Student Loan Debt

Admin on August 6, 2017 Posted in Blog, Chapter 13 Bankruptcy, Student Loans

Many Americans carry significant student loan debt. In the beginning of 2017, there were 44 million people in the United States holding over $1.4 trillion in student loan debt. This number is greater than credit card debt by $620 billion. This is a 6% increase over 2016. What is more, there is a delinquency rate of 11.2%, and the average person holding student loan debt pays $351 per month.

Congress passed various measures to help lessen the student loan burden, with limited results. Congress mandated the introduction of various programs that lighten the load and in some cases forgive student loan debt after time elapses and the borrower fulfills certain conditions. Still, Congress, despite the efforts of many, has not passed a measure that discharges student loan debt through bankruptcy. The United States Bankruptcy Code specifically excepts student loans from bankruptcy discharge.

History of Student Loan Debt

Student loan debt tracks the price of higher education. As higher education has become more expensive, there has been an increase in student loan debt. Over the past 30 years, the U.S. Government and the private sector has promoted higher education with slogans like “education is the key” as a model for prosperity. Many seized this idea and went to higher education, especially when factory jobs shipped to the far east. It is now common to find people holding bachelor degrees from four-year private universities with over $200,000 of student loan debt.

According to the Federal Reserve Bank of New York, student loan debt is the only consumer debt that has consistently grown since 2008. Only mortgage loan debt has greater numbers than student loan debt. Moreover, a significant portion of student loan debt is in either deferment, forbearance, or another form of lower payment.

Higher Education Effect

In recent years, many college graduates have been unable to find entry-level, well-paying jobs, compelling them to seek advanced degrees. This led to a surge in students attending business and law school. In turn, business schools and law schools dramatically increased the cost of attending. This led to even greater student loan debt. This surge created a market mismatch wherein many people have advanced degrees such as an MBA or JD, while there is a shrinking job market for their services. In its wake, many people are unemployed or underemployed while holding high student loan debt. Those who attended highly-reputable private schools as undergraduates and highly-reputable private schools as law or business students often have well over $300,000 in student loan debt. Thus, despite their educational credentials, many of those with enormous student loan debt cannot find employment or are facing a highly-challenging employment market.

Bankruptcy

One avenue to alleviate the dramatic student loan debt crisis is through bankruptcy. As mentioned, the Bankruptcy Code exempts student loan debt from a discharge. The reason for this is that it would too easy for a college graduate to file for bankruptcy and receive a discharge. Someone finishing college with bleak job prospects and few assets would find bankruptcy attractive. Such a system would make lenders uneasy and would likely cause lenders not to provide student loans. In turn, fewer and fewer would get educated, counteracting the “education is the key” concept.

Another reason that Congress still exempts student loans from discharge is that bankruptcy may wreak havoc on the debtor’s ability to obtain employment. Under the law, an employer can refuse to hire someone if the potential employee has gone through bankruptcy. If an entry level college graduate files for bankruptcy, that may mean the end of his or her employment prospects whereas an experienced hire who files bankruptcy would have less to worry about.

Note that a person who files for bankruptcy protection is protected from an employer firing him or her for filing for bankruptcy.

Chapter 13 and Student Loans

As mentioned, bankruptcy does not tackle the student loan issue because the Bankruptcy Code exempts student loans from discharge. Nonetheless, Chapter 13 bankruptcy provides some relief in that a debtor under a Chapter 13 plan is only required to pay student loans according to his or her budget. That is to say, a debtor under Chapter 13 submits a plan to a judge for approval. The plan can include not paying the entire student debt amount because the plan is based on the debtor’s budget. If approved by a bankruptcy judge, the lender cannot collect student loan payments more than the prescribed amount, which may be modified. However, the debtor will owe the non-paid student loan amount upon emerging from bankruptcy.

In debt? Bankruptcy may be your best hope of escape. Contact the bankruptcy law firm of Melanie Tavare.