Facts should matter, especially to newspaper editors. On July 25, The Wall Street Journal based its lead editorial on a factually incorrect premise. I happened to notice the Journal’s error because I’m writing a book about the legal profession’s current crises, one of which is exploding law school debt. But the WSJ blunder raises an important question: How often does the truth lose out to editors’ ideological convictions?
“You Don’t Owe That” suggested that current bankruptcy law proposals to modify the impact of burdensome student loans would “reverse a hard lesson learned during the 1970s.” The editors claimed that provisions barring the discharge of educational loans in bankruptcy occurred “[a]fter a surge in former students declaring bankruptcy to avoid repaying their loans.” For that reason, the WSJ continued, “Congress acted to protect lenders beginning in 1977.”
Not true. There was no such 1970s surge. There was no empirical record of abuse to support the legislative change that began a 30-year slide down a slippery slope, culminating in an even more unfortunate 2005 amendment to the bankruptcy laws.
Old misconceptions die hard. Prior to 1976, all educational debt was dischargeable. That year, Congress amended the Higher Education Act of 1965 to prohibit the discharge of federal educational loans until at least five years had passed since the beginning of the repayment period. Why?
More than 20 years ago, a thorough examination of what some critics characterized as a “loophole” that “allegedly allowed graduating students to discharge their loan obligations through bankruptcy on the eve of lucrative careers” was “more myth and media hype than reality.” More recently, the Congressional Research Service noted that the 1997 Bankruptcy Commission found ”no evidence to support the assertion that when student loans were dischargeable the bankruptcy system was ‘systematically abused.’”
Fear and anecdotes — not facts or evidence — resulted in federal student loans joining the same bankruptcy category as child support, overdue taxes and criminal fines. Except for rare exceptions based on undue hardship, a person paid those debts or died, whichever came first.
The Bankruptcy Reform Act of 1978 continued the new five-year rule, even though statistical analyses from the General Accounting Office and a House report confirmed that earlier claims of abuse were “virtually nonexistent.” In 1990, Congress and the first President Bush extended that period to seven years. In 1998, Congress and President Clinton decreed that debtors would never discharge their federal educational loans. In 2005, Congress and the second President Bush extended that protection to private lenders as well.
The recent Journal editorial worries about those private lenders. No one has been able to identify the author of the 2005 amendment giving financial institutions that huge break. It also gave them something else: a new incentive to lend money with less concern for how debtors would repay it.
Framing the question
The WSJ position seems somewhat paradoxical for the otherwise libertarian-leaning newspaper. On the one hand, personal responsibility is an easy argument to make when focusing on young people who incur debt: “They should be careful and make better choices.”
On the other hand, what entitles such students’ older, wiser and more knowledgeable bankers to put the government’s heavy thumb (in the form of granting special creditor status to lenders) on the scale? For some law school graduates, the result is enormous educational debt for degrees that won’t lead to jobs necessary for repayment. Shouldn’t lenders feel the consequences of their poor decisions? Might everyone be better off if lenders sat down with pre-law students and asked them what they planned to do with their J.D. degrees before approving loans for tuition?
Moreover, from the debtor’s perspective, the underlying issue involves the exercise of a constitutional right. Against the backdrop of eighteenth century debtors’ prisons, the founders empowered Congress to enact uniform national bankruptcy laws so that a debtor didn’t risk losing all assets in one state only to be thrown in jail for not paying debts in another.
Perhaps questions of accountability and personal responsibility turn on the characterization of the issue — and who should be accountable to whom. The Wall Street Journal is accountable to more than two million daily readers. Those readers assume the honesty of editors who include purported facts in an op-ed piece on important policy questions.
This time, readers got what an important newspaper’s editors would like the facts to be, instead of what they are. Even worse, most of them will never know it.