Could student loans be the next financial crisis?

College costs have risen faster than inflation, and more students are borrowing and taking out bigger loans just to keep up. Defaults are on the rise.

"Something is going to have to give if costs keep going up and people keep stretching themselves," says Deanne Loonin, a staff attorney with National Consumer Law Center. "It's not sustainable for borrowers."

For those whose student debt load has reached a crushing level, help is in the works.

Financial reform to be signed into law Wednesday creates a Bureau of Consumer Financial Protection that will have an ombudsman dedicated to helping borrowers resolve problems with private education loans.

Congress also is weighing legislation to allow borrowers to wipe out private student loans in bankruptcy. Ever since bankruptcy reform in 2005, private loans have been treated the same in court as federal student loans, meaning they can be discharged only for an "undue hardship." It's not an easy hurdle to overcome.

Mark Kantrowitz, publisher of FinAid, says private education loans should be treated like other unsecured debt that can be erased in bankruptcy cases. "Why should credit cards be discharged and private student loans should not?" he says.

Student loan giant Sallie Mae supports allowing private and federal loans to be discharged in bankruptcy, but only if struggling borrowers made a "good-faith effort" to repay for five to seven years.

But there's no guarantee that Congress will pass the bankruptcy legislation. And the new consumer bureau won't be up and running for some time.

So if you're struggling to keep up with payments now, explore your options. And the sooner the better. If you wait until default, your options are severely limited.

Federal student loans offer a variety of plans to temporarily suspend or reduce monthly payments while you get back on your feet.

Or consider an income-based repayment plan if your debt is huge compared with earnings. No more than 15 percent of discretionary income would go toward payments, and you might not pay anything if you don't earn much. Any balance will be forgiven after 25 years of payments, or after 10 years if you work in public service.

Private loans don't have all these borrower-friendly options, and traditionally lenders have resisted granting any leniency, Loonin says. Yet with the weak economy, Loonin says, private lenders are more willing to offer a rate reduction, temporary interest-only payments or lower payments based on income.

Leniency is still granted on a case-by-case basis, but it's worth asking about, she says.

Defaults are serious business, and no one takes them more seriously than the government. After all, federal loans are made with taxpayer money.

The government doesn't have to take you to court to be allowed to garnishee your wages, keep your tax refund or even snag a portion of your Social Security benefits in retirement, she says. And steep collection costs will be added on top of your debt.

If you have defaulted on a federal loan — which means you went about one year without making a payment — you can "rehabilitate" your loan by making payments for about nine months, Kantrowitz says. After that, you can enroll in the income-based plan where payments likely will be lower than if the government garnishees your wages, he says.

Another option for defaulters — but rarer — is debt settlement. Here, you offer a lump sum that's less than what you owe to wipe the slate clean. The government will accept only if it concludes that you're never going to be able to repay, Kantrowitz says.

Don't expect to pay just pennies on the dollar, Kantrowitz warns. For recent defaults, a settlement might waive collection charges, which can amount to 25 percent of principal and interest due. Settlements on old defaults might forgive collection fees and half of accrued interest, he says.

He also cautions that the government will want its money within 90 days. That alone makes settlement difficult unless you receive an inheritance, can borrow the cash from family or tap equity in a home.

Contact the holder of your loans if you're interested in settling. Make sure you get the agreement in writing with the statement that this settles your debt in full, Kantrowitz says. And run it by a lawyer.

More borrowers, more debt

The average private and federal student loan debt of graduating seniors:

2004: $18,650

2008: $23,200

Number of graduates leaving a four-year school with loans:

2004: 1.1 million

2008: 1.4 million

Source: Project on Student Debt, a nonprofit that advocates for affordable education.