Cancellation of Debt (COD) Income

Here at Shenwick & Associates, many clients come to us looking to wipe out their debts, usually through bankruptcy or a workout (but we also represent creditors).  While the cancellation of debts is desirable, the problem is that the IRS considers the cancellation of debt to be gross income under § 108 of the Internal Revenue Code. 

However, there are exceptions to inclusion and exclusions to cancellation of debt (COD) income:

Exceptions to inclusion from gross income are:

• Amounts specifically excluded from income by law, such as gifts or bequests (personal property received upon the death of the donor).
• Cancellation of certain qualified student loans. Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers.  If a student loan is canceled as the result of this type of provision, the cancellation of this debt is not included in the recipient’s gross income.  If a taxpayer uses the cash method of accounting rather than the accrual method, the taxpayer does not realize cancellation of debt income if the expense would have otherwise been deductible.
• A qualified purchase price reduction given by a seller.  If debt you owe the seller for the purchase of property is reduced by the seller at a time when you are not insolvent and the reduction does not occur as the result of a bankruptcy, the reduction does not result in cancellation of debt income.  However, you must reduce your tax basis in the property by the amount of the reduction of your debt to the seller.

Exclusions from gross income are:

• Cancellation of qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It also must be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.  The exclusion for qualified principal residence indebtedness provides canceled debt tax relief for many home owners involved in the mortgage foreclosure crisis. The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of qualified principal residence indebtedness.
• Debt cancelled in a bankruptcy case.
• Debt canceled during insolvency (which is the extent that the total of all of your liabilities was more than the fair market value of all of your assets immediately before the cancellation.
• Cancellation of qualified farm indebtedness.
• Cancellation of qualified real property business indebtedness, which is debt that (a) was incurred or assumed in connection with real property used in a trade or business; (b) secured by that real property; and (c) was incurred or assumed before 1993, or after 1992, if the debt is either (i) qualified acquisition indebtedness or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt does not exceed the amount of debt being refinanced).

For more information about how cancellation of debts can affect your income and taxes, please contact Jim Shenwick.

NYT: Debt Collector is Faulted for Tough Tactics in Hospitals

By JESSICA SILVER-GREENBERG

Hospital patients waiting in an emergency room or convalescing after surgery are being confronted by an unexpected visitor: a debt collector at bedside.

This and other aggressive tactics by one of the nation’s largest collectors of medical debts, Accretive Health, were revealed on Tuesday by the Minnesota attorney general, raising concerns that such practices have become common at hospitals across the country.

The tactics, like embedding debt collectors as employees in emergency rooms and demanding that patients pay before receiving treatment, were outlined in hundreds of company documents released by the attorney general. And they cast a spotlight on the increasingly desperate strategies among hospitals to recoup payments as their unpaid debts mount.

To patients, the debt collectors may look indistinguishable from hospital employees, may demand they pay outstanding bills and may discourage them from seeking emergency care at all, even using scripts like those in collection boiler rooms, according to the documents and employees interviewed by The New York Times.

In some cases, the company’s workers had access to health information while persuading patients to pay overdue bills, possibly in violation of federal privacy laws, the documents indicate.

The attorney general, Lori Swanson, also said that Accretive employees may have broken the law by not clearly identifying themselves as debt collectors.

Accretive Health has contracts not only with two hospitals cited in Minnesota but also with some of the largest hospital systems in the country, including Henry Ford Health System in Michigan and Intermountain Healthcare in Utah. Company executives declined to comment on Tuesday.

Although Ms. Swanson did not bring action against the company on Tuesday, she said she was in discussions with state and federal regulators about a coordinated response to Accretive Health’s practices across the country. Regulators in Illinois, where Accretive is based, are watching the developments closely, according to Sue Hofer, a spokeswoman with the State Department of Financial and Professional Regulation.

“I have every reason to believe that what they are doing in Minnesota is simply company practice,” Ms. Swanson said in an interview, but declined to provide details.

In January, Ms. Swanson filed a civil suit against Accretive after a laptop with patient information was stolen, saying that the company had violated state and federal debt collection laws and patient privacy protections. That action is still pending.

An Accretive spokeswoman declined to comment on whether other states were looking into its practices and issued a brief statement, “We have a great track record of helping hospitals enhance their quality of care.” In its annual report, the company said it was cooperating with the attorney general to resolve the issues in Minnesota.

