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Student Loan Debts Could Trigger Next Financial Crisis

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By Michael Cohn
February 9, 2012

A recent survey of U.S. bankruptcy attorneys found a major jump in student loan debtors seeking their help, pointing the way to a possible mortgage-style debt crisis.

Now that state attorneys general across the country have reached a $25 billion deal with the major banks on their investigation into “robo-signing” and other foreclosure abuses, the next financial crisis may be on the horizon, one group is warning.

A survey and report released Tuesday by the National Association of Consumer Bankruptcy Attorneys found that 81 percent of the bankruptcy attorneys polled said that potential clients with student loan debt have increased “significantly” or “somewhat” in the past three to four years. Overall, 48 percent of the bankruptcy attorneys in the survey reported significant increases in such potential clients.

In addition, 39 percent of the bankruptcy attorneys surveyed said they have seen potential student loan client cases jump 25 to 50 percent in the past three to four years. An additional 23 percent of bankruptcy attorneys have seen such cases jump by 50 percent to more than 100 percent.

Not only that, but a whopping 95 percent of the bankruptcy attorneys in the survey report that few of the student loan debtors they have seen have any chance of obtaining a discharge as a result of undue hardship.

While the agreement announced Thursday by the state attorneys general with the banks could lead to another wave of home foreclosures and seizures, it should also provide some relief to those with underwater mortgages and lower payments on their loan principal. On the other hand, the student loan debt problem is not showing any sign of abating. Eighty-two percent of the bankruptcy attorneys surveyed by NACBA 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 loan debts for debtors using Chapter 13 as a “big problem.”

Student loan debt collectors can be relentless too. Nearly two-thirds of the bankruptcy attorneys polled (65 percent) said that student loan provider debt collections have become “much more” or “somewhat more” aggressive in the last 18 months.

There is often no relief with the passage of time. More than three out of five bankruptcy attorneys (61 percent) who are dealing with potential student loan debtor clients have seen cases of debts more than 15 years old still being pursued.

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 estimates the default rate on government loans at 20 percent. The report from the group, "Student Loan 'Debt Bomb': America's Next Mortgage-Style Economic Crisis," points out that college seniors who graduated with student loans in 2010 owed an average of $25,250, up 5 percent from the previous year.

It’s not only young people who have been affected. Borrowing has grown far more quickly for those in the 35 to 49 age group, with school debt burden increasing by a staggering 47 percent. That’s especially true with so many out of work Americans seeking retraining and new educational degrees in order to get a job.

Students are not alone in borrowing at record rates, the groups points out. Their parents are oftentimes on the hook too, especially if they have been forced by lenders to co-sign for their children’s loans. Loans to parents for the college education of their 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, according to the group. In addition, an estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992-1993.

One such parent is Dave Ingham, a disabled Vietnam vet who lives outside Minneapolis and co-signed a loan for his son to attend college.

“I have been personally and gravely affected by the student loan bankruptcy crisis being discussed today,” he told NACBA. “And I know our family is only one of many thousands across America facing these issues. My wife and I live in a condo and she receives barely over $500 per month in Social Security. Our son has to live with us or else he would be homeless. My wife and I and our son are being sued by a collection agency representing Sallie Mae and are scheduled to appear in court on Feb. 13, 2012. My wife and I stand to lose our assets, including our condo. I realize my son made a mistake by being taken in by predatory lenders, but that does not mean his life and ours should be allowed to be ruined by these people.”

11 Comments

If there is a crisis precipitated by student loans, it will be less about our ability to repay and more about the actual SERVICE from our lenders. When I graduated, I consolidated with Great Lakes and they were AWESOME!! Even when I moved overseas they were there with SERVICE. Then last October, for some reason known only to those in Washington (perhaps a prelude to the aforementioned crisis?) Great Lakes sold my account to Nelnet. Nelnet has been AWFUL!!! first they put my PRIVATE telephone number in the mailing address of letters and statements sent to my address overseas. Talk about privacy violations!!! Then they required that I sign up for their online "service" but they can't open an online account for me because I don't live in the US (yes I am a US citizen and yes I graduated from a US university). So now I'm in violation of their editcts and they're threatening to declare me in breach of contract. The problem is A - I did not sign a contract with Nelnet, I signed a contract with Great Lakes and B - my payments are not only up to date, but are paid ahead as I make more than minimum payments. Any "crisis" will be caused by outright REVOLT by students demanding better service from their lenders!!

