Student Loans Can Result In Debt That Won't Go Away

In what is truly a sign that America's system of higher education is morphing into a strange and dangerous beast, Ben Bernanke -- the nation's top banker and chairman of the Federal Reserve -- said on Wednesday that his son is slated to finish medical school with a whopping $400,000 in student loan debt, the Wall Street Journal reported.

Bernanke's son's case is a high-profile example of what is a nationwide epidemic: mounting debt from student loans. College graduates from the class of 2010 carried an average of $25,250 in student loan debt, and the nation's total student debt almost reaches $1 trillion: This is a 14-fold increase from 15 years ago and dwarfs the country's credit card debt, which is just shy of $800 billion.

"I graduated with a lot of experience with nonprofits and the public sector, and that's what I wanted to do with my career," said James Moreau, 27, a first-generation college graduate who earned a bachelors degree in public relations at Boston's Suffolk University in 2006. "But because of my student debt, I had to turn down jobs, like working for AmeriCorps, because I couldn't afford to take them."

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Moreau, an independent marketing consultant in Boulder, is more than $120,000 in debt from his loans. He is paying them down in $650 monthly installments. At that rate, he figures that he'll need 30 years to pay them off.

Though Moreau's business is now doing well, it's been a long haul. After college, he landed a series of marketing jobs, but companies kept downsizing his position in response to the Great Recession. Alternately unemployed or short on cash, he was left rattled and wanted a plan for a worst-case scenario, which he figured would be bankruptcy.

But Moreau can't solve his problem through bankruptcy. Unlike other consumer debt, student loans are virtually impossible to discharge through a bankruptcy, said Maureen Thompson, legislative director of the National Association of Consumer Bankruptcy Attorneys.

"It's pretty much not possible because you have to prove 'undue hardship,'" she said. "And in order to prove you have 'undue hardship,' you have to litigate it." And litigation takes an attorney, which requires money -- something the borrower clearly doesn't have, otherwise he would be sending in loan payments.

Student debt -- which encompasses both federal and private loans -- is unusual in this regard and results from the political process as opposed to any unique feature of the financing itself, Thompson said. "When the government launched its student loan program in the 1960s, there was a lot of negative publicity around the idea that consumers would have unlimited ability to discharge the debt," she said. "So they created a law that forced consumers to wait five years before they could discharge it."

Over the decades, as the legislation evolved, the five years stretched to seven, which then morphed into a permanent ban on erasing government debt through bankruptcy. When the bankruptcy laws were rewritten in 2005, legislators added in a provision limiting the discharge of private student loan debt to "undue hardship."

Legislation has been introduced to ease the restrictions on private loan debt, but there's no parallel legislation for government debt. Instead, consumers can apply to federal programs, such as the Income-Based Repayment Plan, to request relief for the federally funded portion of their loans.

But the fact that bankruptcy would probably not solve Moreau's problems leaves him frustrated. "You can't declare bankruptcy on student loans," Moreau said. "I can't say, 'Listen, I can't pay these.' When I say that, the bank says, 'Okay, we'll tack more interest on, and you still have to pay them.'"

So Moreau still has to figure out an alternative. "My thinking now is that maybe in five or 10 years, I will be ahead of the curve enough where it won't be such an issue," he said with a sigh. "But that remains to be seen."

CORRECTION: A previous version of this story quoted an inaccurate statement by Moreau on the circumstances of his grandfather's bankruptcy. That statement has been removed.