Student Loans Seen as Potential ‘Next Debt Bomb’ for U.S. Economy
Bankruptcy lawyers have a frightening message for America: They’re seeing the telltale signs of a student loan debt bubble that is placing increased financial pressure on families struggling with their children’s mounting debt. According to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80 percent of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.
In most cases, those clients could not meet the federal hardship standards that are necessary to discharge a student loan through bankruptcy proceedings. Instead, many of these parents or guardians who co-signed the student loans face the prospect of losing their life savings, cars or homes to collection agencies for aggressive private lenders.
William Brewer, head of NACBA, has said, “This could very well be the next debt bomb for the U.S. economy” — something akin to the housing mortgage loan crisis that triggered the U.S. financial crisis.
“Obviously, in the short term, student loan defaults are not going to have the same ripple effect through the economy that mortgage defaults did,” Brewer said. “My concern is that the long-term effect may be even graver, because people who need student loans to try to get a higher education or retraining” will be unwilling to run the risk of taking out a student loan. “Our best and brightest won’t necessarily get the education that they need to move us forward,” he added.
The amount of student borrowing skyrocketed from $100 billion in 2010 to $867 billion last year — or more than the $704 billion in outstanding U.S. credit card debt, according to the Federal Reserve Bank of New York. Of the 37 million borrowers who have outstanding student loan balances as of third-quarter 2011, 14.4 percent have at least one past-due student loan account. Together, these balances come to $85 billion, or roughly 10 percent of the total outstanding student loan balance.
College seniors who graduated with student loans individually owed an average of $25,250, up 5 percent from the previous year, according to a study by Brewer’s group. Parents are responsible, on average, for $34,000 in student loans, a figure that rises to about $50,000 over a standard 10-year repayment period. An estimated 17 percent of parents whose children graduated in 2010 took out loans, a 5.6 percent increase from 1992 and 1993.
A report last year by the Pew Research Center and the Chronicle of Higher Education warned that public anxiety over college costs is at an all-time high. Moreover, “low income college graduates or those burdened by student loan debt are questioning the value of their degrees,” saying the cost of college has delayed other life decisions, the report said.
The Inghams of suburban Minneapolis are an example of how one family got into financial hot water. David Ingham, a 70-year-old disabled Vietnam War veteran, co-signed about $50,000 worth of student loans for his son to attend a fine-arts school in Minneapolis as well as Catholic University in Washington.