America has just reached an ignominious milestone: ten percent of recent college grads with outstanding loans have defaulted on their debt—the highest figure in nearly two decades.The two-year default rate, which measures the number of defaults for students who have been in repayment for less than two years, has risen steadily throughout the recession. The Department of Education is now moving to change the way it calculates debt to a three-year rate, which it believes gives a more accurate picture of students’ debt burden. This rate is now nearly 15 percent.Many students may be aware that student debt is not dischargeable in bankruptcy, but this rule has a number of effects on indebted graduates that may not be immediately obvious. The Wall Street Journal reports:
Under the federal bankruptcy code, consumers almost never can get rid of student loans—unlike credit-card, medical and many other types of debt. The rule is meant to prevent people from filing for bankruptcy soon after they leave college in an attempt to renege on their school loans.On top of that, the process under Chapter 13 of the code generally restricts these borrowers from making full payments on student loans during the three-to-five-year bankruptcy period. That allows lenders to add interest, late fees and other penalties to the student-loan balances during that time.The upshot: Aside from rare cases, student loans are the only consumer debt that ends up larger after bankruptcy.
In spite of the growing consensus that student debt has gotten out of hand, the debt crisis keeps getting worse. Policymakers need to get serious about attacking the rising cost of college, not just helping them get more loans to pay for it—before another generation enters adulthood buried in unshakable debt.[Ball and chain image courtesy of Shutterstock]