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Can bankruptcy solve student debt woes?

Allowing Americans to wipe out some student debt by filing for bankruptcy will do little to help most families.

By MSN Money Partner Jul 24, 2012 10:52AM

This post comes from AnnaMaria Andriotis at partner site SmartMoney.

 

SmartMoney on MSN MoneyA federal agency is asking Congress to consider letting people wipe out some of their student debt by filing for bankruptcy protection. Consumer advocates, however, say the move will do little to help the vast majority of families struggling with college loans.

 

Image: Graduation cap (© Stephen Wisbauer/Getty Images)Richard Cordray, director of the Consumer Financial Protection Bureau, suggested the change to the bankruptcy rules last week in conjunction with a report criticizing private lenders. A 2005 law preventing borrowers from discharging private student loan debt in bankruptcy failed to prompt lenders to lower rates as promised, he said during a media call.

 

But even if Congress changes the private-loan policy, federal loans -- which account for about 85% of the more than $1 trillion in outstanding student debt -- would still not be dischargeable through bankruptcy, says Mark Kantrowitz, the publisher of FinAid.org, a student loan tracker. (Post continues below video.)

And the federal loans are not only much more common, they also default at nearly twice the rate. Approximately 9% of the total dollar amount of federal loans outstanding is in default compared with roughly 5% of private student loan dollars, according to data from the Department of Education and FinAid.org.

 

The recommendation comes at a time when student debt is rising rapidly. Since June 2005, debt has soared from $430 billion to more than $1 trillion, with many Americans across all age groups struggling to keep up with payments. With the aim of easing some of that burden, last month Congress voted in favor of extending the 3.4% rate for new federal subsidized Stafford loans for one more year. Rates on those loans, whose interest is paid by the government while borrowers are in school, were set to double if Congress didn't intervene. Experts say more aid may come soon.

 

Though private loans are often criticized for giving borrowers fewer options to stretch out payments in times of distress, the repercussions for those behind on federal loans are often worse. Private lenders and the federal government can both garnish borrowers' wages, but the government has a much greater reach. After borrowers default on federal student loans, the government can also keep their income tax refunds and withhold part of their Social Security checks during retirement.

Roughly 850,000 private loans that went into repayment from 1998 to 2009 are in default, according to the CFPB. During that same period, nearly 2.1 million federal student loan borrowers defaulted within two years of entering repayment, according to data from the Department of Education.

 

But allowing federal loans to be discharged through bankruptcy may be a nonstarter, officials say, as taxpayers would be saddled with the cost.

 

More from SmartMoney and MSN Money:

106Comments
Jul 24, 2012 3:35PM
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If education is so good and necessary for the overall health of our society ,  it ought to be supported and regulated  so it is cheap enough that students don't end up hopelessly in debt.
We want our young people educated,  but we want to make a lot of money on them and enslave them in the process.............forever.
And why do universities always build such a lot of overpriced buildings,  administered by legions of administrative clones who just munch down a big lunch and carry home a huge paycheck for their otherwise dumb job?
No,  really.
We are about to price our colleges and universities out of the reach of anyone except (foreign) state-supported foreign students. That's who's geting the tech jobs at half the pay and crowding out the U.S. citizens who played the education game and are losing their shirts because of it.
Thank lobbying for that.  Another word for lobbying is CORRUPTION.  Why pretend any longer?


Jul 24, 2012 4:42PM
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again, stupid stupid me.  bought a home, sacrificed and paid it off.  then some klutz decides it is okay to forgive home loan defaults.  had college debt and paid it off.  and now some suggest going bankrupt and allowing someone else to pay the debt.  country has lost concept of personal responsibility and self reliance.  in other words, people want to stay suckin' the nipple of government instead of growing up and paying own way. 
Jul 24, 2012 5:47PM
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Eliminate the student loans alltogether and watch how fast the cost of education falls to levels people can afford.
Jul 24, 2012 4:35PM
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A student today may acquire well over $100,000 in student debt to get a degree.  Consider it a mortgage.  The problem is, this mortgage has a higher interest rate than most current home mortgages, and a much shorter time period to repay.  If I buy a $100,000 home, and pay 4% interest over 30 years, it is much more affordable than that same loan, but at 6.8% (and that is only the federal rate - artificially 1/2 that currently), payable in 10 years.

 

Most of us hold off on buying the home until we can afford the payment, but the student loan repayment starts 6 months after graduating, unless deferred, during which time it till accrues interest, as it did all the way through school, and it does not matter if the student has a job sufficient to make the payments.

