Student debt could be ‘next bomb for the U.S. economy’

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HOLD FOR RELEASE UNTIL 12:01 A.M. EDT. THIS PHOTO MAY NOT BE PUBLISHED, BROADCAST OR POSTED ONLINE BEFORE 12:01 A.M. EDT. - In this Oct. 6, 2011 photo, Gan Golan, of Los Angeles, dressed as the "Master of Degrees," holds a ball and chain representing his college loan debt, during Occupy DC activities in Washington. As President Obama prepared to announce new measures Wednesday to help ease the burden of student loan debt, new figures painted a demoralizing picture of college costs for students and parents: Average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or 8.3 percent, compared with a year ago. (AP Photo/Jacquelyn Martin)

Updated: March 11, 2012 8:32AM

Student debt is looming as a national problem reminiscent of the mortgage crisis, says a new report by the National Association of Consumer Bankruptcy Attorneys.

“This could very well be the next debt bomb for the U.S. economy,” says William E. Brewer Jr., president of the group.

The study, based on a nationwide survey of 860 bankruptcy lawyers, said that bankruptcy attorneys are seeing “what feels too much like what they saw before the foreclosure crisis crashed onto the national scene.”

In the survey, 81 percent of respondents said that potential clients with student loan debt have increased “significantly” or “somewhat” in the last four years.

The total debt from student loans is about $1 trillion, about 14 times more than 15 years ago and well above the estimated total credit card debt of $798 billion.

Individually, college seniors who graduated with student loans in 2010 owed an average of $25,250, up 5 percent from the previous year, the report said.

Student loans to parents have jumped 75 percent since the 2005-06 academic year, averaging $34,000. An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992-1993.

The Chronicle of Education puts the default rate on government loans at 20 percent.

Few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove “undue hardship” — a standard that is difficult to meet.

“You have former students who filed for bankruptcy and are not able to get a fresh start,” said Douglas J. Lustig, a trustee for federal bankruptcy court in western New York.

Those with student debt should be able to discharge all or part of the money owed in a bankruptcy proceeding, and the law should be changed so that the debt can be paid over a longer period of time, Lustig said.

Gannett News Service