Last year the student loan debt passed the $1 trillion mark. That’s 1000 billion dollars. It now exceeds the total debt for all credit cards in the country and many experts are warning that this will be the next credit bubble to burst.
Here’s what Dr. Andrew Jennings, Chief Analytics Officer at FICO (the credit reporting agency), says. “Evidence is mounting that student loans could be the next trouble spot for lenders. A significant rise in defaults on student loans would impact lenders as well as taxpayers, who could be facing big losses due to these defaults.”
Skyrocketing educational costs, a declining economy, high unemployment, a shrinking middle-class, predatory private lenders and draconian revisions to the bankruptcy laws are contributing to this growing problem.
In an effort to secure decent employment, students are borrowing in record numbers and graduating (or not) with massive debts which will follow them to the grave. For instance, college students who graduated in 2010 owed an average of more than $25,000 on their loans and these were not just the traditional students. Older workers, facing layoffs or marginal employment are returning to school in droves and borrowing by those in the 35-49 age group has grown by 47 percent.
Nor is it just students who are borrowing for education, parents who have borrowed for their children’s education now owe an average of $34,000 in student loans. Loans they may take into retirement.
Meanwhile default rates are soaring. The Chronicle of Education puts the default rate on government student loans at 20 percent and for profit-making educational institutes, the fastest-growing sector of higher education which rely heavily on federal student aid, the default rates may be twice this figure.
According to an article published September 12, 2011 in the New York Times a study by the Institute for Higher Education Policy found that “…only 37 percent of borrowers who started repaying their student loans in 2005 were able to pay them back fully and on time.”
Certainly college graduates earn more than those without a degree and if they are able to secure decent employment, their student loan debt will be manageable. But for those who find only marginal employment or those who experience one of life’s many calamities, such as disability, extended illness, divorce or death in the family, their debt will follow them into old age because there is no way out.
What about bankruptcy? Ah, there’s the rub.
In 1976, after much bally-hoo regarding the number of graduates declaring bankruptcy to dissolve their student loan debts (which in actuality was only about 1 percent), Congress changed the bankruptcy law to prohibit the discharge of government guaranteed education loans. Further changes to the bankruptcy laws in 1978, 1990 and 1998 made it even more difficult to resolve student loans through bankruptcy.
Then in 2005, Congress, under pressure from loan company lobbyists, declared most private student loans to be non-dischargeable under the bankruptcy law.
While the law provides provisions for “undue hardship,” as a practical matter very few facing bankruptcy can afford the necessary legal challenge to attain this status.
Furthermore, there is no statute of limitation on student loans and it is one of the few things for which the government may take a portion of one’s Social Security benefits.
As things stand, those with student loans have them for life.
Which brings us to the point of this column. There are two bill languishing in Congress, House Bill 2028, the “Private Student Loan Bankruptcy Fairness Act,” and Senate Bill 1102, the “Fairness for Struggling Students Act,” which would restore bankruptcy relief for private student loans.
Congress should pass this bill but it should also restore the right to discharge federal student loans through bankruptcy. Restoring bankruptcy protection does not mean liquidation of the loan for those with the means to repay them.
On the other hand, if we can bail out the banks why not our students? Really, which is more important?