As hospitals struggle under a glut of unpaid bills, they are reaching out to companies like Accretive that specialize in collecting medical bills.

Hospitals have long hired outside collection agencies to pursue patients after they have left hospital facilities. But financial pressures are altering the collection landscape so that they are now letting collection firms in the front door, according to Don May, the policy adviser for the American Hospital Association, a trade group.

To achieve promised savings, hospitals turn over the management of their front-line staffing — like patient registration and scheduling — and their back-office collection activities.

Concerns are mounting that the cozy working relationships will undercut patient care and threaten privacy, said Anthony Wright, executive director of Health Access California, a consumer advocacy coalition. “The mission of these companies is in direct opposition to the supposed mission of these hospitals.”

Still, hospitals are in a bind. The more than 5,000 community hospitals in the United States provided $39.3 billion in uncompensated care — predominately unpaid patient debts or charity care — in 2010, up 16 percent from 2007, the hospital association estimated.

Accretive is one of the few companies specializing in hospital debt collection that is publicly traded. Last year, it reported $29.2 million in profit, up 130 percent from a year earlier.

Late last month, Fairview Health Services, a Minnesota hospital group that Accretive provided services to, announced it was canceling its contract with Accretive for back-office debt collection. After Accretive informed investors, its stock plunged 19 percent in a day. On Tuesday, the company’s shares closed at $18.49, down 2.7 percent.

Accretive says that it trains its staff to focus on getting payment through “revenue cycle operations.” Accretive fostered a pressurized collection environment that included mandatory daily meetings at the hospitals in Minnesota, according to employees and the newly released documents. Employees with high collection tallies were rewarded with gift cards. Those who fell behind were threatened with termination.

“We’ve started firing people that aren’t getting with the program,” a member of Accretive’s staff wrote in an e-mail to his bosses in September 2010.

Collection activities extended from obstetrics to the emergency room. In July 2010, an Accretive manager told staff members at Fairview that they should “get cracking on labor and delivery,” since there is a “good chunk to be collected there,” according to company e-mails.

Employees were told to stall patients entering the emergency room until they had agreed to pay a previous balance, according to the documents. Employees in the emergency room, for example, were told to ask incoming patients first for a credit card payment. If that failed, employees were told to say, “If you have your checkbook in your car I will be happy to wait for you,” internal documents show.

Employees at Accretive’s client hospitals ask patients to make “point of service” payments before they receive treatment. Until she went to Fairview for her son Maxx’s ear tube surgery in November, Marcia Newton, a stay-at-home mother in Corcoran, Minn., said she had never been asked to pay for care before receiving it. “They were really aggressive about getting that money upfront,” she said in an interview.

Ms. Newton was shocked to learn that the employees were debt collectors. “You really feel hoodwinked,” she said.

While hospital collections at Fairview increased, patient care suffered, the employees said. “Patients are harassed mercilessly,” a hospital employee told Ms. Swanson.

Patients with outstanding balances were closely tracked by Accretive staff members, who listed them on “stop lists,” internal documents show. In March 2011, doctors at Fairview complained that such strong-arm tactics were discouraging patients from seeking lifesaving treatments, but Accretive officials dismissed the complaints as “country club talk,” the documents show.

Ms. Swanson said that the hounding of patients violated the Emergency Medical Treatment and Active Labor Act, a federal law requiring hospitals to provide emergency health care regardless of citizenship, legal status or ability to pay.

In the January lawsuit, Ms. Swanson said that by giving its collectors access to health records, Accretive violated the Health Insurance Portability and Accountability Act, known as Hipaa (pronounced HIP-ah). For example, an Accretive collection employee had access to records that showed a patient had bipolar disorder, Parkinson’s disease and a host of other conditions.

In addition, she said, the company broke state collections laws by failing to identify themselves as debt collectors when dealing with patients.

Late Tuesday afternoon, Accretive announced it won a contract to provide “revenue cycle operations” for Catholic Health East, which has hospitals in 11 states.

Copyright 2012 The New York Times Company.  All rights reserved.

WSJ: To Pay Off Loans, Grads Put Off Marriage, Children

By Sue Shellenbarger

Between the ages of 18 and 22, Jodi Romine took out $74,000 in student loans to help finance her business-management degree at Kent State University in Ohio. What seemed like a good investment will delay her career, her marriage and decision to have children.

