A recent study out of Georgetown University predicts that, when the economy returns to stability and hiring picks up again, employers will need more college-educated employees than are available. The deficit of adequately educated employees could average 300,000 a year in the coming decade.

To meet the increasing need for higher education, a number of for-profit colleges have entered the education marketplace. Twenty-five percent of for-profit schools offer bachelor’s degrees, which is a far cry from the vocational schools and beauty schools of the past.

Enrollment at these schools have also continued to grow. In 2000, 673,000 students attended for-profit colleges. Now that number is 2.6 million.

As Kiplinger is reporting, with the rise in enrollment, there have come increased complaints about student debt loads, and the ability of students to repay them.

Regulators cracking down

In response to the growth in the for-profit college industry, the Department of Education is becoming more stringent with its regulations.

The department wants to require colleges to let prospective students know what their graduation rates are and what their job-placement statistics show. There is, in the mind of the Department of Education, an acceptable ratio of student debt service to income, which it considers to be gainful employment.

They also want to limit some of the more high-intensity ways that for-profit colleges market their schools. Proposed rules would increase the rules against compensation currently allowed for recruiters, who are paid based on the number of students that they are able to recruit. Such limits would help to curb some high-pressure sales tactics that for-profit colleges enlist via recruiters.

Increased oversight

Education Secretary Arne Duncan recently announced that the department will step up its oversight of federal student financial-aid programs to try and curb these sales tactics. The news came after a government investigation uncovered deceptive marketing practices at 15 for-profit colleges.

The increased oversight would mean expanding the Education Department’s enforcement staff, continuing undercover investigations and increasing program reviews.

“We have a responsibility to ensure that students can make informed choices about investing in post-secondary education, and that taxpayers’ investments in the federal student aid programs are helping students,” said Duncan.

• first, the price of college has risen significantly in recent years
• second, lenders tend of offer student loans freely, which means they can build up fast
• third, student loans are not dischargeable in bankruptcy

In fact, it may be because student loan debt only rarely is discharged in bankruptcy that lenders are so willing to issue loans to students without guaranteed income to repay them: no matter what happens, the lenders know they’ll most likely be able to collect.

A Spreading Problem

While student loans can be deferred (meaning that a graduate can avoid making payments for a given period of time) for those still in school or serving in the military, things don’t always work as planned. Consider this situation, as reported on NPR news:

• Loans are held by multiple banks: It’s common for a single student to have loans issued by multiple banks, which may mean that some lenders don’t get that the message that a borrower is deployed or still in school.
• Lenders try to collect payment: As NPR reported, soldiers serving in Iraq and Afghanistan were taking phone calls from creditors trying to collect payments, even though those payments should have been deferred until after the soldiers returned to the U.S.
• Soldiers may not be able to pay: Those fighting overseas don’t necessarily have the time, energy or resources to address the problem of overdue student loans—especially when those loans should have been deferred.

Leave No Veteran Behind

Two soldiers who experienced the stress of being contacted by creditors while they were deployed decided to start a non-profit organization, Leave No Veteran Behind, to address the issue of student debt among veterans.

According to sources, the organization:

• Seeks to help veterans in tough economic situations pay educational debts
• Offers help for loans not covered by the GI bill, including loans taken out before someone joined the military and loans for classes interrupted by deployment
• Has attracted the attention of hundreds of struggling vets, who average $42,000 in educational debt
• Accepts donations from individuals and companies and puts the money directly toward paying veterans’ debts
• Requires veterans who are assisted to donate 100 hours of community service to “give back” to those who helped them

As of now, the organization has only been able to help a few veterans, but the founder apparently hopes to see the problem of student debt addressed at the legislative level.

The Staggering Cost of Student Loans

As the cost of higher education creeps upward, the amount of money students borrow in order to get their degrees climbs as well. And, because of the process of issuing student loans and restrictions preventing them from being discharged in personal bankruptcy, that can be bad news. Here’s why:

• Many student loans are essentially “low-doc”. During the subprime housing boom, low documentation loans became common: lenders offered borrowers money without much proof that these borrowers had sufficient income to repay. While new restrictions and policies are in place in much of the mortgage market, most student loans require very little information—and perhaps it’s no wonder, as it’s hard to estimate a student’s potential ability to repay loans after graduation.
• Student loans usually cannot be discharged in bankruptcy. Because federal student loans are guaranteed by the U.S. government, and therefore by taxpayers, they have never been dischargeable in bankruptcy. The 2005 BAPCPA laws extended that coverage to private student loans as well, with very rare exceptions of undue hardship. So once you’ve taken loans out, they’re your responsibility.
• Colleges exist to enroll students. The problem is compounded by the fact that colleges and universities don’t want to turn students away on grounds that they’ll have to take out too many loans to attend school. Financial advisors in universities exist to help students figure out how they can attend a school, not to suggest they go somewhere less expensive.
• Lenders exist to make money. Many lenders are willing to lend to students (even those who already have significant educational debt) because of how difficult it is to discharge student loans. Thus, even when students should probably stop borrowing money, the existing institutions make it easy for them to continue.

In addition to these structural problems that currently exist in the world of student lending, many college-age students (and sometimes even their parents) lack sufficient financial knowhow to determine whether or not a student loan is a wise financial move.

