College graduates struggle to repay student loans

College grads struggle with loans as tuition rises.

ByABC News
May 12, 2009, 11:21 PM

— -- Thousands of college graduates are facing a student loan crisis.

The job market is shrinking, and the sour economy is preventing employers, parents and relatives from helping those who are behind on payments.

Student loan defaults are at their highest rate since 1998, and likely will go higher. And though federal student loans offer some payment modification options, private loans are far more onerous, because even filing for bankruptcy rarely wipes out the debt.

Congress might tackle bankruptcy law reform again this year, but it decided as recently as last year not to allow student loans to be easily discharged through bankruptcy filings.

Without such an option, many college grads are saddled with debt and unable to buy a home or obtain other credit. That can leave them in some cases unable to pursue the careers they studied for because they must take low-paying jobs just to try to keep up.

But lawmakers should move carefully on any reform, banking industry officials say.

"If private student debt can be discharged in bankruptcy, that creates risk, and the result will increase the cost of tuition," says Scott Talbott, chief lobbyist for the Financial Services Roundtable.

The cost of going to college or graduate school is rising. On average, the public college experience cost a student $6,585 this school year, up 6.4% from last year. Private tuition costs $25,143 on average, up 5.9%.

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FinAid.org , a financial aid information source, says that two-thirds of four-year undergraduates leave college with debt. Graduate and professional students borrow $27,000 to $114,000.

Bankruptcy law allows for discharges of credit card debt, car loans and even gambling debt, but not student loans.

A student loan debtor must try to claim an "undue hardship" to seek bankruptcy protection a claim that is successful at best about 50% of the time. Unlike a traditional bankruptcy filing, a hardship filing requires debtors to file a lawsuit against creditors. That pits the student against corporate lawyers and defense teams, and often requires an expert witness, which can cost the graduate thousands of dollars to arrange.

"We're talking about people who are in bankruptcy because they don't have money," says Rafael Pardo, associate professor of law at