Are Student Loans Next Debt Crisis? Part 2

This is a continuation from Part 1 of this article.

  NACBA has called on Congress to immediately eliminate the nondischargeability of private student loans.  "There simply is no reason to allow private student loans to be treated differently from other types of unsecured credit.  In fact, exempting these loans from discharge is likely to cause even more harm for borrowers since there are no interest rate limit or limits on fees charged for private student loans," the NACBA report states.

  NACBA also recommends restoring the ability to discharge federal student loans after they have been owing for five years.  Student loans owed for less than five years could be discharged based on a showing of undue hardship.

  "Restoring bankruptcy protection for student loan debt is not the same thing as simply forgiving these loans.  The 2005 changes to the Bankruptcy Code ensure that debtors who enter bankruptcy with funds to repay debts are not able to simply liquidate them through Chapter 7," the NACBA report states.  "In addition, there are significant new barriers to access, including higher filing fees and mandatory counseling and education requirements.  Any question about the existence or extent of past abuse of the bankruptcy system should be put to rest by the new system.  The discharge should be restored for students who truly need the bankruptcy safety net."

  Finally, the NACBA recommends restoring a reasonable statute of limitations for collecting student loans.  "Just as student loans are among the few unsecured debts that generally are not dischargeable in bankruptcy, student loan borrowers have the unenviable distinction of holding debt with no statute of limitations.  The Higher Education Act Amendments of 1991 eliminated the statute of limitations within which suits could be filed, judgments enforced or offset, garnishment or other actions initiated, to collect federal student loans.  This lumps student borrowers with a very small number of law violations, such as murder and treason.  Despite the governmental and societal interest in pursuing criminals, statues of limitation apply to nearly all federal criminal actions.  The rare exceptions exist for those crimes that are punishable by death, including espionage and treason, and now, student loan defaults."


This the Part 2 of a 2 Part article.

Are Student Loans the Next Debt Crisis? Part 1

  In its March 13th edition, Consumer Bankruptcy News reports that student loan debt now exceeds credit card debt in the United States with more than $1 trillion (yes, that's with a "t") in student loans now outstanding.  The article states that America faces the very real possibility of another major economic threat on a par with the devastating home mortgage crisis, according to the new survey and report from the National Association of Consumer Bankruptcy Attorneys ("NACBA").

  "Take it from those of us on the frontline of economic distress in America:  This could very well be the next debt bomb for the U.S. economy," said NACBA president William E. Brewer Jr.  "The amount of student borrowing crossed the $100 billion threshold for the first time in 2010 and total outstanding loans exceeded $1 trillion for the first time last year.  The reason:  Students and workers seeking retraining are borrowing extraordinary amounts of money through federal and private loan programs to help cover the rising cost of college and training.  In many cases, parents responsible for the student loans are in or near retirement years and facing repayment demands."

  It's a concern shared by lenders.

  FICO's most recent quarterly survey of bank risk professionals found growing concern for the stability of the student loan market and deepening fears.  In FICO's survey, 67 percent of respondents expected delinquencies on these loans to rise.  That is 19 percentage points higher than last quarter.  Only 8 percent of respondents expected a decline in delinquencies.

  "Evidence is mounting that student loans could be the next trouble spot for lenders," said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO labs.  "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.  Our survey results underscore the ongoing challenges that millions of American households face as they try to cope with their debt during these uncertain times."

  Concern that the student loan debt burden is becoming too great was also reflected in the anecdotal experiences of 860 bankruptcy attorneys from across the country who responded to NACBA's survey.  Their survey found that -

*  More than four out of five bankruptcy attorneys (81 percent) say that potential clients with student loan debt have increased "significantly" or "somewhat" in the last three to four years.  Overall, about half (48 percent) of bankruptcy attorneys reported significant increases in such potential clients.

*  Nearly two out of five of bankruptcy attorneys (39 percent) have seen potential student loan client cases jump 25 to 50 percent in the last three to four years.  An additional quarter ((23 percent) of bankruptcy attorneys have seen such cases jump by 50 percent to more that 100 percent.

*  Most bankruptcy attorneys (95 percent) report that few student loan debtors are seen as having any chance of obtaining a discharge as a result of undue hardship.

  Student loans are necessary to make sure that every person who wants to earn a college degree has a way to pay for it.  However, the student's financial need should not become a lifetime of stress and financial hardship, NACBA says and recommends policy reforms "intended to help build a better and more equitable system for student loan borrowers who encounter financial difficulties."


This is Part 1 of a 2 Part article.