Submitted by New Jersey Bankruptcy Lawyer, Lee M. Perlman.
David King grew up on public welfare as a young man in Ambridge. Five years ago, he got married and moved his wife into a low-income housing project in Imperial. He was only earning $7.40 an hour at a part-time job. But he kept the faith and never stopped pursuing his dream of a college education.
“When me and my wife met, we were on the [government] system,” he said. “But I told my wife that this is not where we’re going to end up.”
Mr. King, 29, thought a college degree would be his ticket to the middle class. He became the first person in his family to earn a bachelor’s. Then he went on to obtain a master’s in intelligence and global security, both from Point Park University.
But with a wife and three children ages 5, 3, and 5 months, Mr. King, an employee at Point Park University earning about $31,000 a year, finds himself under more pressure than ever.
He is up to his eyeballs in financial obligations, working a second job as a McDonald’s supervisor — which he did for three years until recently — for $9.03 an hour to make ends meet. Now he has opted for bankruptcy protection to help manage $80,000 worth of student loan debt.
Julie West, 45, of Belzhoover, accumulated $223,000 in student loan debt while earning a dental hygienist bachelor’s degree after attending State College of Florida in Bradenton, Fla., and the University of Pittsburgh from 2004 to 2010.
She estimates about $90,000 stems from her education at Pitt and $60,000 came while earning her associate’s degree in Florida, which included prerequisite courses. She used the rest of the loan money to cover her living expenses while in college.
Ms. West currently earns $52,000 a year at a nonprofit Christian organization in East Liberty where she has worked for five years.
“The student debt when I graduated, I couldn’t believe the bills that were rolling in and the interest on top of them,” she said. “When I sat down and did the math, I figured I probably would have paid for my education seven times over on the 30-year plan and I would have been paying them until, basically, I died.”
According to Mark Kantrowitz, a nationally recognized expert on college funding, recent graduates with a bachelor’s degree are leaving school with an average debt of $35,000 in federal and private student loans. He said Ms. West’s college debt puts her in the top 1 percent category of all student loan borrowers.
“At $223,000 in debt, [Ms. West] will never be able to pay that back,” said Mr. Kantrowitz, vice president of EdVisors, a college funding website based in Las Vegas. “The rule of thumb is that total student loan debt at graduation should be less than your annual starting salary. Dental hygienists don’t make $200,000 a year
“For Mr. King, it will be a challenge, but if he adopts an austere lifestyle, he might be able to pay off that debt.”
Chapter 13 bankruptcy
Although student loan debt cannot be discharged in bankruptcy filings, it can be reorganized and placed on an income based repayment plan that substantially reduces the payments under the Chapter 13 bankruptcy process, said Matt Herron, managing attorney at Downtown-based law firm The DebtDoctors at Quatrini Rafferty, which represents both Mr. King and Ms. West.
Mr. King’s student loan payments, which had been about $1,000 a month, were reduced to $200 a month after the Chapter 13 filing.
His wife, Kristin, 25, has about $25,000 in student debt for an associate’s degree in business she earned from the online Kaplan University. She works part-time as a cashier at a Shop ’n Save grocery. Her debt was not included in her husband’s Chapter 13 bankruptcy because she is able to manage her payments.
Meanwhile, Ms. West’s monthly payments of $711 are garnished from her paycheck bi-weekly. Her student loan payments had been that amount before the Chapter 13 bankruptcy, but the bankruptcy also included other debts, including credit cards and a car payment that is rolled into a single payment.
The downside of a Chapter 13 reorganization is that after five years all of the payments revert to their normal amounts.
“If a private loan company won’t give you an income-based repayment plan, we can use Chapter 13 to force an income-based repayment plan on a student loan company,” Mr. Herron said. “But there is a five-year limit because a Chapter 13 bankruptcy plan can’t be any longer than 60 months.
“I guess there are people who could perpetually file Chapter 13s. But would that be an abuse of the system? I don’t know.”
Mr. Herron said private student loans are the main ones driving people to choose the Chapter 13 bankruptcy option. Private student loans have higher interest rates than federal ones, and private lenders are far less flexible with borrowers.
“What I’ve noticed as a bankruptcy attorney is that recently, private student loans are being more aggressive as far as collecting their debt,” Mr. Herron said. “They are quicker to start trying to contact co-signers like parents who sign for students and try to collect from them.
“They are also more aggressively pursuing litigation as an option to collect student loans where they are trying to get a judgement and trying to take property based on student loan debt,” he said. “The other benefit of a Chapter 13 plan is if a private student loan company attempts to do that we can stop any litigation by filing the Chapter 13 bankruptcy.”
Stress of student loan debt
The cost of both private and public college degrees has skyrocketed, and total student loan debt nationally has swelled to $1.2 trillion, according to the Consumer Financial Protection Bureau, an amount that dwarfs total credit card debt.
But wages for college graduates have not increased at the same pace.
The burden of so many young people making high monthly payments has a negative impact not only on their future, but also on the economy. While making agonizing choices between making loan payments or buying groceries and paying rent, young people are hindered in their ability to do other types of consumer spending, or qualify for home mortgages, auto loans, save for retirement or launch businesses.
Mr. King’s five-year clock on the Chapter 13 bankruptcy began ticking down about a month ago. He is hoping that five years of $200 monthly payments will give him the break he needs to build up his income and savings so that he will be able to afford $1,000-a-month payments in 2020.
He has been able to move his family out of public housing and into a four-bedroom home in Leetsdale, which he rents for $725 a month. He is proud of the fact that his family receives no government assistance.
But he worries about holding onto what he has in light of his tremendous debt burden.
“The best way I can describe my situation is it’s like mountain climbing with no ropes, nothing to support me, and I have weights on my legs,” he said. “I really can’t bear the weight, but I keep trying and striving and moving up. But if I slip one time, I’m right back to where I was. That’s my biggest fear.”
Ms. West is single with no children. When she moved from Florida back to Pittsburgh in 2007, she and her boyfriend pooled their student loan money to purchase a two-bedroom home in Belzhoover for $15,000 so they have no rent or mortgage payments. Ms. West said her recovery plan during the next five years is to buy more low-priced homes for either rentals or flips.
Her hope is to build enough real estate equity to offer her student loan lenders a lump sum settlement in 2020. Mr. Herron said such settlements are rare, but possible.
A lump sum settlement is a single large payment made to a creditor in place of small monthly payments made over time. While it is a lesser amount than what is owed on a debt, the debt is considered paid-in-full after the lump sum payment is made.