Can Americans Ever Escape Debt?

In 2005, then-Sen. Joe Biden voted in favor of the Bankruptcy Abuse Prevention and Consumer Protection Act, a bill that was meant to curb the abuse of bankruptcy proceedings. But in hindsight, advocates say the bill made it more difficult for students to discharge their educational debt through bankruptcy. More than a decade later, while campaigning to become the 46th president, Biden promised to forgive $10,000 per borrower and cancel student loan debt for graduates of public colleges and historically Black colleges and universities (HBCUs). Now, after being in office for six months, Biden has yet to forgive student debt, but he has reportedly encouraged lawmakers to continue pressuring him to do so. 

“With the right legal representation, a borrower can have their student debt discharged to bankruptcy, [but] that is a healthy area for the president to do some redemptive work because many people point to the president as being one of the legislators who helped developed these bankruptcy reforms [that] make it very challenging for student loan borrowers to discharge her loans,” said Cody Hounanian, program director at Student Debt Crisis, a nonprofit which aims to reform student debt and higher education policy. 

As the world attempts to recover from the COVID-19 pandemic, student loan debt and other forms of household debt continue to weigh down Americans, ranging from medical and credit card debt to mortgage and utility debts. To provide a better financial future for Americans, relieving student debt, as well as other forms of household debt, requires not only debt cancellation but also simplifying the debt-cancellation process and addressing the underlying factors that cause people to accumulate debt in the first place, sources told DAME. Here’s how it could work for different types of debt.

Student loan debt

Thus far, the Biden administration has canceled student loan debt for borrowers who attended colleges like Corinthian and ITT Technical Institute, but collectively, Americans owe $1.72 trillion in student loan debt as of the first quarter of 2021, according to the St. Louis Federal Reserve. According to the American Association of University Women (AAUW), Black women hold the most in cumulative debt from their undergraduate loans one year after graduation, averaging $41,466. Black women also hold the most cumulative graduate school debt at an average totaling $75,085.

While the Department of Education decides whether to cancel student loan debt, the agency’s moratorium on student loan debt repayment will end on Oct. 1. 

Student Debt Crisis  has heard from borrowers who can’t afford to save for their children’s college education, parents who are struggling to pay off loans that their children couldn’t repay, and people who’ve delayed marriage and child-rearing, said Sabrina Calazans, outreach coordinator at Student Debt Crisis. However, student loan debt cancellation could be a stimulus to the economy, allowing people to start businesses, pay for childcare or achieve other dreams they’ve otherwise had on hold, she said.

Student loan debt is also typically thought of as a young person’s issue, but many older Americans are paying off student loan debt that they either took out themselves or borrowed to support their children’s college education, Calazans said. As a result, some older Americans have seen their income tax checks or social security benefits garnished to cover their student loan debt repayment, she said. 

“I’m a child of immigrants and my parents’ vision was that we would have a better life and so I pursued higher education,” Calazans said. “I haven’t lost our vision of having a better life. I think student loan debt is making that very challenging not just for me, but for millions of people.” 

In addition to canceling student loan debt, Student Debt Crisis is also calling for improvement of the student loan borrower repayment programs, consumer protections and loan servicer accountability, bankruptcy protections, student loan refinancing options, as well as ultimately free college for students.   

The Biden administration has previously said that it is unsure of whether Biden has presidential authority to cancel student debt, though lawmakers like Sens. Elizabeth Warren and Chuck Schumer have said that the president can. Some lawmakers’ who oppose debt relief believe that it will primarily benefit high-income borrowers. However, research from the Roosevelt Institute indicated that student loan cancellation under the Warren-Schumer plan would cancel $562 per person among the top 10 percent of households for net worth. But for Black and white borrowers in the bottom 10 percent of net worth, the Warren-Schumer plan would cancel an estimated $17,366 for Black borrowers and $12,617 for white borrowers, per the report.

“It’s not just a financial issue. It’s not just a racial issue. It is a moral issue. This is something that we need to get done in this country to help millions of people be able to move forward with their lives, and it will also benefit the economy as well,” Calazans said. “There’s no excuse for not wanting debt cancellation. If you care about your constituents, if you care about the economy, if you care about racial justice and gender equity, then this is the issue that you need to focus on. I think that’s really the issue—a disconnect between policymakers, lawmakers and their constituents.”

Though discharging student loan debt through bankruptcy remains a challenge for borrowers, bankruptcy remains an option for borrowers with other household debts. Bankruptcy is an option that can be costly and typically requires a lawyer, said Andrew Pizor, staff attorney at the National Consumer Law Center (NCLC). However, filing for bankruptcy, which is carefully regulated, can be less expensive than debt settlement companies, foreclosure rescue, or other for-profit options that often leave borrowers paying more to their creditors in the end, Pizor said. 

And while the bankruptcy process requires creditors to stop calling debtors, creditors can still call debtors who are working with debt settlement companies, a process which can take years to resolve, Pizor added.  