After all, insufficient financial literacy has been identified as a problem throughout the country, and few high schools and colleges require students to take courses in financial management before graduating.

If you’re in the process of choosing a college or university, take the financial angle seriously—those four years pass quickly, and when it’s over, the bills will be due.

Additional Resources

The Burden of Borrowing

Lifting the Burden

The Bankruptcy Case

The case in question involves a man who was looking to reorganize his debts by filing for Chapter 13 bankruptcy. Here’s what happened:

• The man entered into a repayment plan, as outlined by the bankruptcy court. The bankruptcy judge approved the plan and all creditors involved were given notice of the payment schedule.
• No creditor objected to the terms of the repayments listed or to the amount of each debt set to be repaid.
• The man completed the repayment plan on time and received a discharge from the court.
• After he received his discharge, one of the man’s creditors (the company that had issued his student loans) objected that he still owed them $4,000 in interest, though that amount had not been included in the repayment schedule.
• The case went all the way to the Supreme Court and the judges ruled unanimously that, because the creditor didn’t object during the appointed objection period of the case, it had no claim to the money.

What the Ruling Means for Bankruptcy Filers

The Supreme Court’s ruling is good news for bankruptcy filers because it protects them from creditors who fail to take timely action and try to pursue debts already declared paid in full by the court. Essentially, the ruling means that once you’ve gotten a discharge from the bankruptcy court, you’re safe from anyone trying to collect “zombie debts.”

Sources suggest that the ruling should act as a warning to both bankruptcy judges and creditors in bankruptcy cases, who must carefully review repayment plans and object within the legal time frame in order to make substantive changes to a case.

On Student Loans

The case is particularly interesting because student loans are generally not dischargeable in a bankruptcy filing unless a filer can prove that continuing to make payments would cause undue financial hardship.

But the high court’s ruling indicates that this general rule does not exempt individual creditors from checking repayment plans for specific terms of payment of student loans they’ve issued.

Additional Resources

Managing Student Loans (PDF)

Background: Student Loans in Bankruptcy

Student loans are one of the few types of financial obligations (along with child support payments, alimony and taxes) that are difficult discharge in bankruptcy court. Generally speaking, student loans:

• In Chapter 13 bankruptcy: become part of the filer’s three- to five-year repayment plan and are largely (if not completely) paid off by a case’s end; or
• In Chapter 7 bankruptcy: cannot be discharged and so remain the filer’s responsibility after other unsecured debts (such as credit card debt) have been forgiven.

The rules are strict to ensure that the majority of student loans are repaid, which in turn allows lenders to offer money at lower interest rates.

The Case Before the Court

The case now before the court is that of a man named Francisco Espinosa. Here are the key facts:

• In 1988, he was working for America West airline and decided to go to technical school to learn computer skills.
• Like about one-third of Americans, Espinosa took out student loans to fund his education; however, when he graduated, he was unable to find a job in his field.
• America West began to have financial troubles and cut worker wages. Espinosa, in 1992, earned slightly more than $6 per hour.
• Espinosa lived simply: he reportedly drove an inexpensive car and had no debt except for $13,000 in educational loans, which he was unable to pay.
• To clear his debt, Espinosa filed for Chapter 13 bankruptcy and adhered to a repayment plan. He received his bankruptcy discharge in 1997 after having paid all of his student loans except for the $4,000 in interest that had accrued.
• In 1999, the lender responsible for his student loans (United Student Aid Funds Inc.) began demanding payment of the interest from Espinosa.

A note on Chapter 13 cases: before a repayment plan is confirmed by the court, it must be agreed to by all involved parties – in this case, that means United was informed of the repayment plan (multiple times) before the court approved Espinosa’s case.

United missed deadlines to appeal the ruling and several appeals courts have already ruled in Espinosa’s favor. The Supreme Court’s decision in this case could have significant implications about the power of lenders to collect debts after a personal bankruptcy filer has received a full discharge of debts from the court.

Additional Resources

Student Loans, Financial Distress and the Need for Policy Reform PDF

The survey of 1,600 families and titled How America Pays for College found that 58% of American families fund their students’ higher education without federal or private student loans, down from 61% last year.

Borrowing Statistics

The report found that the average college student pays tuition with:

• 36% parent income & savings
• 25% grants & scholarships
• 14% student borrowing
• 10% student income & savings
• 9% parent borrowing
• 6% relatives and friends

The survey also shows that those who take out student loans spend more on education, showing that the loans may make up the difference between different calibers of universities.

The study also showed that, while those whose families make less than $35,000 are most likely to receive grants (totaling $4,338 on average), they’re also most likely to take out student loans (totaling $3,231 on average).

The True Cost of an Education

Families who do borrow money, either by a parent or the student, accrue $10,779 in debt each year on average, or roughly half of the annual tuition. Those who do not borrow primarily depend on parents’ income and savings.

Understanding the true cost of an education is crucial for college students, who often graduate saddled with debt from loans and credit cards.

But unlike credit card debt, student loan debt is difficult to discharge in bankruptcy.

Forgiving Student Loan Debt

Recently, the city council of Albany, N.Y., passed a resolution urging the federal government to consider forgiving student loans as part of a stimulus package for young people and to move forward on reforming the student loan process.

The resolution noted that, in 2008, there was nearly $131 billion in outstanding private loans and $502 billion in federal student loans.