National Association of Consumer Bankruptcy Attorneys (NACBA), “The ‘Student Loan Debt Bomb’: America’s Next Mortgage-Style Crisis?”
The survey of 860 members finds four in five bankruptcy attorneys have seen “significant” (48 percent) or “somewhat” increases in potential clients with student debt. 39 percent of them saw potential student loan client cases grow by 25-50 percent in the last 3-4 years. 23 percent saw a 50 percent to >100 percent growth. The NACBA went to the trouble of publishing a report on the topic that compared the problem to the mortgage meltdown and recommended restoring bankruptcy protections to both public and private student loans.
Amusingly, Bloomberg, which ran the NACBA story, also uncritically discussed the increase in consumer credit in December. Apparently, Americans are buying cars and educations now, as if that’s something new. To give readers an overview of 2011, here’s how much nonrevolving credit grew. The bottom lines are nonrevolving credit minus the government’s share and the government’s share itself:
As expected nearly all the growth in nonrevolving credit was in the government’s share, which is mostly student debt, but there are a few million dollars in HUD loans and things like that thrown in. It’s also important to note that the private sector’s share includes private loans, so this isn’t an accurate cross section. By my calculations, total nonrevolving credit grew 5.55%, the private sector’s share contracted by 1.51%, and the government’s share grew by an incredible 34.36% ($316.4 billion to $425.1 billion). Here’s the ratio to GDP:
Two to three percent of the economy isn’t a whole lot, but (a) it’s growing faster than the housing bubble, and (b) consumer credit should be shrinking, not expanding. This will be a big problem over the next few years, not because it’s so difficult to solve but because the government (okay, B.H. Obama) is willfully ignoring it, even though the public is more aware of it than the housing bubble. At least, that’s my perception: the housing bubble had higher mass but lower acceleration; the student debt bubble has lower mass but higher acceleration.
Rumor in the bankruptcy world is that business is down generally, so I’m incredulous that the student debt meltdown will be as tumultuous as the housing bubble as the NACBA fears. Then again, homeowners can discharge mortgage deficiencies in Chapter 7. No business because the law hogties debtors doesn’t mean there isn’t a problem. The NACBA hastens to point out that bankruptcy reform isn’t the same thing as loan forgiveness, and because Chapter 7 is now means-tested according to median state income and family size, widespread abuse will be curtailed. The NACBA’s recommendation is one of the few I’ve seen that eliminates all waiting periods, which I think is bold move. I endorse its proposal.
Speaking of which, I should add that if you’re into petitions, there’s one created by Alan Collinge (I think) to restore bankruptcy protections to all student loans “With no qualifications, and no exemptions.” If you were into forgiveness last year, you should be into this.
The real question is whether enough momentum will build up in 2012 to force the Presidential candidates to take it seriously. As of now, a good summary of President Obama’s beliefs can be found in a post by Peter Wood on the Chronicle of Higher Education‘s blog, Innovations. I’d really like to see Obama grilled on student debt in at least one debate.