 

Those of you older folks complaining about the younger folks and their debt simply do not know what is going on.  Most students would prefer to pay their debt, it is financially impossible to do so.  When I went to college, I had no student debt, but I had the Vietnam GI Bill to pay my living expenses, and the PELL Grant covered the cost of school ($4500 for the year).  When I went to law school later, three years of law school cost me over $100,000 in loan debt.  You know why?  financial institutions know we can't discharge the debt, so they raised borrowing limits, and colleges know that money is out there, so tuition costs are skyrocketing.  Kids want the education, but it is no longer economically viable.  We are going to have to hire Chinese engineers, chemists, etc; to do the work because American students have been priced out of the market.

Jul 24, 2012 5:59PM
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The problem here is not the need to get rid of the student loan repayment, but to reduce the astronomical costs it takes to get a college education. I received my BA from a state school which I paid $18,000 for. But later in life had to obtain an MBA to advance my career and it cost me $25,000 which I am paying for the next 10 years. The job I was able to get does make up for the cost, but it is still more than I felt it should be.

 

We need to find a way to lower the costs of education, and its not with more scholarships. The more "free" educations a college gives out the more it costs the rest of the paying students. Scholarships should be for the exceptional students, not anyone who breathes and can't afford to pay. I worked full time throughout all my years in college and so can others.

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This is the next bubble!!! The World, let alone the US, will go into a total tail spin if students and their parents start to default on their loans. We need to be smarter on how much we hand out and make sure that it gets paid back! The population is still growing at a rapid pace and we need to make sure that everyone who can AFFORD it, gets an education. There are many capable community colleges that can get you started for much less than a University! Have you watched these shows on the TV like Campus PD? These kids now a days think they are invincible! Is this how you want our dollars to be spent?? Someone needs to made accountable?? The answer is WHO? The US Government can't always be the one bailing everyone out!! What happen to the good old days?? Morales?? Ethics?? I'm afraid for our future has a race not just a country! The good old days are gone and its only going to get worse! WAKE UP!

 

Jul 24, 2012 5:00PM
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Instead of discharge through bankruptcy, how about you lower the 6.8 % interest rate on my $47K student loan?!
Jul 24, 2012 4:17PM
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This shows the entitlement mentality of you younger people. Your educational assistance is there to provide you a chance to EARN a better paying job, and brighter future. And with that assistance comes the responsiblity for you to pay for your education. Quite your whinning, and pay your debt you bunch of free loaders!

Those of us who provided you with a home, and food, or other assistance don't owe your debt for giving you access with a better future. Your education is your burden for that potential brighter future, not another burden for your parents to carry.

Jul 24, 2012 6:21PM
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My kids went to community college and state college to avoid racking up high education debt.
My oldest son is taking paying back his college debt seriously. My third son is going to community college now.

Those who were careless in running up high education debts want the taxpayers to bail them out.
That means the irresponsible want those who were responsible to bail them out.

I say no. If you don't want to pay the loan back, don't take the loan in the first place.

Perhaps the kids thinking about college need to hear a few good horror stories so they will learn to be responsible with how much college debt they take on.

Jul 24, 2012 4:55PM
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    If my memory serves me correctly, it was President Clinton in the early 90's who signed the bill that barred federal student loan debt from bankruptcy, except where the debtor can show extreme hardship, which usually involves medical issues or old age.  Later President George W. Bush added private loans.  My recollection is that the reason  for making these changes in the law was to increase the amount of loans students could receive by lenders. It was believed that lenders would be more likely to lend if they knew the loans could not later be discharged in bankruptcy and that the economy was robust enough to provide the student borrowers with job opportunities which would be adequate to repay the loans.  

 

    However, the economy has changed much since the 90's.  Education costs have soared.  Jobs for college graduates are scarce. Education grants, which do not need to be repaid, are now available to many students.  I do not know whether the reasons for banning student loan debts  from bankruptcy protection still applies.  

 

     The federal government has no problem dumping millions of taxpayer dollars into AIG, banks, insurance companies, and giving money to families who overpaid for housing they could not afford.   Now the government is taxing poor and middle class people who earn their own living but cannot afford to pay for their own health care insurance because they are saddled with paying down student loan debt.  At some point, it seems to me that American citizens have a right to shout that enough is enough.  I think that time has come.      

    

Jul 24, 2012 5:43PM
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Why am I still locked into a 6.8 % interest rate?  Can't I refinance?  The homeowners do it, why can't I?  Should be simple, right?  Not for our government.
Jul 24, 2012 5:34PM
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I have substantial debt of federal student loans that makes the possibility of buying a house in the future, traveling anywhere, etc... impossible. I got into debt and I will eventually get myself out.

