Unpaid student loan debt increasing
A fair number of New York residents are familiar with student debt. Recent data shows that many individuals are currently behind on student loan payments.
February 16, 2013
Unpaid student loan debt increasingArticle provided by Nathan Erlich, P.C.
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A fair number of New York residents are familiar with student debt. Recent data shows that many individuals are currently behind on student loan payments. According to the Federal Reserve Bank of New York, 11 percent of student loan balances are 90 or more days past due. Last quarter the rate was only 8.9 percent, and the quarter before that was 8.7 percent.
The current number of people behind on their student loan payments is the highest it has ever been in the United States. The amount of student loan debt now outnumbers debt from items such as mortgages or credit cards.
Unfortunately, the problem is expected to get worse. In 2010, student borrowing reached $100 billion. Additionally, total unpaid loans reached $1 trillion in 2011. According to the National Association of Consumer Bankruptcy Attorneys, these unsettling figures may mean that student debt is the focus of the country's next financial crisis.
Student loan debt is generally not dischargeable in bankruptcy
Student loans are generally not dischargeable in bankruptcy. In the mid-1970s, this was not the case, but Congress changed the law in 1976 after receiving reports of new doctors and lawyers taking advantage of the law to eliminate hefty debts. The law has become stricter throughout the years, and now applies to private student loans as well. The only exception to the law is for people who suffer an undue hardship. However, according to a majority of bankruptcy attorneys, undue hardship is extremely difficult to prove.
Federal judges commonly use the Brunner test to determine undue hardship. The Brunner test considers the following factors:
-Whether a current budget allows for minimal living expenses
-Whether a good faith effort was made to pay the loans
-Future ability to pay the loans
In determining whether a good faith effort was made to pay the loans, judges analyze job-hunting efforts, earning potential and living expenses. Future ability to pay loans is hard to predict because of the uncertainty involved.
Financial tips for individuals with student loan debt
Saving money and planning for retirement are two key steps young people can take to help ensure a stable financial future. Most employers offer retirement plans and regularly add a certain sum to a retirement fund if employees match the amount. It is a good idea for people to take advantage of this opportunity.
Target date retirement funds are an ideal option for those with little investing knowledge. Individuals who invest in these funds enter a presumed retirement date, and the funds automatically invest more conservatively as this date approaches. This decreases the risk of losing a significant sum of money due to a risky investment when nearing retirement.
Additionally, it is important for everyone to learn the difference between good and bad debt. Any debt with an interest rate lower than what could be earned by investing is good debt. Fortunately, student loans are often considered good debt, while credit cards are typically bad debt.
Finally, pay attention to credit reports. Order free copies online, and correct any errors or discrepancies. A good credit score increases the chance of being able to purchase a home in the future.
An individual struggling with student loan debt can benefit from speaking to an experienced bankruptcy attorney. Even though student loan debt can usually not be eliminated, a bankruptcy can eliminate most other types of debt, which could make student loan payments more manageable. The attorney can provide knowledge and guidance and assist with developing a solid financial plan.