Feeling the Pressure of the Student Loan Debt Bomb

The student loan debt bomb has an ominous ring to it — as it should. The National Association of Consumer Bankruptcy Attorneys (NACBA) caused a panic when it named the student loan debt bubble as the next possible crisis that could be as devastating for the economy as the 2008 housing bubble.

A NACBA survey in February revealed that 81% of bankruptcy lawyers said clients with student loan debt increased “significantly” or “somewhat” since the start of the 2008 recession. More worrying were the two major thresholds the country had recently passed. In 2010 the amount of borrowing for college had passed $100 billion, and in 2011 the total of outstanding loans exceeded $1 trillion.

Loan Repayment for Medical Graduates

Student loan expert and attorney Heather Jarvis knows a lot about paying off student loans. The whole reason she got into advising students was because she was heavily indebted after finishing law school.

Jarvis doesn’t just advise student loan borrowers, though. When a study she worked on about student debt and the implications for public service was cited in congressional hearings, Congress ended up passing the College Cost Reduction and Access Act of 2007. One aspect of that law is the creation of income-based repayment (IBR), an excellent tool for medical students and physicians.

IBR is relatively new and very underused, according to Jarvis. But IBR can be incredibly helpful for medical graduates with large amounts of debt.

“There are many more student loan borrowers who could benefit from IBR than have registered to take advantage of it,” Jarvis said. “It’s not the perfect option for everyone, but IBR is a terrific way to get an affordable monthly payment even if you owe a lot on your student loans as opposed to your income.”

IBR is a great option for medical graduates who start their careers as residents facing a median indebtedness of $162,000, according to Julie Fresne, director of Student Financial Services for the American Association of Medical Colleges. Through AAMC’s FIRST program, Fresne helps students and graduates navigate their debt.

Another new option physicians have available to them is the Public Service Loan Forgiveness Program.

“If you have a career in public service or you work for a not-for-profit for a certain period of time while you’re making payments on your loans, at the end of 10 years the rest of your loan balance will be forgiven,” she said.

Private vs. Federal Loans

Much of the news about the debt bomb is in regards to undergraduate borrowing through private loans, Fresne pointed out. Although medical students graduate with a large amount of debt from loans, federal loan programs usually cover what they need to borrow for medical school.

Both women agree that it’s important to borrow as much as possible through federal loans before looking at the riskier, more expensive private loans. Private loans lack the protections for borrowers and repayment flexibility that federal loans have. Instead, private student loans are almost impossible to discharge, even in bankruptcy, according to Jarvis.

While Fresne isn’t too concerned that the NACBA’s student loan debt bomb will affect medical students and graduates, Jarvis is more cautious. Unlike other kinds of consumer credit, where people have been borrowing less, student debt continues to grow, preventing people from participating in the economy.

“You have folks who would be interested in buying a home, which is what we all need for the housing market to turn around and for the economy to improve, but they cannot, because even though they have educations and jobs, they have already committed all their income or large portions of their income to servicing their student loan debt,” Jarvis said.

Non-Traditional Borrowers

Students alone aren’t feeling the pressure. Many parents who took out loans for their children or co-signed for them are finding it difficult to pay them back, potentially putting retirement on hold. According to the NACBA, loans to parents jumped 75% since the 2006-2005 academic year.

“What’s happening more and more is student loan borrowers are also parents of college-aged students,” Jarvis said. “Their children are just starting college, and we’re still paying off our student loans and looking to borrow money to help our kids pay for their college education.”

The debt problem is growing worse because many borrowers aren’t the “traditional” students who just finished high school. These new borrowers could be seeking to advance their career or they could have turned to school because of unemployment during the recession. And while the country wants people to get more educated, it’s only adding burden to the situation, Jarvis said.

“It’s important for people to become educated,” she said. “It’s the key to getting better jobs, better work, and to keep America competitive. But the problem is that these individual borrowers are shouldering that burden, and when people are having difficulty finding and keeping good work it can be very hard to manage student loan debt.”

Easier Time for Medical Graduates

Jarvis doesn’t expect to see any turnaround in the student loan debt situation for a long time because of both the increasing cost of higher education and interest. But the situation isn’t all that dire for medical graduates.

Despite the uncertainties of a career in medicine — such as declining reimbursements and changing regulations — FIRST is still seeing very low default rates among physicians, according to Fresne. A low unemployment rate and higher salaries mean many physicians are not just paying their student loans off in a timely manner, but early.

“Over the last couple of years the medical school average indebtedness has leveled off to a certain extent,” Fresne said. “We’re not seeing as dramatic of increases each year as we were maybe three or four years ago.”