The level of student loan debt is a creating a dangerous situation today. In 2017, the student loan outstanding debt reached $1,490.8 billion! That’s up $262 billion in the last four years! At the beginning of March, Federal Reserve Chairman Jerome Powell expressed his concerns about the state of student loan debt to the Senate Banking, Housing, and Urban Affairs Committee.
Clients who themselves cannot or have children who cannot pay off their student loans are seeing long term effects. Their credit rating is suffering. Powell said this debt “…impacts the entire path of their economic life.” Beyond the negative effect on personal situations, Powell also sees a larger macro-economic effect over time. He said “as student loans continue to grow and become larger and larger, then it will absolutely hold back growth.” Is this a house of cards destined to fall down?
What about bankruptcy?
In the discussion, Powell brought up a very important point. Student loan debt cannot be discharged through bankruptcy. The Federal Reserve cannot change this. He was “…at a loss to explain why that should be the case.” To change this situation, Congress would have to enact new policy.
Currently to discharge a student loan debt, your clients must prove undue hardship. They must demonstrate in bankruptcy court that they and their dependents would suffer due to the repayment of the loan. The definition of “undue hardship” is not defined in the law. The courts will hold a very high standard and have looked at these factors:
- If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
- There is evidence that this hardship will continue for a significant portion of the loan repayment period.
- You made good faith efforts to repay the loan before filing bankruptcy.
What are they trying to do?
Congress and the Department of Education are both looking closely at ways to mitigate the student loan debt crisis. So they say. So far, they have not had any success. Proposals are made, but without agreement from both sides no consensus is found.
The Department of Education is quietly looking at how “undue hardship” is defined by seeking public comment. Could they come up with a more favorable standard than the near impossible requirements people face today?
Understand the impact of your loans
The current level of student loan debt continues to rise at a shocking rate, and it is a growing concern for the financial health of our country.
As Chairman Powell explained, borrowing to invest in a student’s future is a good thing. However, your clients need to keep one important thing in mind. Students and parents need to understand the impact of their debt as well as how the loans will work so that they make informed decisions.
We agree! Be an informed consumer of a college education! You may have heard us mention that once or twice or a thousand times.
Here is the fact of the matter. The only movement we have seen in the last 2 decades from Washington has been in the proliferation of a variety of “income based repayment” (IBR) plans and loan forgiveness programs. These plans help keep monthly payments affordable based on your client’s child’s income. These solutions are extremely helpful for temporary relief, particularly as they begin their career. However, they can stretch their repayment period to 25 plus years as opposed to the standard 10 year repayment. This means that they will pay 3X as much interest back to the federal government on the life of the loan. No wonder these plans get support! The problem with all the government solutions is that they are reactive instead of proactive. The college dream shouldn’t have to come saddled with a loan payment until your client’s children are nearly 50 years old. The ideal should be to pay for college as they go; but if they have to take out student loans then they should be able to get their student loans paid off in 10 years while they’re in your early 30’s and move on with their life. Start a family, and begin to save for a home and a comfortable retirement.
What if every college bound family were required to demonstrate how they plan to pay for all four years of college down to the penny including the total student loans and subsequent monthly payments due upon graduation. A College Pre-Approval™ letter! This is how we move the needle on the student loan crisis folks! Not only by helping those that already have the debt, but by helping our college bound teens see into the future and understand the financial impact of those student loans upon graduation.