11 ms·

The weird legal protections for student loans seems bizarre to me. The effect of making these loans exempt from bankruptcy just inflates their value which puts

The weird legal protections for student loans seems bizarre to me. The effect of making these loans exempt from bankruptcy just inflates their value which puts colleges into a position where they can inflate their fees - safe in the knowledge that banks will lend practically anything and students have very little choice. But I'm still left wondering- what is the reason that bankruptcy exists at all, and if there is a good reason, why does that reason not extend to student loans?

toasterlovin 7y ago
The argument for bankruptcy protection for student loans is that, at the end of college, students are in a uniquely advantageous position to file for bankruptcy. They don’t have any assets, they don’t have any significant income earning history, etc. I think the original intent was to incentivize more lending, and thus more access to higher education, by giving lenders more protection. It was a mistake, IMO.
- whyenot 7y ago
  It seems like having a bankruptcy on your credit report for the next seven years would be disincentive enough, especially now when everyone from the phone company, to your landlord, to your employer may look at your report.
  - ouid 7y ago
    why would any of those people care if you have declared bankruptcy? It's much worse for your credit to have a bunch of debt that has higher priority than what a creditor might extend to you. If I'm selling you a cell phone on a payment plan, I would much rather it be the case that you don't have 100k of student loans to pay for first.
    - heavyset_go 7y ago
      > why would any of those people care if you have declared bankruptcy? Landlords aren't in the business of providing housing for free, and seek restitution for damages and unpaid rent through the courts. A low credit score or bankruptcy shows that a potential tenant could incur significant damages and unpaid rent, and leave the landlord high-and-dry when the bill comes due. In today's owner's market, there are plenty of other potential tenants without a poor credit history or bankruptcies.
      - zulln 7y ago
        Did you read the comment? The presumption of that statement was a bad credit to start with. Aka. bankruptcy vs bad credit, not compared to a good credit score.
      - ouid 7y ago
        Tens of thousands of dollars in unpaid student loan debt is bad credit. Your credit score goes down the more money you owe. It is first and foremost a measure of how much you currently owe. This largely determines whether you will be able to take on another debt.
    - travisoneill1 7y ago
      In corporate finance it wouldn't. They would look at your cash flow and ability to service the debt. Personal finance is weirdly moralistic and backward looking.
      - toasterlovin 7y ago
        Corporations have assets and generally behave rationally and non-emotionally if you take them to court.
  - toasterlovin 7y ago
    Seems like a good trade off if you can discharge $100k or more of debt. That is a life changing amount of money for most people.
  - paul_f 7y ago
    Brilliant strategy - graduate college, file bankruptcy, get rid of the student loan debt. Most college graduates rent for the first few years and with the utility of VISA debit cards, no need for a credit card. Live in a city, use public transport ad Uber, no need for a car loan. In 7 years, you can buy a house.
    - heavyset_go 7y ago
      > Most college graduates rent for the first few years Many landlords are loath to rent to recent graduates, those with poor credit and a history of bankruptcy. It's an owner's market, and someone who checks all three risky boxes will be skipped over for another tenant who comes with less risk.
      - dodobirdlord 7y ago
        If it was a common practice for college graduates to declare bankruptcy in this manner then landlords would take that into consideration. But of course, if it were a common practice it would also promptly be banned and we would be back in the same place we are now.
        colejohnson66 7y ago
        It is banned already. It just has another name: fraud. Taking out a loan with the intent to not pay it is fraud.
    - Mountain_Skies 7y ago
      You can get an FHA loan two years after bankruptcy. Twelve months in limited cases. An FHA loan has less desirable terms than a conventional loan but not so much so that it would dissuade anyone from getting $100k in student loans dismissed.
    - stevespang 7y ago
      10 years, not 7. The Gov't will most certainly appeal this ruling all the way to the Supreme Court - - they and their corporate bogeemen have too much to loose.
  - vanniv 7y ago
