Diplomas Come with Degree of Debt; Student Loans, Credit Bills Push Graduates to Bankruptcy

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Byline: Kristina Stefanova, THE WASHINGTON TIMES

Twentysomethings increasingly are filing for bankruptcy as they graduate from college to face tens of thousands of dollars in debt from high education costs and credit cards.

Bankruptcy filings reached a record high last year, totaling 1.5 million. Studies showed that the fastest-growing group of filers comprised those younger than 25, who accounted for nearly 100,000 filings.

The trend makes sense, bankruptcy lawyers say, considering that graduates on average owe $19,400 in student loans, as data from the General Accounting Office show.

Meanwhile, undergraduates are carrying credit-card balances of $2,748, up from $1,879 in 1998 and more than double the average from 1993, according to Nellie Mae, a major student-loan provider.

"You don't have to be an economic genius to figure out that if you're out of grad school with $100,000 at 7 [percent] or 8 percent interest and the only job you can find is paying $39,000, then you're going to be in bad shape," said John Garza, a bankruptcy lawyer with Garza, Regan & Associates in Rockville.

Five years ago, he saw one or two cases of student-loan-related bankruptcies a year. Now, he says, he sees one or two a month.

"Student loans have gotten so much larger than I've ever seen, and interest rates and the repayment rates are much more onerous than they used to be," Mr. Garza said.

Students do not have to begin payments on loans taken out through federal financial aid, which offer low interest rates, until a year after graduation and can be deferred if a student continues education. But loans made by private lenders, which have much higher interest rates, are repayable earlier and often through larger payments because of their shorter terms.

Filing for bankruptcy does not erase student loans - it only defers them.

The loans can be erased in rare cases when a bankruptcy filer can prove undue hardship. Although unusual, this is becoming easier, Mr. Garza said.

"The doors are starting to get cracked open because I think judges are starting to realize that there are situations where student loans have just gotten so huge that there's no hope or expectation that anyone could pay it back," he said.

Custis Nelloms didn't think he could pay back the nearly $50,000 he owed in student loans, so he filed for personal bankruptcy in December.

Mr. Nelloms, a Maryland resident who examines patent applications at the Patent and Trademark Office, racked up debt over 11 years while attending three colleges. He earned his master's degree in business administration in 1999 but was unable to find a high-paying job.

At 33, Mr. Nelloms is recently married. He was paying nearly $400 between two loans and defaulting on another two. So he filed for bankruptcy, losing a new car and avoiding payments on $1,400 of credit-card debt.

"Trust me, I did everything in my power to not have to" declare bankruptcy, he said. "But I had no choice."

His sentiment was echoed by Michael, 28, who filed for bankruptcy in August.

Michael, who didn't want his last name published, filed after realizing how much he would owe in three years when he expected to receive a doctorate in political science from a New York university.

"My dilemma ... was that I could either quit school with $60,000 in debt and look for a job, or continue on in school, finish my degree and be $160,000 in debt," the Maryland resident said. …