The Student Loan Mess: Is There Any Relief in Sight?

student studying

I am finding that the hottest topic right now among those who work with bankruptcies is the overwhelming amount of student debt that burdens so many people for years and even decades after they’ve left school.  Currently, there are few ways that people can try to deal with their student loans when they can’t afford to make their payments, such as teaching or practicing medicine in underserved areas for a certain number of years[1], or income-driven plan arrangements through the U.S. Department of Education.  Discharging student loan debt in bankruptcy is not an option unless the debtor’s financial situation is virtually hopeless.

Student loan debt has literally exploded over the past decade or so, and is now estimated to nationally total about $1.4 trillion dollars.  Approximately 44 million people have contributed to this total, and, of that number, 8 million are in default.  This computes to an 18% default rate, which is enormous.  It is far larger than the default rates on credit cards, car loans, or even the mortgage defaults prior to 2008 that caused the economic collapse.

Some experts are comparing the current growth of student debt in this country to the subprime mortgage collapse of a few years back.  Both government and private lenders are readily approving loans to unqualified prospective students, and these loans are then being traded and sold similar to the way mortgages were in 2008.  Colleges have “taken the bait” offered by the lenders to raise their tuitions, with the result that many recent graduates are burdened with enormous debt and cannot find jobs in this economy that pay enough to deal with that debt. If this situation continues, the national economy in the near future will take a direct hit by reduced consumer spending and overall slower growth than it would have otherwise anticipated.  This nation’s economic growth is largely fueled by young consumers purchasing a home, and then spending money on furniture and home improvements.  We are already seeing that these young graduates are having to postpone buying a home for a considerable period of time because of financial restrictions.  Their first plunge into the home market is being delayed for a longer and longer time.  In other words, the rapidly increasing student debt is slowing down our economy as a whole, and will do so at an escalating rate in the future unless something is changed.

It appears that in May 2017, a bill was introduced in the U.S. House of Representatives to change the bankruptcy laws to make it possible to discharge both government and private student loans.  Whether it will ever become law and to what extent debtors will be able to discharge it is questionable, but I firmly believe that the mounting pressure on the economy will result in this issue being addressed in the next few years.  It may well first come as a benefit available to chapter 13 debtors, with a percentage of the total debt paid to the lender with a portion discharged (“forgiven”) when the plan is completed.  And I predict that it will not include parental loans, such as the Parent Plus program or parental co-signers.

Some states have actually sued the student loan lenders on the basis of their operating tactics that take advantage of student borrowers, but there really needs to be federal action to oversee borrowing and repayment programs.

So what is my advice to graduates who are facing financial disaster while trying to deal with their student loans?  Certainly, look into the income-driven repayment plans offered by the U.S. Department of Education.  You can review the different options they have online.  If possible, see if you can have part of the loan forgiven for public service in selected areas.  If getting rid of other debts right now would help you make your student loan payments, then a bankruptcy might work well in accomplishing that goal.  It might even be advantageous to look into filing under Chapter 13 in order to make affordable monthly payments on your student loans while biding time to see if the bankruptcy laws do change to make student loans dischargeable.

If you get sued by a student loan collection company, such as National Collegiate Student Loan Trusts, see an attorney knowledgeable about student loan practices immediately, as many times these suits have been filed after the statute of limitations is past, or even if they didn’t really have the right paperwork.  With the right defense, these suits can be dismissed.  If you do nothing, they will get their judgment against you and can even lien your property.

Future students should carefully consider what their incomes will likely be in their chosen fields before taking on too much student debt.  For instance, a young attorney who finances her education through student loan debt and attends a private university law school could owe as much as $300,000 in student loans when she graduates.  Considering that there is an over-abundance of attorneys right now, the chances of landing a job that will provide an income sufficient to pay off that amount of debt is risky at best.  Although it’s tempting to attend a prestigious school that offers you an almost free-ride, when it comes to repaying student loans, you might want to reconsider taking out the least amount of loans you can.  And, as a parent, refrain from taking out loans in your own name, even if you have to later help your young graduate repay her own loan obligations.

[1] These public service loan forgiveness programs are available only to those who have Federal Direct Loans.