    Yeah, if I could borrow $250k+ at the start of my career knowing that I'll never have to repay a penny of it, and the only consequence is that I couldn't get a mortgage in the first two years out of university... ...why wouldn't I just borrow every cent I can without even intending to pay it back?
    - tonetheman 7y ago
      this .... so much this.
      - vanniv 7y ago
        All of which, I guess, says that if student loans can be trivially discharged in bankruptcy, then we should expect that non-government loans will quickly go away, and government loans will start to have a ~100% default rate (or this judge's decision won't become universally applicable, or the law will be changed to circumvent it)
        MiroF 7y ago
        hot take: private educational loans largely going away would be a good thing for education pricing
        vanniv 7y ago
        I think it's the government-guaranteed loans going away that would actually be the good thing for education pricing.
    - maxerickson 7y ago
      I doubt they would give you the whole amount up front if it were dischargeable, so your clock is wrong. It might be possible to declare bankruptcy a year or two before graduating still. Not sure what employers would make of it. Maybe they'd like the mercenary attitude.
      - 7y ago
  - redis_mlc 7y ago
    The opposite has been true since at least 2008. Credit card issuers actually target recent bk's since they have no debt. :) They're also ignoring medical debt, since otherwise a large percent of their applicants would be rejected.
    - bigjimmyk3 7y ago
      Also, since there is a waiting period between bankruptcy filings, the potential creditor knows that they have a specific window during which the debtor can't legally dodge the debt.
  - Nasrudith 7y ago
    Ironically the issue is that banks tend to be too forgiving for that to be the deterrent it used to be. I suppose medical bankruptcy also shares some of the "blame" from a number of no fault of their own bankruptcies. Of course the other two issues are that such a "retributive" system of treating debtors with a scarlet letter isn't productive even if it appeals to a sense of "fairness" to those who pay. Second, the reason banks don't care about old bankruptcies isn't anything high minded but because they like money and can make it if they don't pass them up.
- ethbro 7y ago
  College loans rates (costs) would certainly spike if they were made dischargeable. The bargain probably should have been "Cannot be discharged in bankruptcy, until 15 years have passed after loan origination." Like Prop 13, the overall effects of undischargeable loans have been overwhelmingly negative -- decoupling college tuition inflation from income growth / general inflation, via government underwriting of loans, while removing market influence on guiding students to choose majors with a return on investment.
  - mrfusion 7y ago
    Or they could just become more selective and only loan to people with good prospects of repaying. Maybe they’ll look at your major, maybe discourage private universities.
    - wgerard 7y ago
      > Maybe they’ll look at your major That wouldn't make much sense, many students aren't accepted into a major until a year or two into their education. "Intended major" would also be a poor choice, as I think we all know many people who intended to go into one field and ended up in a completely different one.
      - mrfusion 7y ago
        Well you won’t switch your major if your loan depends on it. Someone else is lending you the money, they can add any strings they want. Banks deny mortgages for problems with homes all the time. You aren’t able to swap in a different house after the bank approves it.
        wgerard 7y ago
        > Well you won’t switch your major if your loan depends on it. I'm not sure what this has to do with anything I said. If you're referring to my second statement, I met many people in school who intended to go into engineering or computer science or medicine and had to change their career path once it was clear they weren't going to make it through the first year of introductory classes. I doubt I was alone in seeing that happen.
- FireBeyond 7y ago
  And yet you can declare bankruptcy over most other forms of unsecured debt. Student loans aren't unique in that regard.
- bradleyjg 7y ago
  > I think the original intent was to incentivize more lending, and thus more access to higher education, by giving lenders more protection. I think that's correct, however meanwhile the system dramatically changed and now the vast majority of student loans are made by the government without any underwriting. The largest private sector role is poaching the best risks to refinance. Allowing these refinanced loans to continue to be non-discharable has the net effect of enabling the private sector to more effectively engage in adverse selection against the government-as-lender! It's hard to imagine anyone would actually sit down and design this policy set.
