For an increasing number of young Americans, the postcollege journey leads to the office of a bankruptcy lawyer.
A report released Tuesday by the National Association of Consumer Bankruptcy Attorneys (NACBA) shows that more and more graduates and parents are turning to bankruptcy as their final option to deal with mounting debt.
Four out of five bankruptcy lawyers reported a "significant" increase in clients seeking help with college loan debt, and 40 percent said such cases have increased by at least 25 percent in just the past three years, the report says.
With college loan debt now surpassing $1 trillion and outpacing credit card debt for the first time in American history, many are beginning to see grim parallels between student borrowing and the subprime mortgage crisis that ultimately derailed the nation's economy in 2008.
"You can take it from those of us who are on the front line of economic distress in America. This could very well be the next debt bomb for the U.S. economy. We can't afford to do nothing about this," NACBA President William E. Brewer told reporters in a conference call.
The average college graduate now owes about $25,000 after school. Nearly 20 percent of parents cosign loans or borrow additional money for their children, and those parents now owe an average of about $34,000, the report says.
While federal loans offer deferment plans and income-based repayment options, private loans do not. They often come with variable interest rates, making it difficult for graduates to get ahead.
In almost all cases, federal and private student loans can't be discharged through bankruptcy. Graduates can, however, eliminate almost all other debt by declaring bankruptcy, thereby freeing up money to repay the federal government or private lenders.
A bankruptcy judge does have the power to wipe away college debt, but one must first show "undue hardship," meaning there is little or no chance the loan will ever be fully repaid. Proving undue hardship, many lawyers say, is extremely difficult and very expensive.
"It's left up to the individual bankruptcy judge. The results have been somewhat random," said John Rao, NACBA vice president. "Many lenders litigate these cases heavily. If you're a consumer, to engage in protracted litigation is just not an easy thing to do. Most consumers decide that it's just too difficult."
If a student or his or her parents don't have the money to make monthly loan payments, Mr. Rao said, they probably don't have the thousands of dollars it would take to hire a lawyer and spend months or even years in bankruptcy court.
As a first step in addressing the problem, NACBA is calling on Congress to pass legislation allowing all student loans to be discharged through bankruptcy, and Rep. Steve Cohen, Tennessee Democrat, joined NACBA leaders on Tuesday's conference call and said he will continue pushing a bill to do just that.
"The current bankruptcy law unjustly punishes men and women who tried to improve their lives by pursuing higher education," Mr. Cohen said.
The report comes at a time when the Obama administration is pushing dramatic changes to both the student-loan system and the broader issue of rising college tuition rates. Last year, President Obama signed an executive order limiting monthly federal loan repayments to 10 percent of a graduate's discretionary income. The move also forgives all student debt after 20 years.
The administration also is calling for a cap on tuition rates and is seeking to deny some federal financial aid to institutions that continue to raise rates each year. The plan, which has been widely criticized across the higher-education spectrum and declared dead on arrival by congressional Republicans, would offer financial incentives to colleges and universities that keep tuition below a certain threshold, which has yet to be defined.
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