Bankruptcy lawyers have a frightening message for America: They’re seeing the tell-tale 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 tough federal hardship standards that are necessary to discharge a student loan through bankruptcy proceedings. Instead, many of these unwary 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 E. Brewer, Jr., president of the Consumer Bankruptcy Attorneys association, has warned, “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.
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“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 told The Fiscal Times. “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 more than $1 trillion last year – or more than all the outstanding U.S. credit card debt. At the same time, student loan defaults rose to 8.8 percent in 2011, up from 7 percent the previous year.