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.
“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 $830 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 five 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 with student loans. 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, D.C.
After his son left Catholic University, Ingham held a couple of jobs before he was laid off in October 2009; he hasn’t found work since. When Ingham’s son no longer could repay his loans, a Sallie Mae collection agency took the family to court last month, seeking to place a lien on the Inghams’ condominium apartment in suburban Edina.
“It’s a nice condo, and I worked my butt off for years to get this thing. Now we don’t know what the heck is going to happen,” David Ingham told The Fiscal Times on Thursday. “We’re in a free-fall right now.”
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While Ingham says he and his family are in a state of shock and depression, others are angry and defiant.
More than 125,000 people signed an online petition late last year and early this year to protest a $50 forbearance fee that Sallie Mae, the private student loan giant, had been charging struggling borrowers for years whenever they temporarily deferred payments on a loan. Federal student loan programs that provide the preponderance of loans do not charge forbearance fees.
Stef Gray, a Hunter College graduate from New York, who has paid $300 in forbearance fees to the company since last May, organized the petition drive in hopes of persuading Sallie Mae to drop the fee, just as the Bank of America and other financial institutions dropped unpopular fees in the face of internet protests.
Gray, 23, who lives in Brooklyn, has become a symbol of the plight of young Americans saddled with college loan debt. With both her parents deceased, Gray has had to fend for herself and put herself through school with part-time jobs and three private loans with Sallie Mae.
Since graduating in May 2011 with a master’s degree in geographic information systems, Gray has been unable to find full-time employment. Instead, she says she has gotten by with temporary jobs and waitressing. Without a steady income, she says it has been impossible to make the $700 monthly payments on her $40,000 in loans. Nor has she been able to consolidate the loans, or negotiate more favorable terms with Sallie Mae.
Every time she deferred a payment on the three loans, Sallie Mae slapped her with a $50 forbearance fee for each loan – a total of $150. “That may not sound like a lot of money to some,” she said. “But for me, with no parents, struggling to get by without a job and not receiving any unemployment, that’s a lot of money.” Because of the compounding effect of the interest rate on the unpaid portion of her loan and related penalties, Gray says that her original $40,000 loan has grown to $65,000. “The interest is snowballing,” she said.
Early in February, Sallie Mae announced it was changing how it would handle the $50 fee. The company declined to eliminate the penalty, but said it would now apply the money toward the borrower’s loan balance once on-time payments are resumed for six consecutive months.
“When customers who are experiencing temporary financial difficulty ask to suspend scheduled payments, we ask for a good-faith payment to emphasize the terms and long-term implications of their decision to use forbearance,” said Sallie Mae spokesperson Patricia Christel. “We have been giving careful consideration to our policy for some time, and we are changing it to apply the good-faith payment to the customer’s balance after they resume a track record of on-time payments.”
Gray called the policy change a “partial victory,” but noted she’ll continue to be hit with $150 in fees every three months on her loans because she still doesn’t have a full-time job. Gray and other organizers met this week in Washington, D.C., with Rep. Hansen Clarke, D-Mich., to enlist his support against the Sallie Mae fee. Clarke has introduced a bill that would provide student loan forgiveness as a means of economic stimulus.
Speaking of her Sallie Mae student loan dilemma, Gray said, “They put me in a situation where either I pay this fee, or I’m faced with default. And if I default, I may never be able to buy a home at all, or rent an apartment again, or buy a car, or get a job, with employers checking credit when hiring. I think it’s ridiculous that I have to keep upholding credit card companies as much kinder to their debtors than [student loan] lenders.
CORRECTION: An earlier version of this story incorrectly reported that student borrowing totaled $100 billion in 2010 and exceeded $1 trillion last year. Outstanding student debt totaled $830 billion in 2010 and $867 billion last year, according to Federal Reserve Bank of New York figures.