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.

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.