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Massachusetts Bankruptcy and Student Loans

As a Massachusetts bankruptcy attorney, I have reported on student loans on numerous occasions in our Mostly, we have reported that student loans, because they are subsidized by the federal government, have been carved out of the almost unlimited list of debts that can be discharged. The law requires “undue hardship” before a student loan can be discharged which essentially means that you must be permanently disabled. Our May 2, 2011 Massachusetts bankruptcy blog gives more information on how to work within the system when you have student loan debt that is not dischargable.

But today we are writing about the broader problem of student loan debt. Elizabeth Warren, candidate for US Senate in Massachusetts and former Special Advisor to the President for the Consumer Financial Protection Bureau, said recently that student debt is the biggest consumer issue facing Massachusetts, and in fact, in all states. Her immediate point is that we need to urge Congress to update the College Cost Reduction Act, which expires in July, to keep Stafford Loan interest rates at 3.4%. If the law does not get updated, the rate will double, to 6.8%. She pointed out that the amount of outstanding student loan debt is significant. We crossed the $100 billion threshold in 2010.
This is not a political blog. The National Association of Consumer Bankruptcy Attorneys a nonprofit organization comprised of bankruptcy attorneys like myself, undertook a study recently and found that 80% of bankruptcy attorneys reported a “major jump in student loan debtors seeking help” and expressed fear that the next crisis that will affect the US is not a mortgage bubble, but a student loan bubble. The problem is vast. It involves prospective students, who may make educational decisions based on loans; students, who may make decisions based on mounting loans; job choices for graduates; and, significantly, now, more and more, is involving parents of students who are assisting students because of high tuition rates.
The NACB study noted that $25,250 was the average student loan debt for college students who graduated in 2010. This was up 5% from 2009. Perhaps that’s not alarming. How about this: in the 35-49 year old age bracket, student loan debt is up 47%! And parents’ of students, who we mentioned above, have increased borrowing for student loans by 75% since 2005, with an average debt of $34,000 to help their kids achieve the American dream. That would be about $50,000 in overall payments over 10 years. Furthermore, the percentage of parents taking out loans increased from 5.6% in 1992 to 16% in 2010.
Student loan debt is now greater than credit card debt. The survey of bankruptcy attorneys found that there were “significant” increases in clients with student loan debts. Because of the way the law is written 95% of the surveyed attorneys said that only a few cases had “any chance” of getting an undue hardship finding.
Perhaps the most important statistic is: can they repay the student loans? Well, according to the study, from the Class of 2005, 25% are delinquent and 15% have defaulted altogether. Another source, the Chronicle of Education, estimates the default rate at 20%. The debt affects young folks’ ability to take the jobs they want, consume expensive items such as cars (which keep the economy running), buy a house, plan a family. Of course, it affects middle aged parents’ ability to plan for retirement and make home payments.
Call us for a free consultation regarding Massachusetts bankruptcy at 617-227-7423.