Student Loan Debt, The Next Great Bubble

Student loans are nearly impossible to discharge in a Bankruptcy. The legal standard for discharge is "undue hardship" but the legal code doesn't define what undue hardship actually is. So the judges in each district rule on it. They look at the "totality of the circumstances", which is legal jargon for considering many factors in someone's situation, assigning different weights to those factors and deciding which way the justice scale tips. Typically, it means the debtor must have a disability and is unlikely to ever generate sufficient income to repay. If the debtor had a disability when they borrowed the money for school, the disability typically needs to have worsened considerably. Bottom line, it's difficult and the results aren't standard, meaning they're inconsistent.

My own student loan debt is absolutely crushing. I'm back in school part time taking LLM courses now, just so I don't have to pay what I already owe because I can't afford to pay and I am trying to avoid a default until hopefully my situation improves.

The last bill introduced into legislature proposing dischargeability of student loan debt failed. Way back in the days, student loans were dischargeable. As recent as September 2009, legislators were taking testimony in considering whether a change allowing dischargeability of at least the private student loans. Private student loans are not the same as the taxpayer guaranteed federal loans. But even this proposal has considerable opposition and doesn't seem to be a priority at this time. Perhaps many victims will need to fall before attention and awareness is raised as to the immense suffering these easy get loans are causing to a growing number of people.

There are some organizations working toward changing the law and they make compelling arguments. One argument is that the lenders recklessly loan out the money to anyone with a social security card. The default rates on student loans are only tracked for up to a year post graduation. This is ridiculous, since deferment, forbearance, and use of credit and help from family can usually help people get past that first year. What would be more telling would be an exam of default rates 4-5 years post graduation.

An opinion shared by many is that what had been going on in the real estate lending industry for the better part of past ten years, has and continues to be going on in the student loan industry. Financial institutions package up the private student loan debt and sell them as investments. It may very well be the next bubble waiting to pop. This will be particularly true if the economic recovery is slow, so that there simply aren't sufficient wages and or jobs to allow for repayment of these debts. It is not a stretch to think that the private student lending industry is a major factor in contributing to the unprecedented rise in the cost of tuition. What the real estate lending did for the real estate market could very well be what the private student loan lending is doing to the education market, contributing greatly to the 10-20% rise in tuition year after year.

There are arguments that if you change the bankruptcy law to more easily for student loan discharge, people will take advantage by borrowing and declaring bankruptcy shortly post graduation. That can be addressed by creating a time limit, for example requiring that the student loans be at least over 5 or 7 years old. The lenders could also require co-signing to protect their investment better. This could also mean that the potential student and the co-signer (usually a parent) would consider more deeply the implications of the debt.

Another argument is that if you make the loans dischargeable, it will dry up funding for new students. Probably that is correct. However, perhaps this needs to happen. The lenders in being more stringent about to whom and how much is lend, would probably decrease the amount of money available to students. Yes, certain populations would be hurt more than others, basically lower income bracket students. But, consider the effect of borrowing too much on these same people now. A generation of paupers is rising as a result. Arguably, it’s a drag on the economy as well since these debtors have little to no disposable income to make purchases that create other jobs and ultimately benefit us all. If the funding dried about there is also another possibility. Empty seats in classrooms, could force the education institutions to do something that could benefit us all, drop the tuition rates, making it more affordable to attend. Supply and demand theory could drive this change.

The immense student loan debts are causing tremendous suffering to ambitious hard working diligent people who borrowed thinking they were making a smart choice and a chance to improve their lives. Unbeknown to them, most of them seemed doomed to a lifetime of financial suffering.

Kathryn U. Tokarska
Attorney at Law
Tokarska Law Center Debt Relief
www.sdbankrupt.com
619-285-1992

Have Income? Facing Foreclosure?

Even if you are okay with letting go of the house, it makes sense to consult an attorney. Here is why.

There may be serious implications from the foreclosure. If you have a second lienholder and that loan was created as a result of a refinancing, it is very likely that you will be sued for any deficiency on that loan. These suits are filed by companies, which purchase the debts from the original mortgage lenders. They are in the business of buying up that debt for pennies on the dollar and going after the debtor for recovery.

Obviously, the debtors can't afford to pay back $100K+. If they could, wouldn't they have kept their home? In most cases a suit such as this happens several months after foreclosure and it can be a crushing financial blow.

Here's the problem. In some situations, prior to the foreclosure a household with income exceeding the California Median could have used the deduction of that mortgage payment (even if no such payments were actually made, even if debtor does not wish to keep the home) and often enough that deduction can make a difference between qualifying for a chapter 7, liquidation bankruptcy versus doing a 5 year repayment plan. The difference can be excruciatingly clear and painful.

I have seen this scenario, play out too many times and it is sad. So, please, consult an attorney when you get your default notice. Get the facts. Have your income evaluated. See where you stand before and after the foreclosure. A good attorney will not pressure you into bankruptcy. A good attorney will discuss options and provide with information so that you are able to make choices that are right for you and your family.

Kathryn U. Tokarska
Attorney at Law

Tokarska Law Center Debt Relief
www.sdbankrupt.com
619-285-1992