They need to be looking at WHY students have such ridiculous loans.
Because I don't feel that I was given the proper explanation of all things financial aid like I should have been in high school. But more importantly, look at the public colleges and how they keep raising tuition. I go to the University of Memphis and they've raised tuition twice in the last 2-3 years. I go online and have to pay a $600 fee for the campus... that I don't set foot on. It costs $1000 a class for me. The interest rate is also ridiculous.

Jul 24, 2012 5:44PM
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There is nothing fundamentally different about student loans that make them different from any other loan and no reason for the bankruptcy laws to be applied the same. Further if the loans are not discharchable then why is there interest on the debt? The interest is to cover risk and as the law now stands there is no risk. Government is supposed to be non profit so why the interest? And why the interest on the interest since this can cause the debt to accelerate beyound the capacity to repay ever.

A cynical person would say that the education system is being setup to deny success to the poor, and working class. To make sure that even if you do succeed you won't succeed.

There is a solution to the problem that too many in America are not ready to wrap their heads around yet, UNIVERSAL EDUCATION. We are perfectly capable of educating everyone in this country who is capable and willing to be educated. We should at the very least provide for the best brightest to become doctors and engineers.

Jul 24, 2012 6:41PM
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I agree with John M. Parker. A college degree, in and of itself, has lost its value. Everyone has one and anybody will give you one. As with what precipitated the housing bubble, somewhere along the lines, this country told everyone that you have to have a college degree to do anything.  Just like we told everyone that you have to have a house. And because of this, lending became unscrupulous. The same thing is going on now with student loans. We've got everyone thinking that they'll be relegated to welfare and public housing if they don't get a degree from some big-name school, the cost of which is astronomical, and is saddling the next generation with debt they won't be able to absolve until their old age. It will affect their quality of life, their ability to purchase a home, buy cars, their credit, to provide a better life for their children, and it will impact the future economy. Not having a college degree does not have to be a doomsday scenario. I know many people who do not have a four year college degree that are doing better financially, debt-wise, than people who have one or two degrees! Your job options may change, but that doesn't mean you can't make it and that you'll never have anything. Some of those individuals of which I speak (w/o a degree) will have their homes payed off by the time they are in their 40s or early 50s. There are trade schools, community colleges, two year degree programs, etc. Its time that we re-examine our options. Also, we need to take a lesson from our foreign counterparts and immigrants. AMERICAN FAMILIES MUST START WORKING TOGETHER and re-develop a more communal mindset to get through these times. Live together. Pool your money and resources. Don't become a slave to credit and debt. 

Jul 24, 2012 4:52PM
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If the debt gets discharged via bankruptcy then you should have to hand in your degree since  you really didn't pay for it at that point.
Jul 24, 2012 6:08PM
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Why should we bail out people who made bad decisions.  My kids went to state schools to avoid debt for all of us. It wouldn't be right to let these people get Harvard educations for free and beat my kids in the job market.  This is another entitlement waiting to happen.  Stop the madness.  They can give up their new BMW's until they pay their bills.
Jul 24, 2012 4:46PM
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Borrowing money to get a degree is like spending $100 weatherizing a house to save $25 in elec costs ....

Jul 24, 2012 3:22PM
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Correct me if I'm wrong, but I thought the reason you could no longer discharge student loan debt through bankruptcy was because one too many people with student loands did that throughout the eighties.

 

What are the facts on this?

Jul 24, 2012 5:15PM
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As long as the Federal student loan program is still approving for-profit trade schools and universities with low graduation rates and poor scholastic achievement rates, it still looks like a scam to me.  These schools are taking tuition from students and then not giving them degrees or not teaching them what they have promised and going out of business.  In the student loan contract it states that you can't refuse to pay your loan if you are unhappy with your school, but they should vet these schools better so that students are not taken in by phony programs.  Part of the problem is the approval process that says what schools qualify for student loan money.  Graduation and placement rates (in the profession) should be above 70% for five years before any school is eligible for student loan funding.  That would be a start.
Jul 24, 2012 6:46PM
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One thing I would agree to, and that would be allowing people some latitude to be able to write off on your income taxes the student loan interest. Anything else is just plain wrong.

I for one have paid my loans off years ago. It wasn't fun, or easy. But I did it.

One thing I can mention is there are other alternatives, many others like me have served in the military to earn extra income for schooling. Those funds are still out there. So if you want to make life easier, or a chance at making your future a little brighter, once again try working for it. Otherwise claiming bankruptcy is just another form of asking society "AKA the government" which is nothing more than you and me, to pay your way!

Pull yourself up by your boot straps, and BE RESPONSIBLE to carry your own weight.

Don't forget that you took the money, now it's time to pay back the debt you incurred. Remember that no one forced you to go to school. And no one ever forced you to take the money.

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