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Older Borrowers and Student Loans: Unexpected Burdens Near Retirement
While people tend to think of student loan debt as a financial challenge for young recent graduates, one of every six Americans with delinquent student loan debt is 50 or older.

Many people think of medical bills and upside-down mortgages when considering reasons why senior citizens may want to consider filing for Chapter 7 or Chapter 13 bankruptcy. Data from a recent consumer credit study shows that senior citizen student loan debt is causing significant and unprecedented burdens on elderly Americans.

The latest quarterly report on Household Debt and Credit from the Federal Reserve Bank of New York focused on American student loan debt as of the third quarter of 2011 and introduced new findings broken down by age group. Nationwide, outstanding student loan debt obligations are approaching $1 trillion and have surpassed both auto loans and credit card debt, and policymakers have begun to express concern about the implications for students and their parents.

The average balance is $23,300, and about one quarter of borrowers owe more than $28,000 — a 25 percent increase over the past decade when other debt growth has been much lower. Out of 37 million total borrowers, just over five million (14.4 percent) have one or more past due accounts. Furthermore, the authors of the study suggest that delinquency rates are probably higher than 25 percent because of the forbearance or deferral status of many overwhelmed debtors.

An Increasing Burden for Older Borrowers

While people tend to think of student loan debt as a financial challenge for young recent graduates, borrowers under 40 make up only about two-thirds of the total. About one of every six Americans with student loan debt is 50 or older. 

Student loan debt can haunt those seeking to get by on a limited income, particularly if they are already wrestling with the financial realities of retirement. Whether that debt came from obtaining a degree later in life or co-signing on loans for children or grandchildren, the growth in debt nationwide reflects the significant increases in tuition over the past generation.

The duration of debt creates many problems for those who took on student loan obligations in a much more promising economy. U.S. Treasury Secretary Timothy Geithner recently commented in a Senate subcommittee that higher education costs should reflect quality, and students have been unable to “earn a return that justifies the expense.” When a default falls on the shoulders of parents, they may need to pursue options for debt relief.

Student Loans and Bankruptcy: What Is an Undue Hardship?

When borrowers must contend with escalating financial problems caused by student loan obligations, they may already be aware that government guaranteed student loans are not generally eligible for and Chapter 13 and Chapter 7 bankruptcy protection. Educational borrowers must demonstrate that they have made good faith efforts to keep up with payments and are experiencing an “undue hardship,” meaning:

  • They are unable to both repay the student loan and maintain a minimum standard of living, and;
  • Their current financial difficulties are ongoing in light of employability and other factors

A recent survey by the National Association of Consumer Bankruptcy Attorneys (NACBA) found that the vast majority of bankruptcy lawyers say that few clients are able to show an undue hardship that meets the legal standard for discharging college debt. However, bankruptcy can help still help applicants who are not able to discharge student loans by freeing up other resources.

In addition, other debt relief options can reduce monthly payments for the 80 percent of borrowers who have government-issued or guaranteed student loan debt. Late last year, the Obama administration implemented executive actions that limit monthly federal student loan repayment to 10 percent of a borrower’s discretionary income. Another promising development is the recently introduced Student Loan Forgiveness Act of 2012, which would cap interest rates and provide further modifications to student loan repayment obligations.

Recent college graduates and other older borrowers alike can be caught unaware due to lowered income expectations and higher unemployment rates. A debt relief lawyer can explain how borrowers of all ages can seek relief from entrenched debt problems by exploring mortgage modifications, debt settlement plans and other alternatives to bankruptcy.

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