A Highly Experienced Los Angeles Bankruptcy Attorney Warns: More Bankruptcies may Result if Student Loan Interest Rates Rise on July 1

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As Congress debates student loan interest rates that are set to double on July 1, Attorney Daniel J. Weintraub shares his insights about the relationship between student debt, a potential rate increase and bankruptcy trends: more former college students may default and file for bankruptcy if Congress does not act soon, the attorney says.

Weintraub & Selth

There truly is no financial trouble that is insurmountable as long as action is taken early

Along with multiple media outlets, the New York Times reported on May 31, 2013 that many federal college loan interest rates are scheduled to double on July 1, 2013 unless lawmakers take action to keep rates at their current levels. In early June, Senate proposals to forestall the increase failed. The House has already passed a bill that would link interest rates to financial markets. President Obama, however, has stated that if it passes the Senate, he will veto it. While there is still a small window of time to successfully address the issue, many prospective college students may now even have more to worry them when it comes to financing their education. Washington seems to be taking the debate down to the wire. Los Angeles Bankruptcy Attorney Daniel J. Weintraub, of Weintraub & Selth, predicts that no matter what Congress does, many people who took out student loans will be forced to seek relief from their student loans or file for bankruptcy in the near future. The problem will be even worse if interest rates increase.

"Over the years there have been many proposals to make college loans more easily dischargeable in bankruptcy. While it can be done, getting a college loan forgiven is rarely approved by a bankruptcy court, and there does not seem to be legislative action forthcoming to address that issue. Now, interest rates may increase. That is a troubling combination of forces," the attorney says. "With the rising cost of tuition making loans almost mandatory and the uncertain job market for many graduates, the government should do all it can to make sure students are not unnecessarily burdened with excessive payments. Former students are struggling with paying what they owe now. For the next generation of students, the problem will be exacerbated if the interest rates increase."

A federal study by the Consumer Financial Protection Bureau (CFPB) released in October of 2012 reported that more than 850,000 private student loans are in default. That represents $8 billion dollars that may never be repaid. This is only small change, however, when compared to the total student loan debt. Public loans are much more common than private loans. When they are combined with $150 billion in private loans, total student loan debt hovers around $1 trillion. In a recent article released on June 6, 2013, by CNN's Van Jones, he calls the crisis "a trillion dollar anvil dragging us down." Many graduates unable to find steady and high-paying employment may be unable to repay their loans. And, likely, if they have trouble with loan repayments, they may also fail to qualify for favorable home loans or auto loans. Making long-term investments may be out of the question as well, Jones predicts. As in the mortgage crisis before, many people may simply walk away and stop paying. Though defaulting on student loans may grievously damage their credit, debtors may feel that they are out of options. Jones reminds readers of a fact that data confirms: millions of people are currently teetering on the edge of default,

According to the Treasury Department's Financial Stability Oversight Council's 2013 Report that was released on April 25, more than 35% of college loan debtors under the age of 30 are delinquent on their loan repayments. When reflecting on this data, Weintraub says, "those numbers are almost certainly going to get worse if interest rates double in July." While current loans will maintain the same interest rates, any new loans will have a 6.8% interest rate rather than the current 3.4%. That is, if Congress does not act. Weintraub is not optimistic.

"Even if the federal government does take action, the nation is still looking at a potential crisis in relation to student loan debt. While legislative intervention may help, it will not be a panacea. For individuals struggling with the burden of debt, including college loan debt, the behavior of politicians thousands of miles away may not be of significant interest to them. Instead, they are concerned with making ends meet and keeping their heads above water," he says.

For decades, bankruptcy attorneys at Weintraub & Selth have been helping small and mid-sized businesses as well as families and individuals protect their businesses and assets, resolve their debt issues and, if necessary, proceed through the bankruptcy process. "I have personally assisted countless businesses, individuals and families in Los Angeles that feel overwhelmed by bank loans, taxes, mortgage debt, credit card debt and student loan debt. Based upon my own experience and observations of the economy and the current political situation in Washington, I believe many more people will soon be seeking the advice of a bankruptcy attorney with questions about student debt."

Though Weintraub's tone may seem somber, he concludes with an optimistic point: "There truly is no financial trouble that is insurmountable as long as action is taken early." Part of that action, he says, is reaching out to an experienced bankruptcy lawyer before default, foreclosure or wage garnishment has already happened.

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Erika Halrud

Erika Halrud
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