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Why is student loan debt not dischargable in bankruptcy? If it were, banks would be far less likely to issue them, students would find cheaper education altern

by libria 9y ago

Why is student loan debt not dischargable in bankruptcy? If it were, banks would be far less likely to issue them, students would find cheaper education alternatives, and universities would be forced to provide greater assistance.

Goronmon 9y ago
Why is student loan debt not dischargable in bankruptcy? Because there isn't a way to take back the knowledge/skills/information learned while in college. If you default on a home loan, then can take your house. If you default on a car loan, they can take your car. What can they do when you default on your student loans?
- flukus 9y ago
  > Because there isn't a way to take back the knowledge/skills/information learned while in college. Time does that anyway, you'd be surprised how much you forget when you don't use it everyday. Plus the knowledge get's stale. A university degree depreciates just like everything else.
- int_19h 9y ago
  You can still declare bankruptcy when you don't have the collateral for your car/house loan anymore, though. For example, if your car was totaled, or your house burned down.
  - theoracle101 9y ago
    Yes but what you are describing is essentially unsecured debt. The government is guaranteeing your loans, why do you think student loan rates are so much cheaper than credit cards? The price you pay for that guarantee is that you can't declare bankruptcy. The government is propping up this industry and it has some parallels to the US housing before 08 (encouraging lending to subprime homebuyers)
Goronmon 9y ago
>Why is student loan debt not dischargable in bankruptcy? Because there isn't a way to take back the knowledge/skills/information learned while in college. If you default on a home loan, then can take your house. If you default on a car loan, they can take your car. What can they do when you default on your student loans?
dragonwriter 9y ago
> Why is student loan debt not dischargable in bankruptcy? Student loan debt is dischargeable in bankruptcy, though it has a higher bar than most other debt. > If it were, banks would be far less likely to issue them Banks issue less than 10%, by dollar value, of student loans; the vast majority are federal direct loans. Even if banks dropped out of issuing them completely, it wouldn't make the kind of difference you suggest.
- int_19h 9y ago
  The more interesting question is not how much new debt banks are issuing right now, but how much of the debt that is already there is to the banks.
backpropaganda 9y ago
I'm not an American, but isn't it likely that a student who owns nothing, just out of college, can easily declare bankruptcy, get out of his student loans and lose nothing, and then start a life?
treyfitty 9y ago
Largely because of the perverse incentives to declare bankruptcy immediately upon graduation. Think about it: no major purchase on the horizon, such as a mortgage- why not just ditch the loan if it's only going to hurt your credit file temporarily? Call it a slippery slope fallacy, but it's not fallacious when you realize we are rational beings (for the most part) and this loophole is attractive.
- johnmarcus 9y ago
  lol. for the 50 years prior to the law change (~2007) people weren't declaring bankruptcy after college to avoid the debt - but of course the debt was a reasonable amount back then compared to income and other debts. It's not that strange tuition has close to doubled after 2007, while only increasing near inflation before.
  - treyfitty 9y ago
    Also, (I'm speculating here, since I wasn't alive back then) but bankruptcy was very stigmatized. I won't know the extent, but the way my parents talk about it, bankruptcy just didn't seem like an option. They say it was akin to paying a vet to euthanize your dog rather than suffocating it- it's cheaper one way, but the outcome is the same. It's easy to be "rational" as armchair economists, but social norms and pride are a very important driver. It's what baffles real economists when they gripe "our models would work, if the world were rational!"
stretchwithme 9y ago
I'd say it's because of lobbyists for that industry. But these loans used to be all guaranteed the government. At least that changed. https://en.wikipedia.org/wiki/Student_loans_in_the_United_States https://en.wikipedia.org/wiki/Student_loans_in_the_United_St... So now, I guess, lenders at least need to consider whether a student is a flight risk. If not, they'll eventually be able to collect, presumably. We should have a marketplace where the normal incentives exist. Does an educational plan make sense? Does the student have aptitude and work ethic for the chosen career? Will there be a job waiting for this student when they graduate? If bankruptcy were possible, these questions would be more important.
aianus 9y ago
Then we'd all be mad about how poor people with bad credit can't afford to go to college while middle class people all get their loans cosigned by their parents who have assets.

