Are Student Loans A Ticking Time Bomb For The Economy?

Four years later, we’re still standing on the rim of a smoldering crater where the housing market used to be, pledging we’ll never let another financial disaster like that happen again. But some prognosticators worry we could soon be bracing for another blast, judging by the growing number of people who can’t pay back their student loans.

More than 80% percent of bankruptcy lawyers have seen an increase in clients looking to get out from under their student loans, according to the National Association of Consumer Bankruptcy Attorneys.

And since many of these people don’t meet federal hardship standards for discharging a student loan through bankruptcy, it’s often the parents who co-signed the loans that face financial ruin.

“This could very well be the next debt bomb for the U.S. economy” says William Brewer, head of the NACBA. “Obviously, in the short term, student loan defaults are not going to have the same ripple effect through the economy that mortgage defaults did… My concern is that the long-term effect may be even graver.”

Brewer explains that he fears some people won’t seek the training or education they need because they won’t want to risk a loan they can’t repay.

As we reported last week, student loan debt in the U.S. now stands at around $870 billion, significantly more than the $730 billion owed on car loans or the $693 billion in credit card debt.

Just under 10%, around $85 billion, of that student loan debt is currently past due.

Back in September, the Dept. of Education stated that the number of college graduates defaulting on student loans have been increasing in recent years. Most notably, in just one year the default rate for graduates of for-profit colleges jumped more than 3% from 11.6% to 15%.

In an attempt to reconcile student loan issues and help keep borrowers from defaulting, the Consumer Financial Protection Bureau recently launched a complaint portal.

Worst Company In America 2012 contender Sallie Mae also recently decided that, rather than simply charging $50 forbearance fees to people who defer their loans, it would actually apply the funds to the loan.

Student loans seen as potential ‘next debt bomb’ for U.S. economy [Washington Post]