Student Loans, The Next Financial Crisis!

If the sub-prime mortgage crisis hasn’t broken the back of the middle class consumer, the student loan collection industry will soon be taking a swing at it. The future is not looking good for the American middle class.

The 2005 legislative changes made Bankruptcy more difficult and more expensive for the consumer debtor.  Creditors are now selling defaulted debt that was once thought too expensive to collect.  Specialized collection companies buy these old debts, some have even been previously discharged in bankruptcy, for a few cents on the dollar and beat on consumers hoping to make a profit.    Consumers have less money to pay their debt, creditors are becoming more aggressive  and bankruptcy is  more difficult and expensive.

Financial pressures on the American consumer continue to grow.  Also growing is the student loan default rate.  A recent article, entitled Student-Loan Problems Add to Debt Worry published in the Wall Street Journal states that United Student Aid Funds, Inc., the country’s largest student loan guarantor has just reported a 22% increase in default claims for its most recent fiscal year.  The true default rate is probably even greater if loan consolidation and income contingent repayment plans are included.

Student loans default rates are going to grow in the future and will add to the financial misery felt by the middle class.  A college education is becoming more expensive each year.  According to an article published at the U.S. News & World Report Website in October, the annual survey released by the College Board finds that the cost of a college education outpaced inflation by 2.8 percent for 2007.

Now, with ever escalating house payments from bobby trap loans with adjustable rates, the middle class consumer may have to face the choice of educating their children or keeping the family home.  Middle class students will be looking for more student loans and, now that private student loans are from discharge in bankruptcy, the private lenders are lining up to fill the gap. See my prior article on just how broad the definition of private “student loan” can be.

The new student loan debt crisis will include the elderly, the young, and those in between. Many parents have co-signed for a child’s student loan. Some middle aged baby boomer still carry their own student debts. You see, the government guaranteed student loans have no statute of limitation. They can be collected from the most elderly with an administrative garnishment against social security old age benefits. The debts can be 20 or 30 years old. Bankruptcy is seldom available even for debtors with disabilities and even the earned income credit has been seized in some states to pay the debt.

While waiting for help from congress is a thin thread to grasp for the drowing debtor, it may be the only hope to reverse the slide into this new bondage, debt slavery.