Federal Loans, Student Debt, and Limited Options

Recent news stories have highlighted the serious problem in our country of student loan debt. Student loans are linked to a new consumer debt crisis across America. By and large, those reports tend to focus on private student loans, for which borrowers are not eligible for income-based repayment plans and often run out of deferment or other hardship options when attempting to make payments. And as many of us know, it is difficult although not entirely impossible to have your student loan debt discharged when you file for Chapter 7 bankruptcy. However, private students loans are not the only problem. According to a recent article in the Huffington Post, the federal student loan debt burden in our country is beginning to eerily mirror the subprime mortgage crisis.
High Interest Rates, Overwhelming Debt
How could student loans resemble subprime mortgages? On the surface, the two types of loans should not look alike at all. However, when we look at data on lower income borrowers who attended for-profit schools or non-selective institutions that did not provide a rewarding educational outcome, the number of defaults and delinquencies is shocking. A paper presented for the Brookings Institute on economy activity emphasized that certain borrowers simply are, statistically, less likely than others to make efforts to repay their loans.
How could these defaulters look like borrowers with subprime mortgages? As the Huffington Post article explains, the subprime mortgage crisis was based on lenders giving loans to borrowers who simply could not afford them. Those lenders were able to do that by offering loans with very high interest rates, which ultimately meant that any payments made by borrowers largely were not used to pay down the principal of the loan. Instead, any payments went (mostly) toward interest. With such a practice, we can see that asking borrowers to make timely payments simply does not seem sustainable. With loans of this type, the borrower begins looking at a situation in which she will never be able to repay her loan—even partially.
Given that damaging outlook, many borrowers with subprime mortgages defaulted on their loans. In short, they elected to deal with the loss of their homes instead of continuing to make payments that would not result in lowering the amount owed. Now, some commentators believe we are facing a similar situation with regard to federal student loans. As the article explains, “borrowers with federal student loans are likely to have their suffering drawn out for years” due to a number of different factors, including but not limited to:
  • Stagnancy in the economy;
  • Wages remaining the same; and
  • Inability to discharge student loan debt in bankruptcy.
Students from Low-Income Households Struggling Against Default
Returning to the data set forth in the Brookings Institute paper, we can see that student loan borrowers who attended selective and/or non-profit institutions tend to make timely payments on their student loans. However, lower income borrowers, the writers imply, “borrow too much relative to their eventual earnings, and subsequently default on their federal student loans at astronomical rates.”
The study also shows that, for borrowers who began repaying student loans in 2010, 2011, and 2012, those borrowers now owe “more on that debt two years after they first entered into repayment.” In other words, student loan payments are not getting at the principal of the loan. Instead, borrowers have been making dozens of payments that are doing nothing more than covering interest costs while interest continues to accrue.
What is the solution? Commentators suspect that the Department of Education will need to take a closer look at how students borrow and how they are expected to repay educational loans. In the meantime, if you have questions about your rights as a consumer or the possibilities of discharging student loans through bankruptcy, you should contact an experienced Oak Park bankruptcy lawyer to discuss your case. Contact the Emerson Law Firm today.
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Violations of the Bankruptcy Discharge

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