More people are going back to school to learn new skills and earn graduate degrees to improve their job prospects and set themselves apart in a highly competitive job market. Universities have increased tuition rates as the government cuts funding. The private student loan industry has stepped in and flourished.
The amount of student loan debt in America now exceeds the total amount owed on credit cards. A recent study by the Institute for Financial Literacy found increasing rates of bankruptcy filings for those who have earned bachelor's or graduate degrees. The largest increase was seen in the rate of applicants filing who obtained bachelor's degrees.
- In 2010 the percentage of debtors with a bachelor's degree increased to 13.6 percent, up from 11.3 percent in 2006.
- In 2010 the percentage of debtors holding graduate degrees increased to 6.7 percent, up from 4.9 percent in 2006.
Typical federally backed student loans have features that allow for a borrower to defer repayment in various situations. Federally-backed student loans are protected in bankruptcy proceedings and cannot be discharged except in very unusual circumstances.
Private student loans cover living expenses and any tuition fees above the maximum borrowing limits of the federally-backed programs. These private loans do not have the same deferment options and generally have variable interest rates. They are also federally guaranteed and cannot be discharged in bankruptcy.
Private loan lenders increasingly large profits are due to advantages they have over credit card issuers, casinos and other issuers of unsecured debt subject to bankruptcy. At many schools students are pushed to take private loans without realizing they are any different from the government sponsored programs.
Legislation was recently proposed that would make private student loans dischargeable through bankruptcy, which was the law in 2005. This would provide private student lenders more incentive to investigate a borrower's ability to pay. The legislation would end the unfair protections to private student lenders. Borrowers would also be given a chance of a fresh start.
