1 Trillion dollar problem. Student loan debt increases 275% over the last decade! When will they be bankruptable?

It’s true!  According to an article posted online by CNN Money student loan debt has tripled in the last 10 years.  The total amount of student loan debt in the U.S. is $904 billion in the first quarter of 2012 and that is up from $241 billion in 2003.  It is now the second highest form of debt behind mortgages which means that credit cards have less charged on them than these student loans.

As if this is not bad enough the debt keeps growing.  In fact it is the only type of debt that has substantially increased since 2008 according to a senior economist at the NY Fed.

And the delinquency rates on these student loans are also rising.  They are up to 8.69% from just 6.13% a decade ago.  Does this mean that over 90% of people are not delinquent?  No!   Almost 50% of these loans are currently in deferment or grace periods according to another Fed. economist.  That means that 60% of these loans are basically not being paid because the borrowers who are still in school or unemployed don’t have to pay anything yet.

So you have a whole class of debts that has reached astronomical heights and almost two-thirds of that debt is not being serviced.  It sounds like a potential disaster to me.  The median amount borrowed is $12,800 but 25% of borrowers owe more than $28,000, and 10% owe more than $54,000, and 3% owe over $100,000.  90% of the lending comes from the federal government and borrowing is way up apparently because of the economic downturn.  Students are apparently rushing to take out new debt for this coming year.  Most likely debt which they cannot pay.

My experience with these student loans is that they don’t care if you get a job in your field or if you cannot pay your rent.  They want their money when you get out and get a job and they will wait forever to get you to pay.  They tacked on over $7000 to a student loan which a client of mine took out years ago after he did not make payments on the loan.  We attempted to settle with borrowed money but they would have none of it.

They wanted their whole amount plus their interest and fees and they were not interested in any settlement.  My client made $10,000 a year on menial labor with a pregnant wife and two children and the student loan collectors did not care even that he would probably never be able to pay the debts.  Nor did they care that he never got a job in the field which he studied for.  The lady on the phone told me that “lots of people are having hard times”.

Yes, and let them eat cake!  How long can this country tolerate this intolerable student loan problem?  It’s over A trillion dollars and growing and 60% of these loans are not being paid on.  Collectors don’t care whether you can pay or not and just want the money and the economy is down so people are lining up to get more loans which they will never be able to pay.

The whole problem could be solved by making these debts dischargeable in a bankruptcy.  It is ridiculous that these loans cannot be included in bankruptcy when car loans, credit card loans, personal loans and mortgage loans can all be taken care of through a bankruptcy.  How can it be that someone who tries to improve themself by getting an education must be stuck with that debt for life when others can get rid of their debts in bankruptcy when they reach the level which they cannot pay for them?

And it is not just a problem for government backed loans.  Private student loans are also not dischargeable in bankruptcy since 2005.  This has led to an explosion in private student loan debt too that leaves many with worthless degrees and debts they cannot pay for.  I also wrote a blog about private student loan debt.

I also argued in another blog that student loans should be dischargeable in bankruptcy.   If they made all student loans dischargeable in bankruptcy then the problem would go away for these students.  That is what bankruptcy is for.   It serves to help people get rid of debts which they have no hope of paying and then move on in life with a fresh start.  The whole bankruptcy process is looked over by a series of trustees and a bankruptcy judge.  They make sure that income and assets are insufficient to pay the debts and to make sure there is no fraud.  It is the perfect system to handle these debts.

How long can we kick the can down the road?  These students cannot pay these debts.  Like many of my clients they are barely surviving and they can only pay rent and food if they are lucky enough to get a job.  How can we pretend that they can pay 10s of thousands of dollars in student loan debt?  Are we to hound them to the grave?  The only solution that makes sense is to make these dischargeable in bankruptcy.  Take it from one who sees this situation every single day.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Advertisements

“Occupy Chicago” wants to forgive student loans. Your student loan bailout should be through bankruptcy!

The “Occupy Wall Street” movement has created many spinoff movements all over the country like the one here in San Diego.  After hearing criticism for their lack of coherent demands, the “Occupy Chicago” chapter came out with a list of demands on Monday.  Among other things, like taxing the wealthy and attacking Wall Street, they want student loans forgiven.  I argued in a blog that I posted Sunday on the Occupy San Diego movement that student loans should be dischargeable in bankruptcy.

