How a Minnesota lawyer ended up on public assistance with $300,000 in debt

biz journals ^ | 10-2-14 | Mark Reilly

[old and tired]

The problem is that many, many loans are in deferment while disillusioned graduates scramble for retail work at Old Navy. And if the loan is unsubsidized, it is accruing interest. It seems at least once a week there is an article in the Wall Street Journal or on Yahoo finance where the story is told of some sad sap who borrowed 30 grand only to now have a six figure debt when her dream of working in Women's Studies or Anthropology from Tiddlywinks U went unrealized.

I hope you're right, but take a look at this article. (sorry I don't know how to do clickable links). http://online.wsj.com/articles/joel-best-and-eric-best-student-loan-debta-federal-toxic-asset-1412204612

I fear the bursting of the education bubble - which is coming shortly after the stock market crashes - will make the housing bubble look like a walk in the park.

[sitetest]

Dear old and tired,

I previously read the article. In fact, I think I cited it herein in a post. Her debt quadrupled from what she originally borrowed, from $70K to $270K.

That didn't come from compounding of interest. That came from all sorts of penalties, fees, and other garbage charges. At 6% interest, it'd take nearly a quarter century for the debt to go from $70K to $270K. Even at 12% interest, it'd take about a dozen years. And that's if she paid ZERO on the debt for that many years.

At bankruptcy, the first thing the court would likely do would be to wipe out that part of the debt that came from penalties and fees, etc. In fact, if the bankruptcy laws were amended as previously suggested, folks wouldn't even have to go to bankruptcy in many cases, as lenders would be highly motivated to keep borrowers from declaring bankruptcy, and would likely offer to discount all the penalties and fees, and even most or all of the accumulated interest, if the lender didn't have to agree to take a big haircut on the principal.

Private lenders can't book fees and penalties from non-performing loans as performing assets, and thus, must make allowances to accommodate those losses, should they be realized. There's a lot more forbearance in the system than folks let on, because, well, they don't have to, right now. Student loan debt is very difficult to discharge, and the lenders thus hold the whip in hand. Change that rule, and they'll start working with people.

I suspect that after subtracting out all the penalties and fees, most folks who aren't paying will have debts around the average of $30,000. Six percent interest on $30,000 is $150 per month. For folks who go through periods where they can't pay principal, the banks will take $150 per month to keep the loan performing and up-to-date. To amortize $30K over 10 years is roughly $345 per month. Over 20 years, it's about $220 per month.

The article also exaggerates the scope of the problem, saying, oh dear, at the height of the financial crisis, only 10% of mortgages were delinquent, but 44% of student loans are delinquent. That's true, but there was $13 trillion of mortgage debt, and there's only currently about $1 trillion of student debt. Thus, the problem is only about the third of the size of the mortgage crisis, and because the amounts of debt are often going to be much smaller in absolute terms, most folks will be able to - and required by the courts to - pay back a higher percentage of their original debt.

At this point, if the country were to act, it would be a manageable problem. Taxpayers would pick up a chunk of the bill (maybe a couple of hundred billion over the course of 10 years or so), banks wouldn't need a bail-out, and we'd all survive just fine.

The problem is that this will likely fester for a while longer before anything is done, and then, it could prove very, very bad.

sitetest