- james_s_tayler 7y ago
  I see a number of replies in the comments saying you could just take out the loan, get the degree, declare bankruptcy, get a job and 7 years later buy a house and be all good. I wonder if this is just a very American thing because the loans are so ridiculously big? In NZ student loans can be forgiven through bankruptcy. See http://www.studentloan.org.nz/options.html http://www.studentloan.org.nz/options.html But the loan is only around like $30k anyway and I basically never hear of anyone purposely declaring bankruptcy to get out of it. The whole thing is pretty much a non-issue. People take them out, people pay them back. Some people used to go overseas in order to avoid paying it back but they changed the law, so that you can't do that anymore.
  - pkaye 7y ago
    What is the cost of a typical New Zealand 4 year college education including tuition/fees, books, room and board?
    - teruakohatu 7y ago
      Here in NZ Bachelor's degrees are usually three years. The first year is not supposed to be exploratory, you should more or less know your major before you start. A Bachelor of Science might cost $20,000 NZD ($13,000 USD), extra fees are pretty low, textbooks are not cheap but professors usually try to avoid you having to buy them. In your first year you might get away without having to buy a textbook (in the maths departments at least). A Bachelor of Arts would could a few thousand less. Fully catered accommodation is expensive. Higher end would be $14,000 NZD ($9,200) for a year. Not many students continue in halls of residence past the first year. Staying in a shared flat would cost a LOT less. A lot of students also live with parents and commute. The Student Loan is interest free and covers course costs as well as a portion of living costs. Domestic students also can get a Student Allowance of about $220 NZD/week (or more depending on circumstances). The allowance is welfare, not a loan. Walking away with a degree and $30,000 - $40,000 NZD ($20,000 USD - $26,000 USD) interest free debt is reasonable. Some people will be more, others will be less because they worked part time while studying. Repayments are taken out of your paycheck (12% of income over $19,670 NZD, so probably 8-11% of total grad compensation per year). There is no incentive to repay it faster due to the lack of interest. Most students I think would have it paid back in 11 years or less. If you learn less than $19,670, you don't have to make any payments. The catch is you pay 4% interest if you go work overseas. Salaries are higher overseas so you will still win. There is little to no incentive to declare bankruptcy. I have never even heard of it discussed.
- BurningFrog 7y ago
  > I think the original intent was to incentivize more lending, and thus more access to higher education If so, that is a classic intellectual mistake that comes from not understanding any Economics. If you increase demand by pumping out extra education dollars to students, and the supply doesn't increase accordingly, all you've done is raise prices and give the suppliers a huge windfall profit. Why the supply of college spots doesn't respond to a demand increase, like most goods and services do, is an interesting question!
mamon 7y ago
>> I'm still left wondering- what is the reason that bankruptcy exists at all. Because society decided that people should have a way out of bad financial situation they've gotten into, quite often for reasons beyond their control (e.g. car accident that leaves them unable to work for a long time, and with huge medical bill to pay).
- ethbro 7y ago
  Aka preventing debt slavery.
- chrisseaton 7y ago
  > car accident that leaves them unable to work for a long time, and with huge medical bill to pay Lol society should have decided to go with out-of-work benefits and free-at-the-point-of-use healthcare instead. It'd be better for the creditors as well who wouldn't get left hanging!
  - martin_a 7y ago
    Free healthcare? Where would that end? In something like communist Europe? Beware of that! /satire
rayiner 7y ago
Student loans are unlike nearly any other loan. First, the government is the lender for almost all student loans. Second, the government makes loans almost without assessing creditworthiness. Even people with extremely bad credit can get hundreds of thousands of dollars in student loans. Third, the government has an income based repayment system for student loans. Bankruptcy protection is a general mechanism for helping people move past debt. (The theory is that it’s better to pay claims for pennies on the dollar and resolve everything at once than to have debt hanging over the person indefinitely.) But student loans are different enough that it’s entirely reasonable for the government to decide a different regime should apply to student loans.
- ganstyles 7y ago
