Student Loan Debt is the New Black
As it stands right now, Bankruptcy filings across New York seemed to have dropped almost 20% from the same time last year. The same holds true for the entire United States. You can attempt to explain this in a variety of different way:
- Everyone has already filed.
- Unemployment numbers are getting better
- Banks are electing to workout foreclosure deficiencies (and sometimes forgive them) and people longer need to file Bankruptcy to get rid of that debt.
- People are saving more, which, ironically, may be hurting the overall economic recovery.
In as much as I can tell, the above are merely half truths. Yes, people may be saving more, but that doesn’t mean they’re able to pay off debt at mafia (so I hear) interest rates. Individuals may be working with banks to give back their homes, but many of them may simply be living in their underwater homes and are mired in litigation. In other words, it’s not Doomsday yet.
Bankruptcy attorneys are going a little nutty because of all of this. In the halls of Courtrooms you’re hearing “Are your filings down too? What’s the story?” My colleague, Jay Fleischman, on his informative website, points out that many Bankruptcy attorneys are trying to diversify their practices. Certainly 2012 is not as profitable as 2009 was. This, however, only gets us half way. We still have to deal with the 800 lb. gorilla literally staring at us from across the room. The 800 lb gorilla is the crisis surrounding student loans.
Over the next 5 years or so, Student Loans will be to Bankruptcy what foreclosures were to Bankruptcy during the previous 5. The conversation so far has been pitifully inadequate and, shockingly enough, divided along partisan lines. On the one hand, you have the President attempting to keep interest rates capped low, but only for Federal Loans. On the other, the Republicans have stood firm in the belief that you shouldn’t extend the interest rate cap (currently 2.75%) on these loans for several years when they were due to expire now. Both approaches are literally akin to screaming “cut it out, only the front of the house, I told you!” at a drunk arsonist with a blowtorch on your roof. They don’t do very much to solve the overarching problem.
Total student loan debt at the end of 2011 hit almost 1 Trillion (with a “T”) dollars. More than all outstanding credit card debt and auto loan debt in the U.S. combined. And it’s not the federal loan debt that’s really the issue here. It’s the private student loan debt. Private lenders charge interest rates that are wayyyy higher than the Feds. Sallie Mae can charge up to 9.75%. These loan, as they current stand, are almost never dischargeable in Bankruptcy. A recent case out of Ohio found that an individual who, after being declared legally blind, having transplants of several organs due to early onset of Diabetes, begin declared disabled by Social Security Administration and living with his father because he couldn’t find a job in his rural community, STILL had to make minimal payments to his lender for a period of two years before the Judge would be ready to rule that he could discharge his student loans. It’s insanity, but right now, it’s the law.
Over the next few posts I will be covering the Student Loan crisis, and what reforms need to come about. Notice I didn’t say “should” come about. We’re dealing with the same crisis we dealt with just a few years back. Many clients that come into my office these days can’t pay the rent because of their student loans. I have to shrug, and it kills me to do so. Nothing we can do for you right now. But this is an issue that has to be dealt with sooner or later. And not in a piecemeal way. I would also welcome your comments and thoughts about what we can do to deal with this problem.