Bankruptcies Rise over Student Loans; Lawyers Predict 'Next Debt Bomb'

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Byline: Ben Wolfgang, THE WASHINGTON TIMES

For an increasing number of young Americans, the post-college journey leads to the office of a bankruptcy lawyer.

A report released Tuesday by the National Association of Consumer Bankruptcy Attorneys (NACBA) shows that more and more graduates and parents are turning to bankruptcy as their final option to deal with mounting debt.

Four out of five bankruptcy lawyers reported a significant increase in clients seeking help with college loan debt, and 40 percent said such cases have increased by at least 25 percent in the past three years, the report says.

With college loan debt now surpassing $1 trillion and outpacing credit card debt for the first time in American history, many are beginning to see grim parallels between student borrowing and the subprime mortgage crisis that ultimately derailed the nation's economy in 2008.

You can take it from those of us who are on the front line of economic distress in America. This could very well be the next debt bomb for the U.S. economy. We can't afford to do nothing about this, NACBA President William E. Brewer told reporters in a conference call.

The average college graduate now owes about $25,000 after school. Nearly 20 percent of parents co-sign loans or borrow additional money for their children, and those parents now owe an average of about $34,000, the report says.

While federal loans offer deferment plans and income-based repayment options, private loans do not. They often come with variable interest rates, making it difficult for graduates to get ahead.

In almost all cases, federal and private student loans can't be discharged through bankruptcy. Graduates can, however, eliminate almost all other debt by declaring bankruptcy, thereby freeing up money to repay the federal government or private lenders.

A bankruptcy judge does have the power to wipe away college debt, but one first must show undue hardship, meaning there is little or no chance that the loan will ever be fully repaid. …