The Student Loan “Debt Bomb”: With Student Loan Debt Out of Control, What Can Bankruptcy (and Congress) Do to Help?

A new financial catastrophe is facing Americans, and it’s quickly becoming America’s latest and greatest “debt bomb”. According to the National Association of Consumer Bankruptcy Attorneys in August 2014, there are 7 million Americans in default on over $100 million in student loan debt, and the total student loan debt carried by Americans (defaulted and non-defaulted) is an enormous $1.2 trillion. To put this confounding figure into context, $1.2 trillion dollars is equivalent to 1,200 billion dollars, or over a million million dollars. $1.2 trillion is enough to buy a new Prius for about half of all American households, or to pay Congress’s salaries for over 11,000 years.

To measure the extent of the student loan crisis on Americans, simply compare this $1.2 trillion in federal and private student loan debt to the total $1.3 trillion in toxic subprime mortgages that coincided with America’s most recent recession. The foreclosure crisis of the 2000s has now (and almost dollar-for-dollar) been replaced by this decade’s student loan crisis.

Currently there is nearly nothing that filing bankruptcy will do to cauterize the student loan crisis. But a wave of change is on the horizon.

As recently as ten years ago and prior to the 2005 amendments to the Bankruptcy Code, most private student loan debt was dischargeable in a bankruptcy proceeding.  However for the past ten years, debtors have found no relief for their student loan debt in bankruptcy: bankruptcy will not even discharge late fees or reversed-amortized interest due on accrued interest, which can have the effect of doubling the amount due on a defaulted student loan. In a penalizing twist of fate, chapter 13 debtors can emerge from a 5-year chapter 13 plan actually owing as much as twice more on their student loans than when they first filed chapter 13.

U.S. Congress is presently considering reform to higher education legislation, including possible relief for private student loan* debt in bankruptcy.  The suggested student loan bankruptcy reforms include fast-track discharge for private student loans in cases of death or permanent disability, discharge where the private lender has failed to offer the borrower deferment and forbearance options, discharge of private student loans that carry unreasonably high interest rates, and discharge of both federal and private student loans which are granted from institutions having high drop out and default rates (i.e., many for-profit institutions that target low-income students and where success is measured by profit rather than graduation rates).

To date, Congress has done nothing to meaningfully address bankruptcy reform as the student loan crisis continues to drive generations of Americans into widespread default with no avenue for even a moderate relief in the form of restructure of student loan interest rates, late fees or accrued interest.

*Private student loans are not funded by the federal government, which means these loans are obtained directly from banks, credit unions, schools and other market lenders at usually higher interest rates that compare to credit cards. Unlike federal loans, private student loans cannot be consolidated, often require a co-signer and may require payments due while the student is still in school.  Critically unlike federal loans, private student loans may not offer forbearance or deferment in situations of medical or financial hardship.

Wartchow Law Office provides free bankruptcy consultations to discuss options in Chapter 7 and Chapter 13 consumer bankruptcy as well as non-bankruptcy debt relief alternatives.

 

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