Posted by: Marilyn W | February 17, 2012 10:22 PM

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I agree that we are not accessing the ability of someone to pay the loan back. However, really is it going to make a difference if we look at the current income of an 18 year old and hope that he actually finishes the degree, then he may get a job to pay that loan. There are way to many what if's going on which make it impossible to determine that this child can repay this loan.

The student loan itself being created back in 1982 is the problem. By attaching financing to anything it leads to an increase in the price. Typically the undereducated consumer will pay more for something with financing than if they had paid cash, not even considering the interest. I am just talking about the initial amount financed.

Lastly, corporate america has done this. They are paying the politicians to write the laws toward their favor. Student loan laws are out of control. I have a student loan in which more interest is allowed to accrue each month than the payment amount is set at. I am an accounting major and have figured this out and now have to pay nearly $125 more in my payment just to make sure that I am not getting behind, like Sallie Mae wants. They want to keep you in a loan for the rest of your life and never let you pay it off. That is the problem, this company is crooked and the only company besides the government that offers any kind of loan.

Posted by: abranch23 | February 14, 2012 11:48 AM

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Professionals.can't do much to help indebted graduates, but we can encourage future college students to look at a do-it-yourself education. See www.duybook.com and Edupunksguide.org. It offers a creative and affordable path to a college education.

Posted by: mufette | February 10, 2012 11:17 PM

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Wow, I'm reading a lot of insanity above. It's incredible. Everyone with debt is blaming others (Govt, the rich, banks, etc.) when YOU DECIDED TO BORROW THE MONEY!! You took the loan terms you did. You choose the crappy deadend major you did. You decided to not go to a school you could afford. You decided to not work hard for 4 or 5 years and save up the money to go. You decided to not work full time and go to school in the evenings. You decided to spend more than you took in and live it up. NO ONE HELD A GUN TO YOUR HEAD. WHat...did you want the Govt to come in and be your parent and make the decisions for you, protect you from your own bad decisions? of course not, but now that's who you blame. You are LUCKY someone lent you the money...they certainly shouldn't have....with an anti-personal-responsibility attitude like that. I worked my butt off during school and went to a school I could afford, as a result, I left with only $5k of debt, and paid it off quickly. Guess what, life's not fair, you made mistakes, and it's your fault, welcome to reality. Quit your blaming and complaining. (Blaming lost homes, divorce on "Banks and Millionaires"??!! that's priceless). Wow, what a blind entitlement society we have become!

Posted by: Newsosc | February 10, 2012 3:40 PM

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I am a recent graduate and I had over 50k in student loans. I have made my payments in a timely manner. It's probable I am lucky, but I'm not swimming in money. Instead I am getting by. I will continue to make my minimum payments until my salary increases. Eventually, I should be able to pay off my loans under the current term of 20 years.

The issue I am having is I am unable to consolidate my private student loans. I am stuck with my variable interest rate loan. I know this is sad to say, but I'm loving the current state of the market, soley based on my variable interest rate. Depending on the market, I might end up as one of those slim reasons of default.

If we want to fix this potential "bomb", allow me to consolidate into a reasonable FIXED interest rate. It's not like I'm able to make it disappear by filing bankruptcy. As you know, student loan debt will always be collected. Why can't I find a consolidation loan with a reasonable fixed interest rate? It's unfair to charge me more than 5% fixed interest rate loan that WILL be collected.

Please, correct me if I'm wrong.

