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If you make student loans dischargeable via bankruptcy you will basically eliminate lending for college. The issue is that the vast majority of people have ~0 a
by harryh 8y ago
If you make student loans dischargeable via bankruptcy you will basically eliminate lending for college. The issue is that the vast majority of people have ~0 assets when they graduate from college.
There would be a huge incentive for all of these people to declare bankruptcy, discharge the debt, and then wait around the ~7 years for the bankruptcy to disappear from their credit report. As long as they don't want to buy a house during that period it wouldn't even be much of an inconvenience.
- imgabe 8y ago7 years is a long time and credit is necessary for many more things than just buying a house. People will also need cars, many apartments will do credit checks, as will many jobs. If what you say is true, why don't people graduate college, live large on credit cards for a few years, and then just declare bankruptcy? There's zero consequence to it right? Edit: This would also put further pressure on banks to make sure the loans are not so burdensome that this becomes an attractive option. Theoretically, anyone could do this with any loan (although taking out a loan with the intention of declaring bankruptcy is fraud and would go badly), but most people don't, because it's easier to just repay the loan than deal with 7 years of hassles b/c of bankruptcy.
- tptacek 8y agoIn reality, credit is not essential for maintaining a pretty standard US lifestyle. I've had what I assume is terrible credit my whole life (judging from the fact that I get turned down for things like checking accounts, and had to debate my bank to get a secured credit card months after depositing the proceeds of selling a company) and I've been pretty much just fine. I rented apartments no problem (pay your rent, get reference letters from landlords), managed to rent cars when I needed them, and simply didn't use credit cards (I still don't understand what the purpose of a credit card is). I got 3 mortgages (in 3 different places) during that time frame too. Maybe it's harder to get one now? Who cares? You're 25, wait a couple years to buy a house. (Preemptively: for almost that entire time, my family was living basically paycheck-to-paycheck, and our largest expenses were rent and food). People do leave college and rack up enormous credit card debt. The reason everyone doesn't BK is that there's a social stigma to it, and also, in general, the average American consumer does not have a good idea how the credit system works. Read Patrick McKenzie about this sometime. If more people understood how generous our creditor/debitor laws were to consumers, or how clownshoes disorganized consumer finance was (why would they give a shit? they're judged almost entirely on growth), people would take much more ruthless advantage of it. But there's also a difference between accumulating $50,000 of revolving credit debt over a span of 5-10 years and six figures based on a decision you make when you are eighteen years old.
- imgabe 8y agoIt sounds like you're comparing no credit to bad credit. If you just don't have a credit history, then you're an unknown quantity, but most institutions will still take a risk possibly with some security. Everyone starts out with no credit so you have to start somewhere. This is entirely different from someone who has proven themselves to be a bad risk by already refusing to repay their debts.
- tptacek 8y agoI'm not sure what more I can tell you than "everything gated on a credit check tends to deny me service" without literally showing you my credit score. You can easily live a normal life through your 20's with a bankruptcy on your record. (I don't have one, but I know people who do.)
- imgabe 8y agoFair enough, but that only proves my larger point. If you make a whole bunch of a certain type of loan, and everyone who takes that loan declares bankruptcy, that should be a pretty strong indicator that the loan is a poor risk and you should not have made the loan in the first place. Right now banks are shielded from that risk because the government backs the loan and the law forbids the debtors from defaulting, so it's basically just giving free interest payments to banks. Without loans to support exorbitant tuition, prices will have to go down to what people are actually able to afford to pay.
- tptacek 8y agoI think at this point you, me, and Harry might have a hard time finding a disagreement. All I read him saying is that making student loans dischargable in bankruptcy would upend the whole student loan system.
- patio11 8y agoRandom question for Thomas or the peanut gallery: would you be interested in reading How Consumer Credit Works if I were to lock myself in a room for a couple of days to write it?
- harryh 8y agoCollege students with no income can't actually get all that much credit for exactly the reason you mention. They can get a little sure, but not nearly as much as they can get in student loans. And there isn't zero consequence to defaulting. They'll still take the couple grand you have in your checking account. And having crappy credit is somewhat inconvenient (for the reasons you mention). It's about cost vs reward. If you've only got $5k in credit card debt then the reward isn't worth the cost. But if you've got $100k in student loan debt those costs start to look pretty small.
- imgabe 8y agoRight, banks won't make the loans in the first place. Or they'll make much more conservative loans based on major and potential job prospects. Without an unlimited supply of money, universities will not be able to charge outrageous amounts for tuition and will have to be more in line with what people are actually able to pay. That's better all around. I mean, if any 18 year old could fill out a form and get a government-guaranteed six figure loan to buy a car. A loan that they were prohibited from ever defaulting on...then Toyota Corollas would probably cost $150k too...
- harryh 8y agoI'm partially with you because I agree that college in the US is too expensive because the costs are in many ways unrestrained. I think your proposal would lead to more radical change than you think though. We wouldn't end up with "the system we have now but cheaper." You'd have a lot fewer people going to college. And the people missing out would be poorer and browner. Now, maybe that would be OK. But a lot of people wouldn't see it that way.
- imgabe 8y agoI'm not so sure. If you're really poor (or let's be honest, really poor and a minority), there's a ton of need-based aid available in the form of grants and scholarships. If tuition prices drop, those grants could go even further and allow even more really poor people to go to college. The people who lose out the most in our current system seem to be those in the middle - not poor enough to qualify for need-based aid, but not rich enough to be able to afford it. Those are the ones who end up with the loans. If tuition hadn't been significantly outpacing inflation for the last few decades, they and their families would probably be able to swing the bill.
- stordoff 8y agoFWIW, this is an often-claimed "strategy" in the UK (run up as many debts as you can while you are a student, then immediately declare bankruptcy). In practice, it isn't an issue.