It’s a vicious cycle. Many families in this country cannot afford the skyrocketing cost of higher education without student loans. But many graduates cannot find a job and cannot pay off the loans. As a result, they wind up in a much deeper hole (as the interest and collection fees accrue) with no way out.
Student loan debt in the U.S. now totals more than $1 trillion. That’s more than all the outstanding credit card debt in the country.
A recent report by the National Association of Consumer Bankruptcy Attorneys found that both students and parents are borrowing at record rates.
College seniors who graduated with student loans in 2010 owed an average of $25,250, up five percent from the previous year. Parents had an average of $34,000 in student loans for their children. The report says the number of these parental loans has jumped 75 percent since 2005-2006.
“These are enormous numbers,” says Ike Shulman, a bankruptcy attorney in San Jose, Calif. “They’re basically setting us up for having a large number of fellow citizens become economically non-functional for the rest of their adult lives.”
Growing numbers of people are being crushed by this debt -- unable to pay and unable to get relief. A recent nationwide survey of bankruptcy attorneys by NACBA found that most (81 percent) had seen a spike in the number of people with student loan debt looking for help. But in most cases, there is nothing a lawyer can do.
Current law makes it almost impossible to discharge student loan debt through bankruptcy. And unlike other unsecured debt, there is no statute of limitations on student loans. Lenders can pursue borrowers to the grave.
“It’s not fair and it needs to be corrected,” says NACBA president William Brewer. “It is a debt bomb that could cripple our society.”
The association’s report says the country faces a serious economic threat from this growing mountain of student debt, one that could be every bit as devastating as the mortgage meltdown.
“This will be a drag on the economy for the foreseeable future,” warns John Roa, an attorney with the National Consumer Law Center and NACBA’s vice president.
It’s a problem for students and parents who co-signed loans
Dave Ingham, a disabled Vietnam veteran who lives in Minneapolis, fears he could lose his savings and his house because he co-signed student loans -- now in default -- for his son. Ingham is being sued by collectors.
His son Shannon has been unable to find work since October 2009. He’s now been diagnosed with acute anxiety disorder and depression. He’s still looking for work, but his father says the loan defaults keep him from getting hired.
“It seems that whenever he comes close to a job interview, they run a credit check, see his loan defaults and the interview does not proceed,” Ingham said at a recent telephone news conference arranged by NACBA.
Can something be done?
With student loans backed by the federal government, someone in trouble can try to get the payments deferred or modified. There are even loan forgiveness programs. With private loans, it’s pay or end up in default.
The National Association of Consumer Bankruptcy Attorneys wants a “safety net” under student loans, just as there is for other consumer lending.
If you start a business that fails, they point out, you can file for bankruptcy and go on with your life. But college students -- or their parents -- don’t have the same protection.
“We need to make some common sense reforms, something like creating an escape valve to relieve some of the pressure before the whole thing blows sky high,” says NACBA vice president John Roa. “There’s no way to diffuse this bomb if the status quo remains the same.”
NACBA wants Congress to roll back the bankruptcy code to 1978, when borrowers who couldn’t pay off their student loans (private or government-guaranteed) could discharge that debt in bankruptcy.
Rep. Steve Cohen, (D-Tennessee), has introduced a bill, H.R. 2028: Private Student Loan Bankruptcy Fairness Act, which would treat private student loan debt the same as other consumer debt.
Congressman Cohen says his bill would “restore fair treatment to Americans in severe financial distress” and give “an honest but unfortunate debtor a chance for a financial fresh start.”
The bill is supported by the American Association of Community Colleges, the American Association of State Colleges and Universities, the American Council on Education and the American Federation of Teachers, as well as various consumer groups. There is currently no formal opposition.
The idea of making it easier to discharge student loan debt via bankruptcy will not sit well with those who backed bankruptcy reforms passed in 2005. Clearly, getting the law changed is a long-shot.
Dave Ingham says he doesn’t know how to solve the current situation. But he believes something should be done before others face the same financial ruin he does.
“It’s something that’s really out of control,” Ingham says. “There are thousands and thousands of us out there who need help with this situation. Please do not give up on us.”
Read: NACBA report and member survey on student loan debt
Find helpful information at: StudentLoanBorrowAssistance.org
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