With the economy still reeling (or perhaps just dusting itself off and picking itself up) from the crash of the housing market in 2007 and 2008, you’d think policymakers would pay attention to warnings about other industries likely to collapse under their own weight.
That’s why it’s troubling to see numbers like those published by the National Association of Consumer Bankruptcy Attorneys (NACBA) this week, which point to student loan debt as the next big bubble that could burst and throw the nation’s economy (back) into a tailspin.
Here’s what the NACBA’s poll of 860 bankruptcy lawyers found:
- Of the lawyers surveyed, 81 percent noted an increase in the number of potential clients they saw with student debt in the last three to four years. Forty-eight percent noted “significant” increase in student debt cases in that time.
- Jumps of 25 to 50 percent in student loan-related cases were reported by 39 percent of lawyers surveyed.
- Jumps of 50 to 100 percent of student debt cases were reported by an additional 23 percent of lawyers.
- The vast majority of bankruptcy lawyers surveyed (95 percent) reported that few of the people who approached them with student loan debt had a realistic chance of discharging that debt in bankruptcy court, in large part because of the restrictions on student loan discharges outlined in bankruptcy laws.
These numbers are, if not startling, then at least eye-opening in the larger context of a tough employment landscape for young adults. We already know that more and more young adults are choosing to move back in with their parents because of the recession, but NACBA study points out another worrisome trend linking parents to their adult children.
Because many parents cosigned their children’s college loans, they are responsible for making payments if and when their children are unable to. That could be a problem because…
- In 2010, the average American college student graduated with more than $25,000 in student loan debt.
- Americans save very little of what they make (prior to the recession, the average savings rate was actually negative in the country).
- Parents of college students may be forced to tap into their retirement funds, mortgage their homes, or otherwise decimate their accumulated wealth to make payments on loans they cosigned.
An Accumulation of Debt
The crux of the problem for parental cosigners of student debt is that, in the vast majority of cases, student loans cannot be discharged in bankruptcy court. Only when a student can demonstrate that repayment of the loans would cause “undue hardship” does the court forgive him or her.
And in most cases, if a fully employed adult has cosigned the loan, payment will not meet the standards of undue hardship, even if it might mean draining funds set aside for retirement.