September 2012 Bar Bulletin
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September 2012 Bar Bulletin

Private Student Loan Debt Hits Crisis Point

By Christina Latta Henry and Jacob DeGraaff


Bankruptcy May Offer Relief

During the housing bubble, as tales of subprime loans and other lending abuses mounted, another lending bubble - less visible, but potentially much more insidious - was growing at the same time.

Over the past decade, as rising tuition costs at colleges and universities far outstripped the rise in the cost of living, private student loans (PSLs) increasingly stepped in to fill the gap between what undergraduate and graduate students owed their schools and what they could afford to pay. Whereas bankruptcy protection can provide a last-ditch safety valve for strapped borrowers caught by the bursting of the housing bubble, student loans - including PSLs - cannot be discharged in bankruptcy under ordinary circumstances, unless certain conditions are met.

In this article, we discuss the causes and consequences of the growth in PSLs and examine the options the Bankruptcy Code makes available to delinquent borrowers.

During a decade when inflation rates have remained at or near historic lows in most sectors of the economy, the cost of a four-year degree has risen at a much higher rate, sometimes doubling or even tripling the overall inflation rate. These increases affect public institutions as well as private ones; students at the University of Washington face a 16% increase in tuition and fees this year, on top of a 20% increase last year. The class of 2012 faces a weak job market with debt burdens that may be twice as large as those carried by their elder siblings who graduated just a few years ago.

The CFPB Report

In response to this crisis, on July 20, pursuant to the Dodd-Frank Act, the newly created Consumer Financial Protection Bureau (CFPB) and the Department of Education released a report to the Senate and House on the subject of PSLs.1 The report provides an analysis of the PSL market with an emphasis on student loans issued in 2005 and after.

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