment period. Third, debtors have to show that they have made a good faith effort to repay the loan.
By abdicating any responsibility for determining just what constitutes undue hardship, Congress gave bankruptcy judges an enormous amount of leeway to interpret and adjudicate claims arising from the growing pile of student loan debt. As representatives of the judicial branch of a capitalist state, it should come as little surprise that these judges have, more often than not, privileged the claims of the creditor over those of the debtor in their rulings. In doing so, they have reinforced the normative and disciplinary assumptions of what Michel Foucault called neoliberal governmentality.
Neoliberal governmentality seeks to subject our social life to the logic of what Foucault called the “enterprise society.” In The Birth of Biopolitics, he argued that it encourages the formation of subjects whose moral character and economic activity resembles that of the risk-taking entrepreneur. This should not, however, be construed as a simple top-down process of domination. The genius of this form of social control is that it elicits the active participation of the population in the construction of its own discipline. By bringing ever-widening circles of the population into the orbit of finance capital, it imbues the process of financialization with a spirit that accords with democratic norms of mass participation and equal opportunity. After all, what could be more American than the proposition that everyone have access to a college education and, presumably, a chance to go as far as your talents can take you?
As states disinvest from public higher education and compel students to take on ever-increasing debt loads to fund their studies, the experience and purpose of higher education is transformed. The pursuit of a college diploma becomes an entrepreneurial activity, a species of personal investment and risk-taking that places the attainment of future returns above all other concerns. By integrating higher education into the circuits of financial capitalism, the state encourages debtors to look to the market for self-improvement and personal security. Like the subprime mortgage borrower or the worker with a 401(k) plan, the indebted student is taught to view access to credit and the financial markets as the golden ticket to prosperity and security.
Student debt subjects the borrower to a distinctly capitalist pedagogy, transforming higher education into an increasingly expensive commodity that is bought and sold on the market. But as the legions of student loan debtors can attest, investment in a college education is no longer a guarantee of remunerative employment or personal financial security. It is an increasingly risky investment that can bring the student debtor into severe financial distress, and in the worst cases, to the door of the bankruptcy court to seek relief.
Federal case law offers an important glimpse into the ways in which student debt works to impose a particularly capitalist form of discipline on borrowers. The judges on these cases often seem as if they were social workers trained by the University of Chicago economics department. In cases where debtors have their claims rejected, a common theme quickly emerges. In denying plaintiffs relief from their debts, judges and appellate panels often seek to encourage economic behavior more akin to that of a competitive firm than a healthy human being.
Janet Lynn Parker’s story is, admittedly, something of an extreme case. But her treatment by the bankruptcy courts is not entirely out of the ordinary for the small segment of student debtors who actually attempt to have their debts discharged. The case law is replete with examples of judges resorting to a particularly merciless form of reasoning to deny plaintiffs relief.
Consider the case of Steven and Teresa Hornsby, a Tennessee couple who came to bankruptcy court with approximately $30,000 in student loan debt. Like Janet Lynn Parker, the Hornsbys received a discharge from a lower court only to have the decision reversed on appeal. The appellate judge agreed with the Tennessee Student Assistance Corporation’s argument that the couple did not adequately “tighten their belts” in order to make student loan payments. In moving from Tennessee to Texas (a state with higher monthly rental expenses), taking on debt to purchase a newer used car, and running up “relatively high bills for telephone use, electricity, meals eaten out, and cigarettes,” the Hornsbys failed to meet the highly restrictive standards of judgment adopted by the court. The appellate judge seemed particularly concerned with the couple’s ostensibly “exorbitant” telephone usage as well as the $100 they dared to spend on cigarettes each month.
In other cases where they have denied discharge, judges have directed dance teachers to seek better-paying work in other, often unrelated fields; reproached workers for leaving higher-paying jobs for lower-paying ones, whatever the reason; and, in one case, advised the pastor of a small, financially insecure church to close it and do something more profitable with his time. Unsurprisingly, many student loan debtors desperate enough to seek relief through the courts work in public sector professions. In an extensive 2005 empirical study of undue hardship cases, Emory University law professor Rafael Pardo and Tulane University mathematician Michelle Lacey found that a disproportionate number of plaintiffs worked in education, training, and library occupations. In today’s enterprise society, becoming a teacher or a librarian just isn’t a wise investment.
Chris Maisano is the chair of DSA's NYC local and a contributing editor at Jacobin Magazine.
This is the second installment in a three part series. All three installments were originally published in Jacobin Magazine.