The coming crisis in delinquent student loans has been evolving for some time. However, with the ongoing economic stress of a poor economy, fewer students are able to even pretend to keep up with payments. Many are delaying marriage, having children, or even moving out from their parents as a result of high debt levels. At the end of 2011, student loan debt stood at over $1 trillion, surpassing credit cards for the first time. As a result, fewer than one in four students are keeping current with their loans, dragging down consumer spending, housing, and savings levels nationwide. It all adds up to a simmering crisis ready to boil over.
In the last three years, bankruptcy lawyers report that cases involving substantial student debt have increased at least 25%. Student loan debt now figures prominently in 40% of cases, according to the Washington Times. While the student loan debt itself can’t generally be discharged in bankruptcy court without proof of “undue hardship”, many students are using bankruptcy to eliminate their other debt (credit cards, car payments, mortgages) to free up money to make student loan payments.
2011 graduates owed an average of around $25,000 each at graduation. The first payments are due 6 months later, meaning that right before the holidays graduates get their first student loan bill. It can be frightening to realize that instead of a lifetime of prosperity, you’re enmeshed in a life of debt, many borrowers say. As a result, they spend less to make ends meet, borrow from their parents, and delay major purchases to try to stay ahead.
Those who can’t stay ahead face a demoralizing journey. Late fees and interest pile up and are regularly capitalized into the balance of the loans, increasing the difficulty of ever paying the money back. It can make it hard for graduates to even look at their student loan paperwork with feeling angry and frustrated – an anger and frustration on very public display during the Fall 2011 Occupy protests nationwide.
As students find themselves unable to pay, it creates a situation where hiding from lenders is the norm. Letters are tossed in the trash unopened, while former students grow bitter about the economy recovery. Disrespect and cynicism toward a system that steered them so far into debt is building, and Occupy protests could easily turn into more serious civil unrest a la Greece or even Egypt.
Estimates from the Wall Street Journal and student advocacy groups show that delinquency and default rates continue to rise with each graduating class. It’s an army of disillusioned, frustrated, and cash-strapped college graduates looking desperately for a way out. What will happen next? Theories abound in bankruptcy courts and online forums. However, no one is denying that the coming crisis in delinquent student loans is something to take very seriously indeed.