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Commentary: Would Canceling Student Debt Stimulate the U.S. Economy the Way Candidates Say It Would?

ABI Bankruptcy Brief

December 5, 2019

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Commentary: Would Canceling Student Debt Stimulate the U.S. Economy the Way Candidates Say It Would?

Democratic candidates on the campaign trail have called the student debt crisis, now an estimated $1.5 trillion, a drag on the economy that prevents younger generations of Americans from purchasing homes and making larger investments. The most left leaning and popular plans are supported by Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.): They want to grow the shrinking middle class by canceling student debt for those who owe the most — graduates in their 20s and 30s, according to a Fortune commentary. The average student debt total per person in 2019 is about $30,000, according to Credit.com data, with an average monthly payment of $393 upon graduation. For specific fields, that debt is much higher: Medical school graduates, for instance, owe approximately $200,000 for their education. Proponents of canceling student debt argue that doing so would put billions of dollars back into the economy, stimulating growth while providing financial relief to young people. But while estimated to add $86 billion to $108 billion to GDP annually over the course of a decade, the improvement would only be a modest one in terms of the U.S. economy overall, according to a recent report by Moody’s Investors Service. A similar economic boost could also be achieved through less aggressive means, such as payment restructuring, the report adds.



Attending the Winter Leadership Conference? Don’t miss the ABI Talk tomorrow by Inez Feltscher Stepman of the Independent Women's Forum, who will explore whether there is too much emphasis on reducing student loan debt, including through bankruptcy, and not enough on the real causes of skyrocketing college costs.

High-Interest Loan Companies in Utah Using Small Claims Court Proceedings to Have Borrowers Arrested

While it is against the law to jail someone because of an unpaid debt (Congress banned debtors’ prisons in 1833), debtors across the country are routinely threatened with arrest and sometimes jailed, and these practices are particularly aggressive in Utah, ProPublica reported. Technically, debtors are arrested for not responding to a court summons requested by the creditor. But for many low-income people who are not familiar with court proceedings, lack access to transportation, child care options or time off, or move frequently and thus may not receive notifications, it’s a distinction without a difference. In Utah, payday lenders and similar companies that offer high-interest, small-dollar loans dominate small claims courts. Loans for Less, for example, filed 95 percent of the small claims cases in South Ogden, a suburban city of 17,000 about a half-hour north of Salt Lake City on the interstate, in fiscal year 2018, according to state data. Across Utah, high-interest lenders filed 66 percent of all small claims cases heard between September 2017 and September 2018, according to a new analysis of court records conducted by a team led by Christopher Peterson, a law professor at the University of Utah and the financial services director at the Consumer Federation of America, and David McNeill, a legal data consultant and CEO of Docket Reminder. Companies can sue for up to $11,000 in Utah’s small claims courts, which are stripped of certain formalities: There are rarely lawyers, judges are not always legally trained, and the rules of evidence don’t apply. Lenders file thousands of cases every year. When defendants don’t show up — and they often don’t — the lenders win by default. Once a judgment is entered, companies can garnish borrowers’ paychecks and seize their property. If borrowers fail to attend a supplemental hearing to answer questions about their income and assets, companies can ask the court to issue a bench warrant for their arrest.

Author Provides Historical Look at Small-Dollar Lending on Latest ABI Podcast

ABI Executive Director Sam Gerdano talks with Prof. Anne Fleming of Georgetown University Law (Washington, D.C.), author of City of Debtors: A Century of Fringe Finance. In City of Debtors, Prof. Fleming explores the origins, growth and regulation of small-dollar lending institutions in the U.S. over the twentieth century. Listen to the discussion about the book and issues surrounding small-dollar loans.

How Credit Unions Outgrew Their Down-Home Reputations

Credit unions, long seen as a humdrum corner of consumer finance, are going toe-to-toe with the biggest financial institutions, the Wall Street Journal reported. Credit unions’ assets have grown at nearly twice the pace of banks’ over the past decade, and cooperatives are buying small banks in record numbers. One recently partnered with Google on its plans to create a checking account. Credit unions are owned by their members and are designed to return their profits in the form of lower borrowing costs and higher deposit rates. They are exempt from paying federal income taxes, and they are using their newfound financial heft to compete aggressively for business. Dozens of them dole out loans for boats, jet skis and recreational vehicles. Others are getting into cannabis banking. Some went big on problematic loans backed by taxi medallions. Economists and analysts are uneasy about how these bulked-up credit unions will fare in a recession. In another financial crisis, some could fail or shrink, stranding borrowers who prefer not to use banks. In a worst-case scenario, taxpayers could be saddled with the losses. “They are making lots of loans with high-risk features,” said Karen Petrou, co-head of Federal Financial Analytics, a regulatory advisory firm that has researched credit unions for the banking industry. Credit unions point out that even the largest cooperatives are small compared with the major banks. The entire industry collectively holds less in deposits than JPMorgan Chase & Co. They acknowledge that credit unions now offer loans for items that aren’t typical of a nonprofit, but they say credit unions don’t usually offer anything that banks don’t. (Subscription required.)


 

ABI’s Code & Rules Site Updated with Bankruptcy Rules that Took Effect December 1

ABI's Bankruptcy Code and Rules site has been updated with the new Rule Amendments effective Dec. 1. For a list of the amendments, please click here.
 

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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Regulators Issue Warning on Growth of Nonbank Mortgage Sector

A report from the Financial Stability Oversight Council cited a bigger share of originations and servicing by nonbanks as a potential vulnerability in the financial system, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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