Ms. Romine's $900-a-month loan payments eat up 60% of the paycheck she earns as a bank teller in Beaufort, S.C., the best job she could get after graduating in 2008. Her fiancé Dean Hawkins, 31, spends 40% of his paycheck on student loans. They each work more than 60 hours a week. He teaches as well as coaches high-school baseball and football teams, studies in a full-time master's degree program, and moonlights weekends as a server at a restaurant. Ms. Romine, now 26, also works a second job, as a waitress. She is making all her loan payments on time.

They can't buy a house, visit their families in Ohio as often as they would like or spend money on dates. Plans to marry or have children are on hold, says Ms. Romine. "I'm just looking for some way to manage my finances."

High school's Class of 2012 is getting ready for college, with students in their late teens and early 20s facing one of the biggest financial decisions they will ever make.

Total U.S. student-loan debt outstanding topped $1 trillion last year, according to the federal Consumer Financial Protection Bureau, and it continues to rise as current students borrow more and past students fall behind on payments. Moody's Investors Service says borrowers with private student loans are defaulting or falling behind on payments at twice prerecession rates.

Most students get little help from colleges in choosing loans or calculating payments. Most pre-loan counseling for government loans is done online, and many students pay only fleeting attention to documents from private lenders. Many borrowers "are very confused, and don't have a good sense of what they've taken on," says Deanne Loonin, an attorney for the National Consumer Law Center in Boston and head of its Student Loan Borrower Assistance Project.

More than half of student borrowers fail to max out government loans before taking out riskier private loans, according to research by the nonprofit Project on Student Debt. In 2006, Barnard College, in New York, started one-on-one counseling for students applying for private loans. Students borrowing from private lenders dropped 74% the next year, says Nanette DiLauro, director of financial aid. In 2007, Mount Holyoke College started a similar program, and half the students who received counseling changed their borrowing plans, says Gail W. Holt, a financial-services official at the Massachusetts school. San Diego State University started counseling and tracking student borrowers in 2010 and has seen private loans decline.

The implications last a lifetime. A recent survey by the National Association of Consumer Bankruptcy Attorneys says members are seeing a big increase in people whose student loans are forcing them to delay major purchases or starting families.

Looking back, Ms. Romine wishes she had taken only "a bare minimum" of student loans. She paid some of her costs during college by working part time as a waitress. Now, she wishes she had worked even more. Given a second chance, "I would never have touched a private loan—ever," she says.

Ms. Romine hopes to solve the problem by advancing her career. At the bank where she works, a former supervisor says she is a hard working, highly capable employee. "Jodi is doing the best she can," says Michael Matthews, a Beaufort, S.C., bankruptcy attorney who is familiar with Ms. Romine's situation. "But she will be behind the eight-ball for years."

Private student loans often carry uncapped, variable interest rates and aren't required to include flexible repayment options. In contrast, government loans offer fixed interest rates and flexible options, such as income-based repayment and deferral for hardship or public service.

Steep increases in college costs are to blame for the student-loan debt burden, and most student loans are now made by the government, says Richard Hunt, president of the Consumer Bankers Association, a private lenders' industry group.

Many private lenders encourage students to plan ahead on how to finance college, so "your eyes are open on what it's going to cost you and how you will manage that," says a spokeswoman for Sallie Mae, a Reston, Va., student-loan concern. Federal rules implemented in 2009 require lenders to make a series of disclosures to borrowers, so that "you are made aware multiple times before the loan is disbursed" of various lending options, the spokeswoman says.

Both private and government loans, however, lack "the most fundamental protections we take for granted with every other type of loan," says Alan Collinge, founder of StudentLoanJustice.org, an advocacy group. When borrowers default, collection agencies can hound them for life, because unlike other kinds of debt, there is no statute of limitations on collections. And while other kinds of debt can be discharged in bankruptcy, student loans must still be paid barring "undue hardship," a legal test that most courts have interpreted very narrowly.

Deferring payments to avoid default is costly, too. Danielle Jokela of Chicago earned a two-year degree and worked for a while to build savings before deciding to pursue a dream by enrolling at age 25 at a private, for-profit college in Chicago to study interior design. The college's staff helped her fill out applications for $79,000 in government and private loans. "I had no clue" about likely future earnings or the size of future payments, which ballooned by her 2008 graduation to more than $100,000 after interest and fees.

