Wow. Just read this post over at The Jobless Juris Doctor about a woman who was denied her petition to discharge her student loans because she had recently been offered a position at a bank making $80,000 per year. The irony? The job offer had later been revoked due to her poor financial situation…which was the result of her student loans. The court did not find this relevant. Amazing.
After remaining relatively stable for several years, the student loan default rate is now on the rise. The Wall Street Journal reports today that the downturn in the economy, especially the credit crunch, is forcing more student loan borrowers into default and the numbers could rise even further:
The fear is that default rates on student loans will increase, as seen in the mortgage and credit-card worlds. SLM Corp., or Sallie Mae, the largest private student lender, reported a delinquency rate of 9.4 percent in September, up from 8.5 percent a year earlier. “It’s clearly because of economic conditions,” said spokesman Tom Joyce. “The credit crunch has washed onto the student-loan beach.”
Until now, the default rate on federal loans has remained relatively stable. The most recent statistics, from 2007, show only 5 percent of students defaulting within two years after they leave school and begin repayment. Experts think that rate could begin rising as the effects of the credit crunch and slowing economy take hold.
In spite of yet another article on the problems of student borrowers, I’m beginning to think that the people in charge, or at least those reporting on them, don’t understand how troublesome the situation really is. The article mentions some measures that students are taking to avoid default: getting second jobs, borrowing from parents, and, naturally, going to Vegas and hoping for the best. Um, hello? When people’s best option for making their loan payments is a lucky hand at blackjack, it may be time to start rethinking what we’re doing to America’s youth.
The article points out that even as the ability to pay plummets, student loan debt is higher than ever. It also notes (very briefly) that student loans are one of the only debts with no bankruptcy protection. But the solutions it offers are just more of the same – deferments, forebearances, and refinancing. Even though some of the people interviewed for the article specifically note that their deferments or forebearances have run out, they are still being told to simply get a deferment or forebearance. As for refinancing, it’s been widely reported, including on this blog, that the current credit crunch has drastically restricted that possibility. And all of these options mean more debt since the interest will continue to pile up the longer payment is delayed.
It’s clear that the current options for student loan relief are simply not good enough. We need something revolutionary, a radical and total shift in the system. How about a moratorium on interest? How about a bail-out for those who have made good faith efforts to secure employment? How about reinstituting bankruptcy protection after 10 years? Something, ANYTHING, besides the old “Just put it off until later and pay double” mantra. That’s what got us into this mess in the first place.
The New York Times reports that bankruptcies rose nearly 8% between September and October, due to the ongoing economic crisis, particularly dropping home values and the credit crunch. Over 100,000 filings were made in October, the first time the number has gotten that high since the new, harsher bankruptcy law was passed in 2005. Additionally, people filing for bankruptcy have more debt than in past years:
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.
I was struck that this article didn’t mention student loans at all or the fact that it is nearly impossible to clear them in bankruptcy. The people interviewed certainly had sympathetic stories – homes lost to foreclosure, medical bills, etc., but I wondered about the other people out there – those who are having some of the same issues and can’t get relief through bankruptcy. How are they going to survive?
*Update – A commenter has provided a lot of additional information on this issue; I encourage readers of this post to check out the comments section.
Michael Berger, one of the lawyers in the lawsuit against Silver State Helicopters Flight Academy, reported on his blog November 10th that one of the lenders in the case, Citibank, is now offering students 100% loan forgiveness on loans taken out to attend the now-bankrupt school in exchange for being released from future claims. From his web-site:
On November 5, 2008, Citibank began offering 100% loan forgiveness of Citibank SSH student loans in exchange for an assignment of the student’s claims against SSH and against Citibank. We highly recommend that all of our clients with Citibank loans accept this offer. 100% Loan forgiveness has always been our highest goal for each and every one of our SSH clients. It is a complete victory for each and every one of our Citibank clients. It sets the bar high for KeyBank and Student Loan Xpress, the 2 other banks that wrote the majority of the SSH student loans.
I don’t know much about this case, but apparently Silver State had students pay tuition, approximately $70k, up front using loans that the school helped them arrange through private lenders. The school wound up declaring bankruptcy in February of this year, leaving hundreds of students in the lurch. Berger’s firm has been investigating whether there was collusion between the school and student loan lenders.
At least somebody’s profiting from the economic downturn.
IndyStar.com reports today that Premiere Credit, which has a lucrative contract with the Department of Education to collect on delinquent student loans, is expected to double in size in the next few months, in sharp contrast to other debt collection agencies, which have been struggling as the poor economy makes it more difficult than ever to collect on bad debts. The reason Premiere is doing so well?:
…[G]overnment-backed student loans are much easier to settle than unsecured loans, such as those for credit cards. Not only are there myriad ways to repay student loans, but debt collectors also have the law on their side.
There’s no statute of limitations on collection efforts. The loans, more often than not, can’t be discharged in a bankruptcy. Collections agents can garnish wages, tax refunds and Social Security payments, and they can access a federal database of new hires that makes it easier to find employed people who can pay.
“Student loan collection agencies have tools at their disposal that are the envy of collectors serving other markets,” Legrady said.
Maybe those 300 jobs will be filled by some of those unemployed new graduates out there who won’t be able to pay their loans any time soon. They can call and harass themselves! They can garnish their own wages! It will be a paragon of efficiency! Who says the student loan industry is rotten?
Peter O’Lalor has had a difficult life by any standard. In 1960, when he was just three years old, his mother was forced to put he and his four siblings in an orphanage. A series of foster homes followed, though he was returned once, at age ten, to his mother and lived with her for a year until she passed away.
By the time he reached his third foster home, Peter says, “I was an elective mute.” Despite his difficulties, however, Peter was an intellectual child. He read adult-level books – “My first book, at age seven, was the biography of Deborah Sampson, the woman who impersonated a man to fight in the Revolutionary war,” he remembers – and he excelled at art. He was an altar boy for seven years and once dreamed of becoming a Franciscan Friar. Read more…
Today, MTV will air a program, taped on Saturday, in which they sat down with Senator Obama and asked him questions sent to them by viewers (they offered McCain the same opportunity, but he declined). Obama talked about a wide variety of issues from gay marriage to civil liberties, but two of the questions directly addressed college affordability and student loan repayment:
Sway: The first question is from joi0924, and she’s from San Antonio: “The young people today cannot afford to go to college because of the cost of tuition. What are your plans as our next president when it comes to making it easier for young people to attend college?” Read more…