by libria 9y ago

Goronmon 9y ago

Why is student loan debt not dischargable in bankruptcy? Because there isn't a way to take back the knowledge/skills/information learned while in college. If you default on a home loan, then can take your house. If you default on a car loan, they can take your car. What can they do when you default on your student loans?

flukus 9y ago
> Because there isn't a way to take back the knowledge/skills/information learned while in college. Time does that anyway, you'd be surprised how much you forget when you don't use it everyday. Plus the knowledge get's stale. A university degree depreciates just like everything else.
int_19h 9y ago
You can still declare bankruptcy when you don't have the collateral for your car/house loan anymore, though. For example, if your car was totaled, or your house burned down.
- theoracle101 9y ago
  Yes but what you are describing is essentially unsecured debt. The government is guaranteeing your loans, why do you think student loan rates are so much cheaper than credit cards? The price you pay for that guarantee is that you can't declare bankruptcy. The government is propping up this industry and it has some parallels to the US housing before 08 (encouraging lending to subprime homebuyers)

Goronmon 9y ago

>Why is student loan debt not dischargable in bankruptcy? Because there isn't a way to take back the knowledge/skills/information learned while in college. If you default on a home loan, then can take your house. If you default on a car loan, they can take your car. What can they do when you default on your student loans?

dragonwriter 9y ago

> Why is student loan debt not dischargable in bankruptcy? Student loan debt is dischargeable in bankruptcy, though it has a higher bar than most other debt. > If it were, banks would be far less likely to issue them Banks issue less than 10%, by dollar value, of student loans; the vast majority are federal direct loans. Even if banks dropped out of issuing them completely, it wouldn't make the kind of difference you suggest.

int_19h 9y ago
The more interesting question is not how much new debt banks are issuing right now, but how much of the debt that is already there is to the banks.

backpropaganda 9y ago

I'm not an American, but isn't it likely that a student who owns nothing, just out of college, can easily declare bankruptcy, get out of his student loans and lose nothing, and then start a life?

treyfitty 9y ago

Largely because of the perverse incentives to declare bankruptcy immediately upon graduation. Think about it: no major purchase on the horizon, such as a mortgage- why not just ditch the loan if it's only going to hurt your credit file temporarily? Call it a slippery slope fallacy, but it's not fallacious when you realize we are rational beings (for the most part) and this loophole is attractive.

johnmarcus 9y ago
lol. for the 50 years prior to the law change (~2007) people weren't declaring bankruptcy after college to avoid the debt - but of course the debt was a reasonable amount back then compared to income and other debts. It's not that strange tuition has close to doubled after 2007, while only increasing near inflation before.
- treyfitty 9y ago
  Also, (I'm speculating here, since I wasn't alive back then) but bankruptcy was very stigmatized. I won't know the extent, but the way my parents talk about it, bankruptcy just didn't seem like an option. They say it was akin to paying a vet to euthanize your dog rather than suffocating it- it's cheaper one way, but the outcome is the same. It's easy to be "rational" as armchair economists, but social norms and pride are a very important driver. It's what baffles real economists when they gripe "our models would work, if the world were rational!"

stretchwithme 9y ago

I'd say it's because of lobbyists for that industry. But these loans used to be all guaranteed the government. At least that changed. https://en.wikipedia.org/wiki/Student_loans_in_the_United_States https://en.wikipedia.org/wiki/Student_loans_in_the_United_St... So now, I guess, lenders at least need to consider whether a student is a flight risk. If not, they'll eventually be able to collect, presumably. We should have a marketplace where the normal incentives exist. Does an educational plan make sense? Does the student have aptitude and work ethic for the chosen career? Will there be a job waiting for this student when they graduate? If bankruptcy were possible, these questions would be more important.

aianus 9y ago

Then we'd all be mad about how poor people with bad credit can't afford to go to college while middle class people all get their loans cosigned by their parents who have assets.