Bankruptcy Lawyers: Student Loans May Be the Next “Debt Bomb”

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By Consumers Union on Tuesday, February 7th, 2012

With outstanding student loans topping $1 trillion – now surpassing credit card debt – and few options for relief, yet another group of experts is weighing in to warn of a student loan crisis. 

The National Association of Consumer Bankruptcy Attorneys just released a survey and a report showing that bankruptcy lawyers are seeing a spike in potential clients who have student loan debts.  The problem is, student loans typically can’t be discharged in bankruptcy like other debts – making them an especially heavy burden in stressful economic times. 
 
The lawyers surveyed by NACBA had this to say about student loans and bankruptcy:

  • More than four out of five bankruptcy attorneys (82 percent) see the limited availability of student loan discharge in bankruptcy as “a big problem” barring a fresh start for clients.
  • Seven out of 10 bankruptcy attorneys see   the lack of ability to separately classify student loans debts for debtors using chapter 13 as a “big problem.”
  •  Nearly two out of three bankruptcy attorneys (65 percent) say that student loan provider debt collections have become “much more” or “somewhat more” aggressive in the last 18 months.
  • More than three out of five bankruptcy attorneys (61 percent) dealing with potential student loan debtor clients have seen cases of debts more than 15 years old still being pursued.

The NACBA report also includes troublesome data about current borrowers’ debt loads: 

  • College seniors who graduated with student loans in 2010 owed an average of $25,250, up five percent from the previous year.   Borrowing has grown far more quickly for those in the 35-49 age group, with school debt burden increasing by a staggering 47 percent.
  • Students are not alone in borrowing at record rates, so too are their parents.  Loans to parents for the college education of children have jumped 75 percent since the 2005-2006 academic year.  Parents have an average of $34,000 in student loans and that figure rises to about $50,000 over a standard 10-year loan repayment period. An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992-1993.
  • Of the Class of 2005 borrowers who began repayments the year they graduated, one analysis found 25 percent became delinquent at some point and 15 percent defaulted.  The Chronicle of Education puts the default rate on government loans at 20 percent.

Students and their families need to take a close look at all their options for financing a college education.  For our tips on how to graduate with less student debt, click here.

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