  The first two points don't seem to have anything to do with _why_ bankruptcy shouldn't be used for student loans. The government makes plenty of loans and to my knowledge all of those other classes of gov backed loans are dischargeable. And in any case many student loans are in fact not government but private, see, e.g. SoFi type outfits. Though I don't know the percentage of gov:private student loans offhand. Your third point seems to suggest you may not be fully aware of the parameters of income based repayment and its many gotchas. People who rely on it, through no fault of their own, regularly find themselves paying 10x their monthly payment through paperwork malfunctions. Additionally many of the benefits of taking jobs that qualify for perks, like loan forgiveness, under income based repayment systems are out the window under the DeVos regime. Based on this, I really don't see how your conclusions follow from your premises. If anything, your argument works against you. People who are allowed to take out hundreds of thousands of no collateral loans at ages like 18 should be able to move past them through bankruptcy. It's downright predatory.
  - godelski 7y ago
    > The first two points don't seem to have anything to do with _why_ bankruptcy shouldn't be used for student loans. The reason is so that these loans are low risk (no risk?) to those providing the loans. This was done in an effort to provide everyone that wanted an education but couldn't afford it could get a loan. Obviously the mechanism used to reach the goal here backfired and people have just doubled down on the bad decision.
Sangama34 7y ago
Any average economist (irrespective of political leanings) would have predicted these secondary consequences of not allowing students to file for bankruptcy.
deogeo 7y ago
> The effect of making these loans exempt from bankruptcy just inflates their value which puts colleges into a position where they can inflate their fees - safe in the knowledge that banks will lend practically anything and students have very little choice. While this is (was?) especially true for student loans, it applies to all loans - their availability increases prices, because there's more cash in the market. Forcing people to take loans, to the benefit of lenders.
strangescript 7y ago
Graduate high school, take student loan, get a bunch of junk credit cards, go on a spending spree, have fun in college and maybe get a degree out of it. At the end of it, declare bankruptcy. You ruin your credit, but you didn't really have any to begin with, and you end up with a degree that can't be taken away. Get a job and by the time you hit your 30s you will be right as rain. (still a bad idea, but its the thought process)
- Sangama34 7y ago
  Not always. If students are allowed to declare bankruptcy from student loans than banks can apply a more realistic risk models to such lines of credit. Students will then have to either pay very high rate of interest or will have to go out their way to prove their financial responsibility. Banks will then be able to create sophisticated models to figure out which young people are responsible enough and who are not. This will incentivize responsible behavior from students as well as institutes and not to mention a competition to reduce fees. Not to mention, this model will also ensure the folks who should not be in college or will not benefit from it will not be able to go to college. I think this is where politicians disagreed and came with the completely wrong policies with perfectly predictable bad outcomes.
chiefalchemist 7y ago
But that's the dark little secret of the proliferation of student loans. That is, they've been instrumental in driving up the cost of higher edu. Making loans more available increases demand. They've also allowed the edu instutions to raise prices because the market can bear those increases. This is the 2000's housing bubble all over again.
Spooky23 7y ago
Medical and Law school students widely abused bankruptcy for student loans in the 60s and 70s. My recollection is that this became even more common as rates went up, (a mortgage in the late 70s could be 15%) prompting the changes in the law.
sintaxi 7y ago
The reason is that an education can't be repossessed and sold to another person. Also, a student typically doesn't have any other assets.
- kube-system 7y ago
  Student loans being unsecured debt has nothing to do with their dischargeability. Plenty of other unsecured debt is dischargeable, like credit cards.
Trias11 7y ago
Student debt is one of the biggest assets of US Government. Obviously they're not interested to get people off the hook.
LorenPechtel 7y ago
Can you say "strategic bankruptcy"? A new graduate with a high priced degree is almost certainly better off declaring chapter 7 the day they graduate. If you want student loans to exist that option must be denied.

