Bankruptcy Effect On Student Loans: The Next Financial Crisis!

by Kent Anderson, Esq.

December 12, 2007

The 2005 legislative changes made Bankruptcy more difficult and more expensive for the consumer debtor.    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.

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.  An article, entitled Student-Loan Problems Add to Debt Worry published in the Wall Street Journal was ringing the alarm bell long ago when it stated that United Student Aid Funds, Inc., the country’s largest student loan guarantor had just reported a 22% increase in default claims for the 2007 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 growing and, despite some good economic news, 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 as far back as 2007.

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 drowning debtor, it may be the only hope to reverse the slide into this new bondage, debt slavery.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.

Last modified: February 23, 2013