Posted by: eortiz244 | February 10, 2012 11:30 AM

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I have been waiting for an article like this to bring light to the student debit CRISIS. Everyone is aware of the problem, but placing blame is not the answer. Young people entering college should be aware of 1. How much their education costs 2.What job, if any, they will be able to get after graduation, and 3. How they plan on paying for their education after graduation. More times then not, young people enter college without thinking about any of these things. So before you blame the government, the universities, etc., take a look at the students making the decisions first. Yes, education is expensive. My advise for my little sister, who will be entering a state school costing about 10,000 a year this coming fall, is to live with mom and dad and work to pay for as much of her college as possible with a part time job. Her major is accounting, not because she dreamed of being that all her life, but because she will get a job out of college making at least 40,000 a year if not more. My advise for people who have graduated with 30,000 or more in student debt who are having a hard time paying for their college is you made your bed and now you have to lie in it. Plan on living with mom and dad or in a friends basement, sell that nice car you thought you could afford and buy a junker, and find a way to make the $500 a month to pay down your student loans. If you can't find a "real job" after getting a college education, then find a serving job. Waiting tables at a restaurant for 40 hours a week will earn you enough money to at least pay the minimum. And yes, the author hit the nail right on the head. College debt will lead to the next financial crisis. My suggestion is that Sallie Mae should be able to dictate what students can major in. We need engineering, accountants, scientists, and doctors. If you can't apply yourself enough in school to be one of the above, then you don't get money to go to school.

Posted by: ktadlock | February 10, 2012 10:24 AM

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After using student loans myself, here are a couple observations:

1 - We need to assess students' ability to repay. The one-size-fits-all approach doesn't work when there are so many fluff majors that don't lead to employment.

2 - While loan forebearances and similar programs may be helpful to graduates getting through the entry-level phase of their careers, we should not be forgiving balances after a certain period. Full repayment of debt should be a presumption of both the student and the American public.

Implement those two items and I guarantee 99% of student loan problems go away, because it makes the borrower act responsibly without enduring undue hardship.

Posted by: alb235 | February 10, 2012 10:02 AM

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jakeryan, Why do you blame the corporate world? It is government and colleges that cause this problem. When the government tries to give hand outs to people, then it raises the costs for everyone. The current administration took over the student loan business, and the interest rates went up. Instead of taking on the colleges for outrageous increases in tuition, they think giving more student loans help. Colleges keep adding useless liberal arts degrees that have no job potential, and increasing their tuition. Also, professors don't teach classes any more, so they need more staff to teach and costs go up without any improvement in education. Don't blame corporations, blame government. The more government gets involved in anything, then the costs go up.

Posted by: JD1 | February 10, 2012 9:39 AM

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I have three daughters all with student loans. They went to schools at different times. The last one ended up with loans at 6.5%. Meanwhile home loans are at record lows. What is wrong with this picture? It is one thing to pay for an education for which you cant get a job but it is another thing to pay such high interest rates. The loan payments are so high that as others have noted previously it is hard for these young people to support themselves.

Posted by: vwharris | February 10, 2012 9:11 AM

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I don't know if it is totally the corporations' fault... I also think that school is way too expensive now, and then even to go to a mediocre school, it is ridiculously expensive, and unless it is a great school, you have less likely of a chance to get a good job afterwards (which makes sense) and you'll have less likely of a chance to be able to pay off your huge loans.

Posted by: Murphyqu03 | February 10, 2012 9:00 AM

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Ok, My kids had to go to college to get a job, we were on the low end of the financial pyramid, so they had to get student loans, went to school graduated with honors, could not get a job without the degree and experience, then had to work as interns for free working second jobs to put a roof over their head and food in their stomachs. Finally get paying jobs and the student loan payments kick in.. The corporate world has done this to our kids. They followed the guidelines that were given , worked hard kept their nose clean, now have lost homes , divorced, their children suffering major consequences and we keep giving money to the Banks and multimillionaires.. And this is what we are proud of???? All the values I grew up with don't exist in this country anymore. God help us

Posted by: jakeryan | February 10, 2012 7:26 AM

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