NACBA warns of student loan "debt bomb"

At its annual Capitol Hill Day in Washington this week, the National Association of Consumer Bankruptcy Attorneys sounded an alarm about the growing student loan problem, calling it a “debt bomb.” NACBA released a survey of its members indicating that more potential clients these days have unmanageable educational loans and are facing aggressive collection efforts. See http://www.nacba.org/Legislative/StudentLoanDebt.aspx. It has become common for people to have two mortgage-size debts, one for a home and another for an education. The educational loan problem is looking something like the one a few years back with subprime mortgages.

Absent “undue hardship,” very hard to establish, student debt can be a life sentence because these loans are not dischargeable in bankruptcy. NACBA supports making private students loans dischargeable again (as they were before the 2005 law). Beyond that, it favors going back to the pre-1990 approach of allowing discharge of any student debt after five years. If the education isn’t paying off enough to make the loan repayable after that much time, something has to give so that people can get on with their lives--and some day buy a home, start a family, and save for their kids’ education and their own retirement.

As a participant in the Capitol Hill Day, I found congressional staff reacted very sympathetically. They are mostly young people carrying big student loans or with friends who have them. They know how hard it is to manage this debt even when you have a decent job. They easily recognize what a big problem this is for their generation and even more so for the next one. This issue isn’t going away.

Comments

[dby]

Pleased to see some focus on this human tragedy.
Amazes me that there is no political light on the subject; are there not votes to be gained by ending this form of human slavery ?
Irkes me no end that there is a huge and profitable industry based on largely misleading its clientele, and overcharging them massively, for the actual product they are receiving, and that the U.S. government and the state governments actively collude.
That the federal U.S. govt has determined to make those millions of foolish people, who fall for the largely false promise of faux educational establishments, pay for their mistake for the rest of their lives, simply astounds.
Indentured servitude, virtual poverty, for life.
In America, in 2012.
Staggering.
I read that the total dollar volume of student loans exceeds that of residential mortgage debt, which offers both an idea of the personal injury it's doing, and to the national financial impact of changing the laws to allow, whether by bankruptcy or other methods, writeoffs of this debt.
Keep up your good work,Prof/Ms. Braucher.
David

[Randy Hilst]

What about the Income Based Repayment program for Federal Student loans? It allows the borrower to pay only a manageable percentage of their income toward the debt and forgives any debt remaining after either 10 or 25 years. Does this not represent some significant relief for those with high Federal student loan burdens?

[Jean Braucher]

I think DBY means to refer to the comparison of credit card debt and student loan debt. In late 2010, student loan debt first exceeded credit card debt outstanding.

As for IRB, it isn't available to borrowers under private student loans. These are part of how for-profit schools stay within the 90 percent cap on use of federal higher ed funds for revenue. See http://ssrn.com/abstract=1971735 for more discussion of the for-profit sector. Dischargeability of private student loans needs to be restored to force better evaluation of these loans to begin with.

The Department of Education has various programs for struggling debtors under federal loan programs, but once you make the mistake of defaulting, you may not be able to qualify. It is good that we have IRB and other programs, but some people fall through the cracks. Back when student loans were dischargeable after five years, there was no evidence of an abuse problem. Most people prefer paying their debts to bankruptcy if at all possible.

[Raymond Bell]

Well, a few questions: First, while the study suggests that private loans are based on credit worthiness, educate this 1964 credit/collection person on how the issuers of private loans base approval on credit worthiness? Credit worthiness use to based on ability to repay, stability to earn an income, and willingness based on how current debt is repaid.Has anyone looked at these so called credit worthiness loans? Here we go again with lack of oversite by the Government and/or HEA and/or DEA PLUS no requirements for a potential student borrower to learn financial education. If the for profit loan is cosigned or guaranteed by a parent then the parent may be subject to repayment regardless of a discharge. One more question-the for profit school already received their tution money, so why not consider them repaying it back to the government rather than the taxpayer?

[russ]

I'd like to see a study on which majors and schools are correlated with inflated student loan debt. One would think if student lending was a private market, lenders would make loans based on the future ability to repay...

I doubt MIT engineering grads are having problems repaying student loans while journalism majors at a 3rd tier regional school might be struggling.

College costs are directly tied to the fact that almost anyone can get a loan to pay inflated tuition for worthless majors at equally worthless schools these days.

[mt]

I see the problem less as one of debtor-creditor but supplier-customer. The size of the debtload is wholly due to the charges of the educational supplier. Is there any debate about that?

The supplying educational institutions need to give much more transparency on the economic value of their credential. Customers should have more choices. We need more apprecenticeship programs and less liberal arts curricula. Every accredited institution should be required to retool its curriculum so stidents get a full Bachelor's Degree in three years. Law schoools should have two year paths to a JD and state bars should receive them equally with three year degrees. The educational credential dispensers are totally captured by the educational institutional agenda and are responsible for this situation.