She couldn't find a job as an interior designer and twice had to ask lenders to defer payments for a few months. After interest plus forbearance fees that were added to the loans, she still owes $98,000, even after making payments for most of five years, says Ms. Jokela, 32, who is working as an independent contractor doing administrative tasks for a construction company.

By the time she pays off the loans 25 years from now, she will have paid $211,000. In an attempt to build savings, she and her husband, Mike, 32, a customer-service specialist, are selling their condo. Renting an apartment will save $600 a month. Ms. Jokela has given up on her hopes of getting an M.B.A., starting her own interior-design firm or having children. "How could I consider having children if I can barely support myself?" she says.

When Debt Takes Over

Potential consequences of taking out too many student loans
--Delays in buying a car or purchasing a home
--Postponement of marriage and childbirth for financial reasons
--Parents feel pressure to take out loans or otherwise help with payments
--Risk for parents who co-sign loans of losing homes, cars and other assets
--Little ability to discharge student loans in bankruptcy
--Inability to get credit cards or home or car loans
--Inability to rent a home because of high debt-to-income ratio
--Being forced to deal with private collection agencies in the event of default
--Having liens placed on bank accounts or property in a default*
--Facing collection fees of 25% of amount owed in a default
--No statute of limitations on collection efforts
--Having wages garnisheed
--Possible loss of state-issued professional licenses
--Reduction of Social Security payments**
--Seizure of tax refund**
*Used primarily by private lenders
**Government loans only

Copyright 2012 Dow Jones & Company, Inc.  All rights reserved.

Village Voice: Obama to Grad Students: Pay Up

By Patrick Arden 

Speaking to a college crowd at the University of Michigan in January, President Barack Obama noted that for the first time Americans owe more on their student loans than on their credit cards. "That's inexcusable," Obama said. "Higher education is not a luxury—it's an economic imperative."

But even as the president laid out a program that included earlier loan forgiveness, lower interest rates, and caps on repayments of loans, he was putting the screws to graduate students. Starting this July, graduate-student loans will no longer be subsidized, meaning students will see their debts multiply with interest even before they've received their degrees.

The change will save the government an estimated $18 billion over the next decade—most of which has already been redirected to fund Pell Grants for undergraduates—but it's sure to tack thousands of dollars onto the debts of individual graduate students. The repercussions for graduate schools might be far-reaching, as people grapple with the question of whether a $50,000 master's or a $100,000 law degree is worth the money.

"The burden on graduate students is growing, and this makes a bad situation worse," says Eli Paster, a Ph.D. candidate at the Massachusetts Institute of Technology and the head of legislative concerns at the National Association of Graduate-Professional Students. "We don't want a disincentive for people to pursue a graduate degree."
 

Borrow Now, Pay Later
Graduate students rely almost twice as much on loans as undergraduates, according to the College Board. In 2009–10, grad students financed 69 percent of their costs with federal loans. Nearly half of the average student's $15,888 in loans was federally subsidized, with the government paying interest while the student is in school and for six months after graduation.

Under the Stafford loan program, the largest of the government's school-financing plans, most full-time grad students have been able to borrow up to $20,500 a year at 6.8 percent interest, $8,500 of which would be subsidized. (Medical students can qualify for up to $40,500 in Stafford loans.) If students require more money, they can turn to Plus loans, which are unsubsidized and have an interest rate of 7.9 percent. Repayment of Stafford loans may be deferred for six months after graduation, though the unsubsidized portion accrues interest while the student is in school; repayment of a Plus loan begins after just 60 days.

With the federal government no longer subsidizing Stafford loans, graduate students will immediately start accumulating interest on all debts. A student who took out just the $8,500 a year in subsidized loans would have repaid $46,953 over the next 10 years, according to the National Association of Student Financial Aid Administrators. Unsubsidized loans would add an extra $6,385 in interest payments.

Of course, many graduate programs have much higher costs. The average master's student graduates with more than $50,000 in loan debt, says the Council of Graduate Schools, $77,000 for those with doctoral degrees. The Association of American Medical Colleges estimates the elimination of subsidies will increase the ultimate cost of loans for the average medical student by as much as $20,000.
 

Passing the Bucks
While acknowledging the student-loan crisis, Obama stopped the federal subsidy for graduate loans on the grounds that the government also owes too much money. Early reports blamed the move on the debt-ceiling debate, but the scheme was first contained in Obama's proposed budget for the new fiscal year.

