Life for the next 20++ years – caught between a rock and a hard place.
Query from a new doctor:
I am a newly graduated medical professional and single mom. In the past six months I have earned more than 80K. I think this disqualifies me from Chapter 7. Even though I make six figures, I have A TON of student loans (private and federal). When I combine rent, childcare, student loan payments I am actually IN THE HOLE at the end of the month. I need relief. I am not interested in a Chapter 13. My credit is horrible and I need to buy a house before my son starts kindergarten. What can I do? I’ve already tried deferment, income based repayment options, etc. I’m paying the lowest I already can on all the loans. My debt is mostly student loans (which bankruptcy cannot help with), medical bills, bills from a failed medical practice and a car repossession (went through hard times after divorce) totaling around 100K. Any insight much appreciated!
ANSWER: The good news – bankruptcy can help with credit card, medical debt and the repossessed vehicle. The bad news – if your income is above a set limit then you may not have a choice – chapter 13 may be your only bankruptcy option. More bad news – unfortunately as the law exists now, bankruptcy is not a option to deal with student loans if you have the ability to pay some or all of the loans over the next 20-25 years.
Student loan defaults do not result in home foreclosures. They result in wage garnishments, seizure of tax refunds and the inability to buy a home or new car.
Student loan debt is growing more rapidly than borrower income. The similarity to the trend in home loan debt leading to the subprime mortgage bubble has been widelynoted. Student loan debt in 1990 represented about 30% of a college graduate’s annual earnings; student debt will surpass 100% of a graduate’s annual earnings by 2023. Total student loan debt also reflects more students going to college, which is a good thing, but the per-borrower debt is on an unsustainable path. Unlike the subprime mortgage bubble, the student loan bubble will not explode and drag down the bond market, banks and other financial institutions. This is because 1) a 100% taxpayer bailout is built into the student loan funding system and 2) defaults do not lead to massive losses. Instead, this generation of students will pay a steadily increasing tax on their incomes, putting a permanent drag on home and car buying and economic growth generally. Student loan defaults do not result in home foreclosures and distressed asset sales. They result in wage garnishments, tax refund intercepts and refinancing via consolidation loans, and mounting federal budget outlays. In many cases, borrowers in default repay the original debt, interest at above-market rates, and 25% collection fees. In other words, defaulting student loan borrowers will remain in a sweat box for most of their working lives. Proposals to cut back on income-driven repayment options will only aggravate the burden, further shifting responsibility for funding education from taxpayers to a generation of students.
Student loan trap
Defaulting student loan borrowers will remain in a sweat box for most of their working lives
Instead of a 2008-style crisis, the student loan bubble will be a permanent and heavy drag on economic growth. An entire generation of borrowers cannot buy homes or cars, and will have their spending permanently impaired. When a tipping point will be reached, and when that generation of borrowers will take up their pitchforks, is impossible to guess.
By Diane Drain|Published On: March 5th, 2018|Last Updated: July 13th, 2022|
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
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