Looming Court Decision Could Hasten Pop of Student Loan Bubble

A federal case now under consideration in the First Circuit Court of Appeals  could have huge ramifications for millions of Americans buried under student loan debt, as well as lenders and US taxpayers.

Bloomberg reports Robert Murphy is closer than ever to victory:

The unemployed 65-year-old, acting as his own attorney, spent three years appealing his way to the Boston federal court that is now considering his case. A win for Murphy would relieve him of hundreds of thousands of dollars in student debt—and could fundamentally change the way U.S. bankruptcy courts handle borrowers who can’t repay college loans.”

In most cases, federal rules put in place in the 1970s make it next to impossible to discharge student loan debt through bankruptcy. Anyone hoping to do so must prove “undue hardship,” something Congress never defined.

Emery University Law Professor Rafael Pardo wrote a brief in Murphy’s case. He said if the court creates a more lenient standard, it would make it much easier for desperate borrowers to earn a reprieve from student debt:

Creditors have been able to stack the deck in their favor as they have litigated what undue hardship means.”

This has contributed to the student loan bubble we see today. According to Bloomberg, a single loan servicer holds a monopoly on student loans and works tirelessly behind the scenes to keep student loan debt out of the bankruptcy equation.

Through a loan servicer called ECMC, the Department of Education has spent several years battling student borrowers who want bankruptcy relief. ECMC, which has an exclusive agreement with the government, has aggressively advocated that judges use the harsh standards to decide when it’s appropriate to forgive student debt.”

As we reported last month, even without the possibility of discharging student loans through bankruptcy, the student loan default rate has blasted through the roof. According to figures released by the White House, about 73% of college loans are being repaid. That means about 27% are not, far more than double the 11.3% the Federal Reserve reported last year.

Some 7.5 million student debtors are now severely behind in paying the government back.

The federal student loan bill currently stands at $1.2 trillion. That ranks as the largest source of consumer debt other than mortgages. If that wasn’t astounding enough, analysts expect the number to more than double in the next 10 years.

Pardo said the looming court decision could prove disastrous for the US Department of Education:

It could be a really dangerous thing for them if the First Circuit announces a rule for debtors to discharge their loans in bankruptcy. That would call into question how much of this $1.2 trillion [in student debt] is collectable.”

As Peter Schiff pointed out in an interview with Tom Woods, this is a problem that was actually created by the federal government, not unlike the housing bubble. And it’s not just a problem for students and student loan lenders. The federal government guarantees the trillions of dollars in outstanding student loans. It could very well bail out lenders like it did the big banks during the 2008 financial crisis. That means the US taxpayer ultimately hangs on the hook for student loan defaults.

The student loan debt is emblematic of a larger problem in America. The student loan bubble adds significantly to the nation’s already gigantic debt burden. At 102% of GDP, this is clearly unsustainable and doomed to inevitably lead to an economic collapse. As SchiffGold precious metals analyst Addison Quale put it:

The inevitable bursting of the student loan bubble will add to the already massive debt burden and is just one more example of abuse that points to the eventual collapse of the US dollar.”

The bottom line is that the student debt bubble will ultimately impact US markets and average Americans. You can learn more, and how to prepare yourself, in Peter’s new white paper The Student Loan Bubble: Gambling with America’s Future. Get the free download HERE.

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