"The idea had come up in the past, but it had never gotten much traction until it appeared in the president's budget proposal," says Patricia McAllister at the Council of Graduate Schools. "There was a search for savings, and once this was on the table, it was hard to push it off."

The death of subsidized loans was sold to student advocates as a necessary sacrifice to save the Pell Grant Program, which provides 9 million undergraduates with grants of up to $5,500 a year. "Congress now views all spending as bad, and we wanted to make sure the Pell Grant didn't get cut," recalls Rich Williams at the U.S. Public Interest Research Group's Higher Education Project. "Unfortunately, the money had to come from other programs in the higher-education pot."

That's small consolation to graduate students, who warn undergraduates to watch their backs. Already, interest rates on undergraduate subsidized loans will be doubling to 6.8 percent this summer, and the elimination of all subsidized loans might not be far behind, Paster says. "Graduate students went first, but undergraduates will be next."

"At least the money saved from eliminating subsidized loans went into a student-aid program rather than deficit reduction. That was a real possibility," says Megan McClean at the National Association of Student Financial Aid Administrators. She's troubled that a lot of recent changes to financial aid have come as part of budget negotiations, instead of being deliberated by legislative committees, which first conduct research and hold hearings with experts. "That creates better policies," she says.

This might also explain why many graduate students were caught by surprise at the elimination of their subsidized loans. "When financial-aid changes happen in the budget, it's not really announced," Paster says. "You find out about it when you apply for loans before the start of the next semester. At that point, you don't really have a choice, except not going to school."

Some worry the higher costs could make graduate school solely a province for rich kids: On average, black and Hispanic students already have higher debt loads than whites and Asians.

McAllister says the government must make sure that debt doesn't dissuade students from going to graduate school. The Bureau of Labor Statistics projects that in the next decade, 2.6 million jobs will require people with advanced degrees. "If we want to meet these workforce needs, we should be investing in graduate education," she says, "not balancing the federal budget on the backs of students."
 

The $80,000 MFA
Student debt might already be affecting some graduate programs, as nationwide enrollment dropped slightly in 2010, the first decline in seven years, according to a recent report by the Council of Graduate Schools. But it's a mixed bag: While fewer students are seeking doctorates in the arts and humanities, more have enrolled in business schools and the sciences.

That trend is mirrored at area universities. The number of graduate students at CUNY has remained virtually unchanged at about 33,000 since the fall of 2009, yet its Graduate Center has seen gains in the health sciences. Likewise, Columbia's professional schools have grown in the past year, while enrollment has been flat in its Graduate School of Arts and Sciences. NYU reports similar findings, though new applications are up a bit this year.

MFA graduate student Monica Johnson found unwanted fame for showing up in Zuccotti Park last November to talk about the $88,000 in debt she accumulated during college and graduate school. She understands those who criticize her for a costly degree choice.

"At this point, I'd never say an MFA is the best degree, but there was a logical line of reasoning that led me here," Johnson says. "Both of my parents have associate degrees from a technical art school in Michigan, and both of them were able to have viable careers." She points out that not even law school is a safe bet these days. The job market is having a hard time absorbing new law graduates, and as a result, the number of students taking the LSAT has dropped by 25 percent over the past two years.

"I wasn't comfortable taking out the loans, and I kept asking people, 'Is this what you're supposed to do?' I'm not blaming anyone, but now I wish someone would have pulled me back. Everybody said, 'You just got to do it.'"

Johnson says her big mistake was starting her master's at Pratt Institute, where she borrowed more than $40,000 to cover one year's tuition, before leaving to enroll in an integrated-media art program at Hunter College. "I have a job, and I'm paying only $1,000 a class," she says. "It really is the price tag that's the problem, I think."
 

Facing the Future
The students gathered in front of St. Francis College in Brooklyn don't look like the next class of suckers, but everyone interviewed during a recent lunch hour was thinking about graduate school. Most claimed a graduate degree is now necessary to get a good job.

"Going to grad school gives you an advantage, but so many people go," says Christopher Santoro, a junior from Dyker Heights. "Grad school's become what college was 30 years ago."
Santoro has paid for his education with Stafford loans. Tuition at St. Francis is $18,100 a year, and 95 percent of students receive financial aid. "It's going to take a while to pay off all the loans," Santoro says. "Especially if I go to law school, it will be a lot, lot more. But I have to do it. I'm even contemplating going to grad school in engineering because law-school graduates are having a hard time getting jobs. My mother is the head of human resources at a bank, and she says everybody they hire is coming out of an Ivy League school.