toasterlovin 7y ago

The argument for bankruptcy protection for student loans is that, at the end of college, students are in a uniquely advantageous position to file for bankruptcy. They don’t have any assets, they don’t have any significant income earning history, etc. I think the original intent was to incentivize more lending, and thus more access to higher education, by giving lenders more protection. It was a mistake, IMO.

whyenot 7y ago
It seems like having a bankruptcy on your credit report for the next seven years would be disincentive enough, especially now when everyone from the phone company, to your landlord, to your employer may look at your report.
- ouid 7y ago
  why would any of those people care if you have declared bankruptcy? It's much worse for your credit to have a bunch of debt that has higher priority than what a creditor might extend to you. If I'm selling you a cell phone on a payment plan, I would much rather it be the case that you don't have 100k of student loans to pay for first.
  - heavyset_go 7y ago
    > why would any of those people care if you have declared bankruptcy? Landlords aren't in the business of providing housing for free, and seek restitution for damages and unpaid rent through the courts. A low credit score or bankruptcy shows that a potential tenant could incur significant damages and unpaid rent, and leave the landlord high-and-dry when the bill comes due. In today's owner's market, there are plenty of other potential tenants without a poor credit history or bankruptcies.
    - zulln 7y ago
      Did you read the comment? The presumption of that statement was a bad credit to start with. Aka. bankruptcy vs bad credit, not compared to a good credit score.
    - ouid 7y ago
      Tens of thousands of dollars in unpaid student loan debt is bad credit. Your credit score goes down the more money you owe. It is first and foremost a measure of how much you currently owe. This largely determines whether you will be able to take on another debt.
  - travisoneill1 7y ago
    In corporate finance it wouldn't. They would look at your cash flow and ability to service the debt. Personal finance is weirdly moralistic and backward looking.
    - toasterlovin 7y ago
      Corporations have assets and generally behave rationally and non-emotionally if you take them to court.
- toasterlovin 7y ago
  Seems like a good trade off if you can discharge $100k or more of debt. That is a life changing amount of money for most people.
- paul_f 7y ago
  Brilliant strategy - graduate college, file bankruptcy, get rid of the student loan debt. Most college graduates rent for the first few years and with the utility of VISA debit cards, no need for a credit card. Live in a city, use public transport ad Uber, no need for a car loan. In 7 years, you can buy a house.
  - heavyset_go 7y ago
    > Most college graduates rent for the first few years Many landlords are loath to rent to recent graduates, those with poor credit and a history of bankruptcy. It's an owner's market, and someone who checks all three risky boxes will be skipped over for another tenant who comes with less risk.
    - dodobirdlord 7y ago
      If it was a common practice for college graduates to declare bankruptcy in this manner then landlords would take that into consideration. But of course, if it were a common practice it would also promptly be banned and we would be back in the same place we are now.
      - colejohnson66 7y ago
        It is banned already. It just has another name: fraud. Taking out a loan with the intent to not pay it is fraud.
  - Mountain_Skies 7y ago
    You can get an FHA loan two years after bankruptcy. Twelve months in limited cases. An FHA loan has less desirable terms than a conventional loan but not so much so that it would dissuade anyone from getting $100k in student loans dismissed.
  - stevespang 7y ago
    10 years, not 7. The Gov't will most certainly appeal this ruling all the way to the Supreme Court - - they and their corporate bogeemen have too much to loose.
- vanniv 7y ago
  Yeah, if I could borrow $250k+ at the start of my career knowing that I'll never have to repay a penny of it, and the only consequence is that I couldn't get a mortgage in the first two years out of university... ...why wouldn't I just borrow every cent I can without even intending to pay it back?
  - tonetheman 7y ago
    this .... so much this.
    - vanniv 7y ago
      All of which, I guess, says that if student loans can be trivially discharged in bankruptcy, then we should expect that non-government loans will quickly go away, and government loans will start to have a ~100% default rate (or this judge's decision won't become universally applicable, or the law will be changed to circumvent it)
      - MiroF 7y ago
        hot take: private educational loans largely going away would be a good thing for education pricing
        vanniv 7y ago
        I think it's the government-guaranteed loans going away that would actually be the good thing for education pricing.
  - maxerickson 7y ago
    I doubt they would give you the whole amount up front if it were dischargeable, so your clock is wrong. It might be possible to declare bankruptcy a year or two before graduating still. Not sure what employers would make of it. Maybe they'd like the mercenary attitude.
    - 7y ago
- redis_mlc 7y ago
  The opposite has been true since at least 2008. Credit card issuers actually target recent bk's since they have no debt. :) They're also ignoring medical debt, since otherwise a large percent of their applicants would be rejected.
  - bigjimmyk3 7y ago
    Also, since there is a waiting period between bankruptcy filings, the potential creditor knows that they have a specific window during which the debtor can't legally dodge the debt.
- Nasrudith 7y ago
  Ironically the issue is that banks tend to be too forgiving for that to be the deterrent it used to be. I suppose medical bankruptcy also shares some of the "blame" from a number of no fault of their own bankruptcies. Of course the other two issues are that such a "retributive" system of treating debtors with a scarlet letter isn't productive even if it appeals to a sense of "fairness" to those who pay. Second, the reason banks don't care about old bankruptcies isn't anything high minded but because they like money and can make it if they don't pass them up.
