Student Loan Debt may be a Bigger Problem than Credit Card Debt

USA Today recently reported that student loan debt in the United States, which totals $850 billion, now exceeds outstanding credit card debt in the U.S., which totals $828 billion.

USA Today gets its numbers from a web site publisher named Mark Kantrowitz, who publishes two scholarship matching services called FinAid.org and FastWeb.com.  I was unable to independently verify Mr. Kantrowitz’ numbers but if you Google “total credit card debt in U.S.” and “total student loan debt in the U.S.” you will get numbers in the range quoted in the USA Today article.

I actually thought that a more interesting element of this issue has to do with the monthly repayment numbers facing borrowers.  The USA Today article suggests that $30,000 of student loans, payable at 6.8% interest over ten years would amount to $350 per month.  At this level of debt, the average person would need to earn at least $42,000 per year.

In my practice I have frequently seen student loan debt far in excess of $100,000, with monthly payments over $1,000.

In a bankruptcy context, student loan debt is not dischargeable except in cases of “undue hardship.”  In the Northern District of Georgia, “extreme hardship” has essentially been limited to student loan debtors who have a medical issue that prevents them from working.   At this point in time, debtors in the Northern District have not been successful in arguing for hardship discharge on the grounds that they cannot find a job that pays enough to support their student loan obligations.  There was a recent Supreme Court decision involving student loans and bankruptcy, but that case did not address the substantive issue of what constitutes “undue hardship.”

Student loan debts create an additional problem for means test calculations in Chapter 7 cases.   In cases involving “above median” debtors, there is no line item for student loans in the means test.  This means that attorneys have to put our clients’ monthly student loan payment at Part VII of the Means Test (the part for Additional Expense Claims).    If this “additional expense” is the only thing bringing your disposable income number below the presumption of abuse, you will likely face an objection by the U.S. Trustee.

In Chapter 13, debtors can include student loan debt into their Chapter 13 plan but the plan will not pay accrued interest, meaning that after the case is over, the debtor will get a bill for several thousand dollars to cover this interest.  Further, given the complications of means test calculations, it is often not feasible to pay student loan debt in a Chapter 13 plan.

Outside of bankruptcy, student loan creditors usually take a very aggressive approach towards collection.  They know that student loan debt is not dischargeable in bankruptcy, they know that the IRS will withhold tax refunds to pay it, and they know that there are special rules which allow for wage garnishment without the need for a lawsuit.

It is therefore no surprise to me that student loan debt issues have engendered such anger, especially among young adults how have entered the working world and who are having trouble finding jobs.