Americans owe more than $1 trillion in student loan debt! What does this mean?

According to an article in the Wall Street Journal today student loan debt has exceeded $1 trillion.  According to the article all this student loan debt could lead to consumers postponing buying homes which could severely impact any possible economic recovery.  This new debt estimate comes form the new agency called the “Consumer Financial Protection Bureau” (CFPB)  which was recently created ostensibly to protect consumers.  The $1 trillion estimate of total student loan debt in this country exceeds the old estimate done by the Federal Reserve Bank of New York by 16%.

The reason for the increase in the estimate for total student loan debt is because this time the new agency used a survey of private lenders to come up with their figures.  In the past estimates have been apparently based upon consumer credit reports.  I don’t know why this estimate is so much higher because credit reports usually always list student loans on them.  But it is possible on the other hand that the private lenders could be remiss in listing these on consumer credit reports because of the bankruptcy laws.  See here for my update on student loan debt.

After 2005 all student loans became non-dischargeable in bankruptcy whether they were backed by the government or not.  A strictly private loan to a private institution therefore survived bankruptcy.  It is possible that because these lenders now that there loans are safe from discharge that they get lazy.  They can always pop up and try to collect a student loan (even a private one) without the fear of the debtor filing or threatening to file a bankruptcy.  Therefore it is possible that a survey of these lenders themselves will yield a more accurate assessment of the true amount of student loans owed out there.  See here for my blog about private student loans.

Officials at the CFPB say this increase could be attributed to the fact that state budgets are being cut, more students are going to school instead of working because of high unemployment, and because tuition is increasing.  Also they say that interest is increasing on these loans and more and more students (or former students) are behind on their loans.

Then they remind us that first time home buyers are a big part of the housing market and these debtors are increasingly postponing the buying of their first house.  This can have a tremendous effect on any potential recovery and the economy as a whole.  The people interviewed in the article are increasingly nervous as they are saddled with ever increasing debt and they wonder if they should continue their education.  The CFPB reiterates how important education is for getting the skills necessary to get a good job in the end.

I agree with the idea of the importance of education and I too am concerned about all of this student loan debt being incurred by people who probably cannot pay it back.  As a bankruptcy attorney I see this every day and I advise bankruptcy for these people.  But student loan debt is different from credit card or other types of debt.  Since 2005 it has all been non-dischargeable in bankruptcy even if the government has no involvement in the loan.

I therefore believe that Congress should pass a law that allows the discharging of student loan debt in bankruptcy after a certain number of years.  It could be 5, 10, or 20 years but the debt should not last forever or until a person dies.

I am a bankruptcy lawyer practicing bankruptcy law in San Diego.  For further information please visit my website ar www.freshstartsandiego.com or www.farquharlaw.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

Private student loan debt is unfortunately not dischargeable in bankruptcy, but it should be!

There is a problem in this country with student loan debt.  I have blogged about student loans here and here and how student loan debt is increasing every year.  Many believe that it is going to be the origin of the next financial crisis or at least the factor that prevents any economic recovery to occur.  Outstanding student loan debt has topped $1 trillion and is still rising every year.  It is clear that this debt will have profound effects on the economy if it is not dealt with.

But student loan debts comes in two types.  The “old” type of student loan debt is government backed student loans.  These are loans backed by the U.S. government (ie taxpayer).  These are loans that government agencies back or give out and these loans have been historically non-dischargeable in bankruptcy as is the case with most debts owed to the government.

But along came BACPA in the year 2005 which created a sweeping reform of the bankruptcy laws and gave us things like the “means test”.  In that 2005 law private student loans were added to the list on non-dischargeable debts.

Years ago, before 2005, I  remember advising people that we could discharge their debts for truck driving schools, hair and nail academies, and other school debts if the the money lent came from a strictly private institution with no government backing or funding.  These loans were far fewer then but could be discharged in bankruptcy.  The lenders of these loans knew of their non-dischargeability and the lenders were therefore careful to whom they lent the money.

Section 523(a)(8)(B) of the new bankruptcy law changed things. Private loans now fell into the category of “any other educational loan that is a qualified education loan” and they were rendered non-dischargeable. Many of us believe that this in turn led to an explosion of these student loans.

With these loans being safe from dischargeability in bankruptcy the lenders went out to push these loans.  They were now after all a good risk.  Debtors would be stuck with them for life and the creditors would get paid back.  According to the PBS special “College Inc.” the schools now got into the act.  They hired recruiters to find masses of students who would sign up for these private degrees.  These masses of students would then attend these private colleges funded by these private loans that were now freely available.

The biggest of these was the University of Phoenix.  I was talked to by a recruiter way back in the 1980s from that “University” so they have been active for some time.  They seemed to have grown substantially more recently though probably due to the availability of this private money.  They and the others then pumped out these degrees to students by the thousands.  Each student then was shackled with a large (non-dischargeable) student loan debt when he or she gets the degree.  This would seem to be such a problem if these students could get a job.

In fact though many of these degrees are worthless.  PBS talks about a nursing school that gave degrees to people who never stepped foot inside a hospital.  Another student took on $200,000 in student loan debt for a doctoral degree from a school without the proper accreditation.  Many of these students never get a job from these degrees that they borrowed massive amounts to fund and many never will because the degrees are worthless and employers know it and don’t hire graduates from these “Universities”.

This new for-profit system of education is a big change in the way have historically educate.  Colleges were in the past non-profit private schools or government schools which were of course non-profit.  These new schools claim they want to change all of that and provide an alternative way of providing education.  But that education or those degrees provided by these institutions must be worth something in that they put heir graduates in line for some occupation.

n the past those for profit schools were smaller and had less students.  I believe it was the 2005 bankruptcy law that in part led to an explosion of these school as it led to an explosion in the money available to finance these schools.  In the 1980s you probably could not get a loan to go to the University of Phoenix.  No private lenders would lend for this as they knew you would bankrupt it away when you got out and could not get a job.

Burt when the law changed and the debts would last forever the became a good risk for lenders and they pushed the money out.  The schools picked up on this and they advertised this money availability and probably stretched the truth a lot about the employment rates of their graduates.  This has led to the $1 trillion student loan debt situation we have today.

There is a law that is attempting to address this but I will save you the trouble of looking it up or hoping it will pass.  I believe if we just go back to making these private debts dischargeable in bankruptcy the money available to fund these schools would tighten up considerably.  The numbers of students would then shrink drastically and so would the graduates. This would certainly help their employ-ability as their would be less of them and if students couldn’t get a job from one of these degrees then bankruptcy would remain an option.  Bankruptcy is usually better than paying for student loans forever when you can’t get a job.

I am a bankruptcy attorney practicing bankruptcy law in San Diego.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.