Others have explored alternative means for debt cancellation at scale to assist overwhelmed borrowers. The Debt Collective, a union for debtors, has abolished more than $2.8 billion in student, medical, payday loan, probation and credit card debt, per its website. 

“When we’re alone as debtors, we’re isolated, we’re ashamed, we’re afraid. But when we are together, when we’re organized into a union, we actually have a tremendous amount of power,” said Hannah Appel, co-director of the Debt Collective.

Medical debt

Research from the U.S. Census Bureau, a range of factors, from race and education to income, determine how likely someone is to have medical debt. According to a 2018 survey, less than a third (27.9 percent) of households with a Black householder had medical debt, compared to 17.2 percent for white non-Hispanic householders and 9.7 percent for Asian householders. Though 3 percent of households with incomes above the poverty line have medical debt, 11.3 percent of households below the property line reported high medical debt.

For debtors who have medical debt stemming from COVID-19, Appel envisions debtors forming a medical debtors union to push back against the health care bills, not only because they can’t afford to pay them but also on the principle that they shouldn’t have to pay for health care in the first place, Appel said. As for preventing patients from going into medical debt in the future, Appel points to Medicare for All, a single-payer, national health care system that would provide care to Americans regardless of their ability to pay, to eliminate the need for patients to pay out-of-pocket for basic medical care. 

As it stands now, medical debt is a hard challenge to address because entities ranging from medical providers and government agencies to debt collections and debt buyers can hold medical debt, said Jenifer Bosco, staff attorney at the NCLC. In addition to expanding Medicaid and subsidizing more people who need health care cost assistance, there also needs to be greater government oversight of nonprofit hospitals to ensure that they’re offering the required financial assistance to low-income patients. 

“A lot of patients who should get charity care or financial assistance don’t know. So they’ll go to the hospital, get treatment, and then they may be billed, and the bill might end up in collections,” Bosco said. “The patient would have been eligible for financial assistance but might never have had the opportunity to apply for it. So hospitals could do a better job of screening patients for financial assistance. And where hospitals aren’t doing a good enough job, government agencies could step in and work with hospitals to make sure they’re complying with the rules.” 

Payday loan, credit card, and household debts 

Though a sizable share of Americans relies on payday and pawn loans, the pandemic appears to have lessened how much people owe to these alternative financial services. Per the Consumer Financial Protection Bureau, the percentage of people with payday loan debt dropped from 48 percent (down from 63 percent), and pawn loans declined to 34 percent (down from 73 percent). Auto title loans, on the other hand, have largely remained the same. 

The debtors union approach could also work in favor of payday loan borrowers to push back against extraordinarily high-interest rates that typically come with payday loans and check cashing companies, Appel said. Besides abolishing payday lending in general, she also said that there should be a public banking option for low-income people to access affordable lending services.

Though the payday lending industry hasn’t been outlawed, the U.S. government could do more to protect consumers from payday lenders’ problematic practices. For example, under the Trump administration, payday lenders were allowed to partner with banks to loan to borrowers, but the Senate passed a resolution to repeal that rule and now awaits passage in the House of Representatives, Pizor said. Passing the resolution to repeal that rule would be able to protect consumers from the practice, he said.

Per the Federal Reserve Bank of New York, credit card balances declined by $157 billion compared to the end of 2019. Credit card or payday loan debt are often expensive alternatives to pay for basic necessities like housing, food, or medical care, Appel said. The Debt Collective has a series of mutual aid legal resources to help debtors with disputing errors on their credit reports, dispute bills that have gone to collections agencies or other credit card related-problems.

A working paper from the National Bureau of Economic Research, residential utility use increased by 10 percent on average. During the pandemic, having access to the internet, electricity, heating, cooling, and other utilities became especially important not only for students studying from home, but also for remote working and access to telehealth services, Bosco said . Some states have utility bill payment assistance, but it would be helpful for more states to have those programs available to people, she added.

According to the Federal Reserve Bank of New York, mortgage balances increased by $117 billion in the first quarter of 2021. With the mortgage moratorium ending June 30, the Consumer Financial Protection (CFPB) could issue some guidance on how servicers can transition from the forbearance to the repayment period and push lenders to let borrowers reallocate the balance unpaid during the pandemic to the end of the loan period, Pizor said. Borrowers who are having problems with their mortgage lender can go to a HUD counselor or file a complaint with the CFPB, he advised. 

As the country tries to progress toward a new normal, Appel said she hopes that our federal government moves past the politics of austerity and funds the services that people need to survive and thrive. The stimulus bills passed during the 2008 financial crisis and the Covid-19 pandemic have shown that the government can spend on services that people need, she said.

From “medical care to housing to college education that’s free into the environment, climate change mitigation—there are public goods that we can spend on that will eliminate this entire problem of household debt completely,” Appel said.