"It's good that Obama's talking about financial aid," Santoro says, and he doesn't blame the president for taking the subsidy away from federal loans for graduate students. The student-debt crisis is another inherited mess, he says. "I'm a libertarian, but if I had to vote right now, I'd vote for Obama. I don't like anyone on the Republican side. We have no choice."

Copyright 2012 Village Voice, LLC.  All rights reserved.

Village Voice: Dawn of the Debt

By Neil deMause 

In tales of the economic miasma of the early 21st century (none but the great and powerful Krugman dare speak the D-word), the Debt-Ridden Student has become a stock character. She or he has graduated from college or is about to, saddled with mammoth loans accrued in order to pay rising tuition—and arrives in the work world only to find that the high-paying jobs that were supposed to repay all that debt have vanished along with Lehman Brothers.

In recent months, though, a new worry has emerged: In addition to destroying their own lives, are today's debt-ridden college graduates going to trash the economy as well?

It's the meme that will not die, reappearing with every study reporting new levels of student indebtedness. (Over $1 trillion! More than Americans' cumulative credit-card debt!) Mincing few words, William Brewer, chair of the National Association of Consumer Bankruptcy Attorneys, told The Washington Post last month, "This could very well be the next debt bomb for the U.S. economy."
Brewer minces only slightly more words in a conversation with the Voice. "My concern is same song, second verse," he says, noting that bankruptcy lawyers were among the first to raise red flags about the mortgage crisis. "We're seeing a tremendous amount of defaults." He points to a Federal Reserve Bank of New York study released last month that showed that 15 percent of Americans with credit reports have student debt, and more than a quarter of those are behind in their payments. While he acknowledges that student debt's "tentacles into the economy are not the same," Brewer foresees a "chilling effect" on such things as new-car purchases and the housing market, as graduates deep in debt are unable to qualify for mortgages.

Hogwash, responds Center for Economic and Policy Research co-director Dean Baker. "The numbers are just totally different," says Baker, who has some cred of his own when it comes to mortgage-bubble gloomcasting, having warned of an eventual housing crash as early as 2002. "We're talking about something on the order of a trillion dollars in student-loan debt. The housing-market peak was over $20 trillion."

What about indebted students reducing their spending as a result? "It's a damper, no doubt about it," Baker says. "That list of big purchases—first car, new house—those are things that undoubtedly many people will have to put off." As for the overall economy, though, he notes that the rule of thumb is that people spend 4 to 5 percent of their wealth each year. Even if you double that under the assumption that young people burn through their money like energy drinks, that's still only $80 billion a year. "That's a little over half of 1 percent of the GDP. It's not trivial, but it's not anything that's going to put us into a recession."

Still, that's not likely to be much comfort if you're one of those holding a share of that trillion dollars in debt—especially if you came of age in the last decade, when student debt was falling to historic lows. That all changed starting a few years ago, to the point where in the class of 2010, two-thirds of students graduated with some outstanding loans, according to the California-based Project on Student Debt. Average debt load per student: $25,250.

That number is rising an average of 5 percent a year, with no signs of slowing down, says Lauren Asher, president of the Institute for College Access and Success, which runs the Project on Student Debt. "Student debt has become a fact of life for more and more Americans and for the majority of college graduates," she says. "That was not always the case."

While rising tuition has gotten the most press, Asher blames a number of factors: "With the down economy, you have this painful convergence of less money in state coffers, less money in family bank accounts, more need and demand for education, and more eligibility for aid." The upshot, she says, is increased costs when students can least afford them.

As a result, loan-default rates are rising as well, in some cases, dramatically so. The number of students who default within two years of leaving school—"the tip of the tip of the iceberg of student distress," Asher says—has risen from a low of 4.5 percent in 2003 to 8.8 percent in 2009, the most recent graduating class for which numbers are available. And a study by the Institute for Higher Education Policy further found that for every student debtor in default, two more have already fallen behind in their payments.