In the face of the bailouts that Wall Street firms and banks received more and more people are asking “where is our bailout”?  Regular people have a tremendous amount of debt which they cannot afford and they believe that justice demands that they need some consideration from government.  It is true that almost 50% of people pay no income taxes but should we bailout the 99% with massive wealth transfers?

I say no.   Most people in this country will not go for that.  I have argued for years on my blog that a bailout plan already exists for the 99% of us that are neither rich nor giant corporations.  It’s called bankruptcy and bankruptcy allows you to legally walk away from your debts and have them discharged so you no longer owe them.  You can then get a fresh start debt free and keep what money you earn from employment.  Everyone can avail themselves of bankruptcy.  You don’t have to be a privileged person or corporation to get it.  In fact if you make too much money you will be means tested out of a chapter 7.

So bankruptcy is available for regular people but there is a problem.  Student loans cannot be included in bankruptcy.  Student loans currently are not dischargeable in bankruptcy.   They do therefore indeed last forever or until you allege “undue hardship” which is very hard to prove.  If these student loans were to be included in the lists of debts that people could discharge in bankruptcy then regular people would not be saddled with them forever.  They could escape them and move on in life with their student loans forgiven.

This could be done so much more easily and fairly in the context of bankruptcy than through some government blanket forgiveness.  Bankruptcy has been around for hundreds of years and the systems are in place to handle forgiveness of debt through the filing of bankruptcy.  There are trustees and judges to oversee each individual to make sure that the people asking for forgiveness really can’t afford to pay these debts back because the have neither the income or assets to do so.

In bankruptcy there are even proscribed exemptions that allow each person to keep a certain amount of property.  For most of the 99% this would amount to people keeping all of their property because most people don’t have more than these allowed exemption amounts.

This solution will also be so much more palatable to the American public.  It allows the forgiveness of the student loan debt but within the confines of the bankruptcy system.  Each individual would have to file for bankruptcy to get his student loan debt forgiveness.  He would then be examined by a Trustee and he would face a judge if fraud or other problems came up.   His income and expenses would be looked at to determine that he could not pay his debts with his current income and thus he is formally bankrupt. Those who could afford to pay the loans would then have to do so in some form but many many student loan debtors would be able to escape these loans if they were dischargeable in bankruptcy.  Bankruptcy is no blanket gift.

And it would be fair.  Many people with student loans cannot afford to pay these loans and they have very little hope of paying them back.  They are under employed or more likely unemployed and they cannot afford their living expenses let alone these student loans that have not even landed them a job.  It is simply not fair that a person who used their credit cards to excess can discharge those debts but the person trying to get an education and a job can never escape them even if they have no money and no job.

But many people will say that if we make student loans dischargeable in bankruptcy then student loans will be harder to get.   Maybe that is a good thing and people won’t borrow money for degrees that won’t lead to a job.  But I also believe that as credit cards are still obtainable by most people today and they are dischargeable in bankruptcy.  Bankruptcy has not stopped that industry and dischargeable student loans will not stop lenders from lending money for these loans either.

It also should not matter whether the loans are government or private.  If  they are private then the loans should be treated like credit cards and if government loans are owed then forgiveness of these loans is only fair in light of the bailouts given by the government to the financial industry.  Whether government or private though the effect is the same on people.  They can’t afford to pay them back in many cases.  (Remember also that IRS tax debt is dischargeable after only 3 years and the IRS still continues to operate).

And for further fairness you could make student loans dischargeable after a period of time say 10 or even 20 years.  If the student has not paid them back by that time then they are certainly having a problem and they probably can’t pay them back.  It is only fair to allow people to escape them in time.

I am a bankruptcy attorney practicing bankruptcy law in San Diego, CA.   For further information please visit my website at www.farquharlaw.com or www.freshsatartsandiego.com.   Or call my office for a free consultation at (619) 702-5015.  If you or someone you know are considering bankruptcy then get my Free e-book “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPCTY FILING” by e-mailing me at farquharesq@yahoo.com.