Bankruptcy: A solution for student loan troubles?

11:56 AM, Aug 1, 2012   |    comments
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GOLDEN VALLEY, Minn. - A federal agency is asking Congress to consider letting people wipe out some of their student debt by filing for bankruptcy protection. How this proposal would actually impact the colossal amount of student debt outstanding remains to be seen. Dan Ament, Financial Advisor with Morgan Stanley Smith Barney discussed this with Kim on KARE 11 Sunrise.

Student Loan Woes - The challenges facing borrowers of student debt are wide spread. It isn't simply a problem for the young either. Borrowers over 40 account for a third of the nations $1 trillion in student debt and they are struggling with making payments more than other age groups. The average balance on these loans is nearly $34,000, up 123% from a decade ago. The delinquency rate these student debts (where a payment hasn't been made for 90 days) for Americans aged 40-49 was 11.9% recently according to the WSJ. That compares to 8.7% for borrowers of all ages.

Private vs. Federal debt - Since 2005, student debt has soared from $430 billion to more than $1 trillion ..... ouch. Federal loans account for approximately 85% while private loans account for about 15%.

Defaults climb - The default rate on Federal debts is running at 9%, nearly double the roughly 5% default on private loans.

Co-signing dangers - Since the financial downturn, more than 90% of private lenders have co-signers according to FinAid.org. That represents a 50% increase since 2008. While necessary in many cases, be mindful of the downside risks related to co-signing loans. If your child defaults guess who the bank is going to ask for repayment? Do you have the financial resources to absorb the required payment or outstanding balance? If not, consider the ramifications to your credit score as well.

Proposed bankruptcy protection? A 2005 law prevents borrowers from discharging student loan obligations in bankruptcy. Currently, up to 25% of a person's wages can be deducted until the loan is paid back in full. The Consumer Financial Protection Bureau has proposed a change to these rules, allowing the discharge of 'private' student loans for bankruptcy filers. That said, consumer advocates say this move would do little to help the vast majority of families struggling with college loans given that a clear majority of obligations are Federal, not private.

Sources and excerpts:
NBCnews.com - Student Loan Defaults Mimic Subprime Woes, Study Shows
Smartmoney.com - Can Bankruptcy Solve Student Loan Woes? - July 20, 2012
Smartmoney.com - Student Loans Sink Mom and Dad - July 18, 2012
Forbes.com - http://www.forbes.com/sites/greatspeculations/2012/06/04/student-loan-bubble-sets-up-to-be-subprime-disaster-part-deux/

Dan Ament is a Financial Advisor with The Ament Group at Morgan Stanley Smith Barney located in Wayzata, MN and may be reached at 952-475-4302 or dan.a.ament@mssb.com.

 

 

 

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