A look at the New York City default numbers shows wide variation from campus to campus. Where most colleges, including NYU, Columbia, and CUNY, sport default rates in the low single digits, two schools—ASA in Downtown Brooklyn and Manhattan's Apex Tech—managed to send more than 1,000 indebted students out into the world (with or without degrees—the numbers don't distinguish) in 2010, more than 20 percent of whom have already defaulted.

ASA and Apex Tech are both private for-profit schools, and Asher says that this is par for the course for the growing industry: Nationwide, students at for-profits are more than twice as likely to default on their loans as those at public schools and three times as likely as students at private nonprofits, according to Department of Education data. (Not all for-profits are created equal, though: For-profit Monroe College in the Bronx managed to cut its default rate from more than 10 percent to just 5.6 percent in the most recent report.)

"Too many are borrowing a lot of money to get degree certificates that turn out not to have the value that they were led to expect," Asher warns. In some cases, students have gotten federal student loans to attend accredited schools, only to find that their particular courses were not themselves accredited, leaving them ineligible to take licensing exams.
Steve Gunderson, president of the Association of Private Sector Colleges and Universities, counters that because they cater largely to a poorer, more adult-student population, for-profits are inevitably going to see more defaults. "We're dealing with a constituency that, if not for grants and loans, would not have an opportunity to pursue higher education," he says.

Although students defaulting on their federal loans is a concern for the government, which gets stuck with paying off the lender and then acting as collection agency, it's no walk in the park for the indebted, either. Student-loan debt is unlike mortgage debt: Where a homeowner can, in a worst-case scenario, walk away from an underwater house and leave their bank holding the bag, you can't dump an unwanted college degree. Nor can you even duck out on student debt by declaring bankruptcy, as lenders are allowed to keep after you for repayment even if you've gone bust.

The only exception is in cases of "undue hardship," and Brewer warns that it's nearly impossible to qualify for. When clients come to him staggering under student-loan debt, Brewer says, he'll sometimes jokingly hand them a bus schedule. "They say, 'What's the bus schedule got to do with it?' I say, 'Well, you walk out in front of my office here, step in front of a bus, get yourself in a coma, I probably can prove undue hardship.'"

For those staring down a mountain of student debt, there are some options—so long as they're standard-issue government loans, at least. In 2009, the U.S. Department of Education launched Income-Based Repayment, under which debtors with low incomes can defer making payments on their student loans and can be absolved of debt altogether after 25 years. Indebted graduates can get loan forgiveness in 10 years if they're working in a public or nonprofit job, and under new rules issued by the Obama administration, starting in 2014 low-income debtors can have their payments capped at 10 percent of their income, down from 15 percent currently. (Asher's group runs a website, ibrinfo.org, that includes a debt calculator to see if you're eligible for the program; the new federal Consumer Finance Protection Bureau offers its own debt-repayment assistant at consumerfinance.gov.)

As bad as "stay poor for 25 years, and you're off scot-free" sounds, it's a breeze compared to what awaits those who've taken out private student loans, which make up an estimated 10 to 20 percent of all student borrowing. With private loans, warns Asher, "you're really at the mercy of your lender. They're underregulated, they mostly have variable rates—they have a lot in common with exploding mortgages." Loan companies can place you in default for being even a day late, as opposed to nine months of nonpayment on government loans. Some private loans don't even discharge on the borrower's death.

Several solutions have been proposed to untangle the student-debt mess. Brewer's group, predictably, would like to make it easier to unload student-loan debt through bankruptcy—something that was possible with private loans until 2005 and which U.S. senator Dick Durbin of Illinois has proposed be reinstituted. At the same time, a few dozen colleges, including Columbia, have pledged to change their financial-aid policies to cap or eliminate debt for low-income students, though it's uncertain how long this voluntary commitment will remain in place.

Meanwhile, students are casting a harder eye on the costs they'll rack up while earning a degree—when they can figure it out at all. Since last fall, all colleges have been required to post "net-cost calculators" on their websites, showing how much you'll actually pay per year based on your income level. These are still a work in progress, though: They can be hard to locate on school websites, and some (Columbia's in particular) require students to enter a daunting amount of financial information before learning how much they'll be expected to pay toward tuition.
"College pricing is still a lot more opaque than it should be," Asher says, and the convoluted loan world doesn't help any. She recalls an award letter she received during her time in graduate school for public policy. "I could not tell what was a grant and what was a loan. I had to call the office and say, 'Can you tell me what this acronym means?'"

With a student-loan system like this, the economy had better not hang in the balance.

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