There’s a lot of bad reporting on student loans out there. Frequently, you will hear about how student loans aren’t a problem because the people with high balances are a tiny minority of all student loan debtors, or that higher debts tend to coincide with higher incomes. The issue isn’t that these points are strictly false; rather, it’s that they don’t matter. People who can’t afford to pay their student loans cannot in fact pay their student loans, no matter how low they are.
Thus, it’s troubling to see the Federal Reserve Bank of New York report that the 90-day delinquency rate for student loans rose slightly at the end of 2014. In mid 2013, the rate jumped by two points to 11 percent, and it’s stayed at that elevated level since then. Meanwhile, the delinquency rates for other types of household debts, mortgages, auto loans, and even credit cards, have fallen. In a blog post on the topic, the New York Fed’s researchers give the Bankruptcy Code’s strict requirements for discharging student loans as the principal culprit for the high delinquency rate. They write, “[D]elinquent or defaulted student loans can stagnate on borrowers’ credit reports, creating an ever-increasing pool of delinquent debt.”
The delinquencies, though, are just the tip of the iceberg. The New York Times reports that nearly half of all student loans are not even in repayment because the debtors are either still in school or in a deferment or forbearance. At the same time, the number of people signing onto income-sensitive repayment programs is rising, meaning that probably less than half of all student loans are in effective repayment. Why it is that so many people can be defaulting on their student loans while these options are available isn’t clear. The Times says that because the average delinquent balance is low, it indicates that most defaulters are people who didn’t complete their studies. Moreover, typically, nonpayment corresponds to higher rather than lower balances, which might mean that the income-based repayment schemes are really default or bankruptcy alternatives for people who will never repay their debts.
In all, the student debt system is a mess, and it doesn’t look like it will be fixed any time soon. There are, however, options for student loan debtors who are finding difficulties repaying their debts. If that describes you, then the first thing you should know is that you’re not alone. Many people are not repaying or cannot repay their debts, one way or another. Secondly, if an income-based repayment scheme can’t help, such as for private student loan borrowers, then a bankruptcy filing can help free income dedicated to other debts for the student loans. Chapter 13 bankruptcy can also provide advantages to student loan debtors.
For answers to more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
Bruce Weiner, Partner
Robert J. Musso, Partner
Rosenberg Musso & Weiner 