what will happen when the student loan bubble bursts
Anyone wondering how to get out of student loan debt - or wondering if a slew of student debtors could try to do so - needs to read this.
Yesterday, I wrote about the case of Michael Hedlund, the failed law student who was able to discharge $58,000 of his student loans in a 10-year bankruptcy action.
Before Hedlund's case, it was widely accepted that there were only two ways to get out of student debt: pay it off, or die.
But the Ninth Circuit took a long, hard look at Hedlund's circumstances. It found that he'd acted in good faith to repay his loans, and that paying the full amount would be an undue hardship for Hedlund and his family.
The court viewed Hedlund as an "ideal debtor," and so it excused a large portion of his debt.
If you are a student debtor, you too could have a decent shot at discharging your student debt in bankruptcy, but only if you are an ideal student debtor.
But what makes an ideal debtor?
Law Student Exposes the Secret to Wiping Out Student Loan Debt in Bankruptcy
Accepted wisdom says that there are only two (rather sobering) ways to relieve the burden of student debt: either pay it off, or depart from this earthly world.
On May 22 the Ninth Circuit Court of Appeals wiped out $58,000 in student loan debt for a former law student in bankruptcy proceedings, sending shockwaves through the formerly impervious facade of student loan debt performance.
Ten years in the making, the ruling could burst the trillion dollar student loan bubble.
How Student Loans Became a $120 Billion Government Bonanza
Business has been good for the federal government when it comes to student loans.
Over the past five years, student loans have generated profits of $120 billion for the Department of Education.
And the latest projections from the Congressional Budget Office (CBO) put the take from student loans for the 2013 fiscal year at $48.6 billion - helped along by a change in 2010 that eliminated the middleman and made the Education Department the direct lender for all government-backed loans.
It means the government will reap more in profits from student loans this year than any of the nation's largest corporations. Last year, for example, the most profitable company was ExxonMobil (NYSE: XOM), which reported income of $44.9 billion.
The money is rolling in partly because the Education Department has stepped up efforts to collect on delinquent loans, but mostly because the U.S. government can borrow money far more cheaply than the students to whom it is giving the loans.
The government's student loans now carry an interest rate of 3.4%, which has proved plenty lucrative.
But unless Congress acts soon, the interest rate on government student loans will double to 6.8% as of July 1. (The temporary 3.4% rate was supposed to expire last July, but last year Congress extended it for one year.)
Meanwhile, 10-year Treasuries go for about 2%, and 30-year Treasuries for about 3%.
That widening gap in rates could drive government profits even higher, but at the risk of appearing to exploit a struggling and vulnerable segment of the population.
"As the pomp of graduation fades, many college graduates become keenly aware of their financial circumstance: in debt," Ernie Almonte, chairman of the National CPA Financial Literacy Commission of the American Institute of CPAs, said in a statement. "They start out with an anchor that slows their progression toward future goals. It's a difficult reality confronting a growing number of people."
The Scary Reality of the Student Loan Bubble in 5 Charts
The explosion of the student loan bubble could lead to the next financial crisis in the United States, says a new federal report -which highlights the growing problem in these alarming new charts.
As of 2012, about $1 trillion was tied up in student loans - more than the total amount of credit card debt in the nation, the report by the Federal Reserve Bank of New York said.The majority of the student loans are backed by the federal government, which means the public bears most of the risk associated with student loans.
And those loans are looking riskier by the day.