ethbro 7y ago
College loans rates (costs) would certainly spike if they were made dischargeable. The bargain probably should have been "Cannot be discharged in bankruptcy, until 15 years have passed after loan origination." Like Prop 13, the overall effects of undischargeable loans have been overwhelmingly negative -- decoupling college tuition inflation from income growth / general inflation, via government underwriting of loans, while removing market influence on guiding students to choose majors with a return on investment.
- mrfusion 7y ago
  Or they could just become more selective and only loan to people with good prospects of repaying. Maybe they’ll look at your major, maybe discourage private universities.
  - wgerard 7y ago
    > Maybe they’ll look at your major That wouldn't make much sense, many students aren't accepted into a major until a year or two into their education. "Intended major" would also be a poor choice, as I think we all know many people who intended to go into one field and ended up in a completely different one.
    - mrfusion 7y ago
      Well you won’t switch your major if your loan depends on it. Someone else is lending you the money, they can add any strings they want. Banks deny mortgages for problems with homes all the time. You aren’t able to swap in a different house after the bank approves it.
      - wgerard 7y ago
        > Well you won’t switch your major if your loan depends on it. I'm not sure what this has to do with anything I said. If you're referring to my second statement, I met many people in school who intended to go into engineering or computer science or medicine and had to change their career path once it was clear they weren't going to make it through the first year of introductory classes. I doubt I was alone in seeing that happen.
FireBeyond 7y ago
And yet you can declare bankruptcy over most other forms of unsecured debt. Student loans aren't unique in that regard.
bradleyjg 7y ago
> I think the original intent was to incentivize more lending, and thus more access to higher education, by giving lenders more protection. I think that's correct, however meanwhile the system dramatically changed and now the vast majority of student loans are made by the government without any underwriting. The largest private sector role is poaching the best risks to refinance. Allowing these refinanced loans to continue to be non-discharable has the net effect of enabling the private sector to more effectively engage in adverse selection against the government-as-lender! It's hard to imagine anyone would actually sit down and design this policy set.
james_s_tayler 7y ago
I see a number of replies in the comments saying you could just take out the loan, get the degree, declare bankruptcy, get a job and 7 years later buy a house and be all good. I wonder if this is just a very American thing because the loans are so ridiculously big? In NZ student loans can be forgiven through bankruptcy. See http://www.studentloan.org.nz/options.html http://www.studentloan.org.nz/options.html But the loan is only around like $30k anyway and I basically never hear of anyone purposely declaring bankruptcy to get out of it. The whole thing is pretty much a non-issue. People take them out, people pay them back. Some people used to go overseas in order to avoid paying it back but they changed the law, so that you can't do that anymore.
- pkaye 7y ago
  What is the cost of a typical New Zealand 4 year college education including tuition/fees, books, room and board?
  - teruakohatu 7y ago
    Here in NZ Bachelor's degrees are usually three years. The first year is not supposed to be exploratory, you should more or less know your major before you start. A Bachelor of Science might cost $20,000 NZD ($13,000 USD), extra fees are pretty low, textbooks are not cheap but professors usually try to avoid you having to buy them. In your first year you might get away without having to buy a textbook (in the maths departments at least). A Bachelor of Arts would could a few thousand less. Fully catered accommodation is expensive. Higher end would be $14,000 NZD ($9,200) for a year. Not many students continue in halls of residence past the first year. Staying in a shared flat would cost a LOT less. A lot of students also live with parents and commute. The Student Loan is interest free and covers course costs as well as a portion of living costs. Domestic students also can get a Student Allowance of about $220 NZD/week (or more depending on circumstances). The allowance is welfare, not a loan. Walking away with a degree and $30,000 - $40,000 NZD ($20,000 USD - $26,000 USD) interest free debt is reasonable. Some people will be more, others will be less because they worked part time while studying. Repayments are taken out of your paycheck (12% of income over $19,670 NZD, so probably 8-11% of total grad compensation per year). There is no incentive to repay it faster due to the lack of interest. Most students I think would have it paid back in 11 years or less. If you learn less than $19,670, you don't have to make any payments. The catch is you pay 4% interest if you go work overseas. Salaries are higher overseas so you will still win. There is little to no incentive to declare bankruptcy. I have never even heard of it discussed.
BurningFrog 7y ago
> I think the original intent was to incentivize more lending, and thus more access to higher education If so, that is a classic intellectual mistake that comes from not understanding any Economics. If you increase demand by pumping out extra education dollars to students, and the supply doesn't increase accordingly, all you've done is raise prices and give the suppliers a huge windfall profit. Why the supply of college spots doesn't respond to a demand increase, like most goods and services do, is an interesting question!

