The Ticking Time Bomb of Student Loan Debt

Since World War Two, going to college has been seen as the ticket to the American Dream. Statistics show college educated employees earn more than their non-college educated coworkers.
A recent report from the National Association of Consumer Bankruptcy Attorneys (NACBA) indicates there may be growing clouds on that horizon.
They report potential clients with student loan debt have increased significantly in the last three to four years and “about half (48 percent) of bankruptcy attorneys reported significant increases in such potential clients.”
No Discharge?
The trouble with student loans for those who cannot repay them, is that unlike many types of debt, they are generally not dischargeable in bankruptcy. There is also no statue of limitations, allowing the creditors to sue years, and even decades, after the debtor left school.
Undue Hardship
The only way, under the bankruptcy laws, to discharge student loans is known as “Undue Hardship.” The most widely used test came out of a case the Brunner case.
A demanding three-part test is used to determine if one qualifies for an undue hardship discharge, where one has to have virtually no chance of ever improving one’s income.
Co-Sign Any Student Loans Recently?
Another source of concern is the number of parents implicated in this debt. The NCBA report indicates that in 2010, 17 percent of parents had taken out loans for their children and this compares to 5.6 percent in 1992-1993.
If their children default on the loans, the lenders will come looking for them. In the worst cases, parents could lose a lifetime of assets repaying large student loans.
A Drag on the Economy
With all, or a large percent, of their income being directed to paying down student loans, this debt will weigh down on the entire economy, taking money away from other purchases.
Many student loans will require 20 to 30 years to repay, leaving many with no discretionary income for most of their adult lives. The NCBA notes that 2010 was the first year that student loans had surpassed $100 billion.

You Cannot Earn a Discharge For Your Student Loans

The combination of the down economy and rising tuition costs has left many recent college graduates with substantial amounts of student debts. And, according to a news article by the Southern California Public Radio, the amount of student loan debt that Americans have acquired now exceeds debts for credit cards and car loans, combined.
The Federal Reserve Bank in New York estimated that by the fourth quarter of 2011, $867 billion in student loan debt was outstanding, and a recent report by the Consumer Financial Protection Bureau estimated that the total amount owed on student loans was over one-trillion dollars.
In an economy where students are unable to find high-paying jobs, making monthly student-loan payments becomes very difficult if not impossible. While filing for Chapter 7 or Chapter 13 bankruptcy may be able to help these graduates alleviate many types of debt – such as credit card debt or medical bills – so that cash can be freed up to make student loan payments, it is very unlikely that their student loans will be discharged.
In certain circumstances, though, student loans may be discharged through bankruptcy. If it is proved that the student loans are an “undue hardship” on debtor, his or her dependants, or his or her family, then a judge may order the student loans to be discharged.
Proving undue hardship is very difficult, though. In general, it must be shown that the debtor:

  • Is unable to maintain a minimum standard of living;
  • Is unlikely to change or improve his or her current situation any time soon; and
  • Has made “good-faith efforts” to repay his or her student loans.

Even though student loans may not be discharged through bankruptcy, filing for bankruptcy still may help you get back on track. Knowing the options available to you can help you make the decisions that are best for your financial future. Another way out of the situation is to rebuild your credit with help of excerpts in Rebuilding Credit Kansas City MO.