mamon 7y ago

>> I'm still left wondering- what is the reason that bankruptcy exists at all. Because society decided that people should have a way out of bad financial situation they've gotten into, quite often for reasons beyond their control (e.g. car accident that leaves them unable to work for a long time, and with huge medical bill to pay).

ethbro 7y ago
Aka preventing debt slavery.
chrisseaton 7y ago
> car accident that leaves them unable to work for a long time, and with huge medical bill to pay Lol society should have decided to go with out-of-work benefits and free-at-the-point-of-use healthcare instead. It'd be better for the creditors as well who wouldn't get left hanging!
- martin_a 7y ago
  Free healthcare? Where would that end? In something like communist Europe? Beware of that! /satire

rayiner 7y ago

Student loans are unlike nearly any other loan. First, the government is the lender for almost all student loans. Second, the government makes loans almost without assessing creditworthiness. Even people with extremely bad credit can get hundreds of thousands of dollars in student loans. Third, the government has an income based repayment system for student loans. Bankruptcy protection is a general mechanism for helping people move past debt. (The theory is that it’s better to pay claims for pennies on the dollar and resolve everything at once than to have debt hanging over the person indefinitely.) But student loans are different enough that it’s entirely reasonable for the government to decide a different regime should apply to student loans.

ganstyles 7y ago
The first two points don't seem to have anything to do with _why_ bankruptcy shouldn't be used for student loans. The government makes plenty of loans and to my knowledge all of those other classes of gov backed loans are dischargeable. And in any case many student loans are in fact not government but private, see, e.g. SoFi type outfits. Though I don't know the percentage of gov:private student loans offhand. Your third point seems to suggest you may not be fully aware of the parameters of income based repayment and its many gotchas. People who rely on it, through no fault of their own, regularly find themselves paying 10x their monthly payment through paperwork malfunctions. Additionally many of the benefits of taking jobs that qualify for perks, like loan forgiveness, under income based repayment systems are out the window under the DeVos regime. Based on this, I really don't see how your conclusions follow from your premises. If anything, your argument works against you. People who are allowed to take out hundreds of thousands of no collateral loans at ages like 18 should be able to move past them through bankruptcy. It's downright predatory.
- godelski 7y ago
  > The first two points don't seem to have anything to do with _why_ bankruptcy shouldn't be used for student loans. The reason is so that these loans are low risk (no risk?) to those providing the loans. This was done in an effort to provide everyone that wanted an education but couldn't afford it could get a loan. Obviously the mechanism used to reach the goal here backfired and people have just doubled down on the bad decision.

Sangama34 7y ago

Any average economist (irrespective of political leanings) would have predicted these secondary consequences of not allowing students to file for bankruptcy.

deogeo 7y ago

> The effect of making these loans exempt from bankruptcy just inflates their value which puts colleges into a position where they can inflate their fees - safe in the knowledge that banks will lend practically anything and students have very little choice. While this is (was?) especially true for student loans, it applies to all loans - their availability increases prices, because there's more cash in the market. Forcing people to take loans, to the benefit of lenders.

strangescript 7y ago

Graduate high school, take student loan, get a bunch of junk credit cards, go on a spending spree, have fun in college and maybe get a degree out of it. At the end of it, declare bankruptcy. You ruin your credit, but you didn't really have any to begin with, and you end up with a degree that can't be taken away. Get a job and by the time you hit your 30s you will be right as rain. (still a bad idea, but its the thought process)

Sangama34 7y ago
Not always. If students are allowed to declare bankruptcy from student loans than banks can apply a more realistic risk models to such lines of credit. Students will then have to either pay very high rate of interest or will have to go out their way to prove their financial responsibility. Banks will then be able to create sophisticated models to figure out which young people are responsible enough and who are not. This will incentivize responsible behavior from students as well as institutes and not to mention a competition to reduce fees. Not to mention, this model will also ensure the folks who should not be in college or will not benefit from it will not be able to go to college. I think this is where politicians disagreed and came with the completely wrong policies with perfectly predictable bad outcomes.

chiefalchemist 7y ago

But that's the dark little secret of the proliferation of student loans. That is, they've been instrumental in driving up the cost of higher edu. Making loans more available increases demand. They've also allowed the edu instutions to raise prices because the market can bear those increases. This is the 2000's housing bubble all over again.

Spooky23 7y ago

Medical and Law school students widely abused bankruptcy for student loans in the 60s and 70s. My recollection is that this became even more common as rates went up, (a mortgage in the late 70s could be 15%) prompting the changes in the law.

sintaxi 7y ago

The reason is that an education can't be repossessed and sold to another person. Also, a student typically doesn't have any other assets.

kube-system 7y ago
Student loans being unsecured debt has nothing to do with their dischargeability. Plenty of other unsecured debt is dischargeable, like credit cards.

Trias11 7y ago

Student debt is one of the biggest assets of US Government. Obviously they're not interested to get people off the hook.

LorenPechtel 7y ago

Can you say "strategic bankruptcy"? A new graduate with a high priced degree is almost certainly better off declaring chapter 7 the day they graduate. If you want student loans to exist that option must be denied.