5 ms·

Am I the only one that thinks it's backwards that student loans can't be discharged? It should be one of the only kinds of loans you can discharge. Why would yo

Am I the only one that thinks it's backwards that student loans can't be discharged? It should be one of the only kinds of loans you can discharge. Why would you as a nation want to saddle your youngest most ambitious and most valuable people?

300bps 5y ago
Because if you allow bankruptcy to discharge them that would make the interest rate 3-4x what it is today and people couldn’t afford it.
- rdtwo 5y ago
  This is a good thing not a bad one. Colleges would have to trim down prices significantly
alisonkisk 5y ago
It sounds like you are saying that education should be funded by the state. Which is a fine idea, much better than playing crazy financing games that turn education into (US) healthcare /insurance. But also, the ambitious and valuable people are the ones who can pay back their loans.
landemva 5y ago
If you look at the ramp in college costs, prices started climbing immediately after Clinton signed this into law. It was a gift to the bankers who get to make loans on a higher priced product and the loans are difficult to not repay because they typically get parents to co-sign.
- sjg007 5y ago
  I think you mean Bush. It was GW who did this.
  - mdorazio 5y ago
    Nope. 1998 - it was Clinton [1]. [1] https://thehill.com/blogs/congress-blog/economy-budget/283625-how-the-clinton-administration-made-it-harder-on-student https://thehill.com/blogs/congress-blog/economy-budget/28362...
coliveira 5y ago
Student loans are a gold mine for banks. There is no other kind of loan that cannot be discharged on bankruptcy. Think about business loans: every business loan can be discharged on bankruptcy by definition.
- mandevil 5y ago
  The ACA (Obamcare) revamped student loans such that banks no longer got government guarantees for loans they originated. (The GOP unanimously opposed this "Government Takeover" of the student loan system.) This has created a system where the Department of Education makes the vast majority of loans, and offers other companies a small fee for servicing the loans, but they don't originate or profit from them directly- that's all the USG. Private lenders do try and cherry-pick the very best borrowers out of the federal system; my wife graduated 5 years ago with a doctorate in Pharmacy and >100,000 in debt, and she got many advertisements to refinance her education loans because she was a pharmacist who was paying enough to finish off her loans in 5 years- she was a great bet to pay off her loans in total, so SoFi, Navient and a whole bunch of their competitors wanted her to refinance through them, but only the DoE was interested in paying for her at the beginning of grad school.
  - coliveira 5y ago
    But even without this guarantee, this doesn't change the fact that the loan cannot be discharged during bankruptcy (at least not easily). This make such loans much more draconic than business loans.
Panzer04 5y ago
Because then they simply wouldn’t exist. If they did, interest rates would be stratospheric, with most of the money coming from the successful borrowers subsidising everyone else.
- sjg007 5y ago
  This is not true.
  - kiklion 5y ago
    What’s the difference between a student loan that can be discharged in bankruptcy and a personal loan? Sure, the student loan can only go to a school but neither has any collateral which makes them the most similar loan products. So go get any 18 year old to try to get a $20,000 personal loan without any credit and see what the rates are and if lenders would even give it to them.
    - sjg007 5y ago
      There are plenty of alternative solutions.
mandevil 5y ago
In the 1970's a couple of doctors declared bankruptcy while they were residents (and thus getting paid peanuts) because of how large their school debts were and how small their income were at that moment. Since the law didn't include "most likely in the future you will be making a lot of money" as one of the factors they then got very good cram-downs of their debts and voila, soon were very wealthy doctors. The handful of people who did this attracted media coverage, and the Government stepped in. There was an immediate patch to this, and then longer term solutions as well. The basic, Econ101 level thought behind this is that if you go into debt to buy a car or a house or anything tangible and the debt proves too much the bank can take those assets back if you declare bankruptcy.[1] But how does that work for a degree or the knowledge in your head? What can they take from that? Another issue is fairness. If student loans paid attention to how likely they were to be paid back then, as a first approximation, they would only be offered to people with above average income attending elite schools and poor people would be cut out of college more completely than they currently are- and they would pay much more attention to your degree, school etc. Everyone who goes to a Ivy would get loans, many people who go to regional schools wouldn't, because they aren't good bets to pay off the loans (people who graduate, as a first approximation, pay off loans; people who drop out don't, and community colleges and regional schools which focus on non-traditional students who have real lives already have much higher drop-out rates than Harvard- this is different in practice because of Pell Grants but that's a different issue). The reason that they are offered student loans is because the government guarantees them, so they have lower interest rates (yes its higher than a mortgage, but its much lower than a credit card or payday loan, which are the other unsecured loans the average person has access to), ignore your school, major, etc. and are available to every US citizen. But if the government guarantees the loan, then isn't someone who defaults on this unsecured debt ripping off the American taxpayer? Easy to see how this can be gamed and the student portrayed as the bad guy, because of how the system works. Even those doctors at the beginning deserve a better system, but Americans first instinct wasn't 'let's fix this so that the doctors don't go into such debt' it was "lets make sure those cheaters don't profit off of ripping off the taxpayer." And that instinct is how we ended up here. [1]: Obviously if you buy a new car the debt will be greater than the value of the car (because the car loses so much value when you drive it off the lot) but they have fancy economic models to account for that, and the house has an appraisal to prove that it can be sold for more than they are loaning out.
dragonwriter 5y ago
> Why would you as a nation want to saddle your youngest most ambitious and most valuable people? That's why student loans shouldn't exist; if the federal government is going to subsidize higher education, it should be by grants, student out-of-pocket cost limits tied to accepting federal research and other funding, and other non-loan mechanisms, not forcing students into debt. (Private student loans, OTOH, should be dischargeable the same as other unsecured debt, and if lenders don't like it they don't have to issue loans.)
nicoffeine 5y ago
Because people in debt are easier to control. It's the same reason we are the only nation that does not provide healthcare as a right. Millions of people would quit tomorrow if they were sure their kids would have access to healthcare. For reference, visit any nation with these rights. You will find more small businesses, fewer franchised chains, and happier people.
- sjg007 5y ago
  People might be happier but there are not more small businesses. But I do agree that health insurance is a big part of it. Less since the ACA passed though since you can get health insurance at any income level now.
TigeriusKirk 5y ago
If they're that ambitious and that valuable, they should have no problem paying back the loans. That's the whole thesis behind making the loans in the first place.
- colordrops 5y ago
  They are ambitious and valuable as a class of people. Not every single person succeeds financially, and not everyone takes up work that makes a ton of money.
hooande 5y ago
It's because the debt is owed directly to the US Treasury, just like debts to the IRS. You can't discharge any debt you owe to the federal government, to my knowledge. Same reason they can collect the debt using wage garnishments and property liens, methods that aren't available to most creditors. This is only explained to some students (it was to me). But no one plans on not having money in the far future, regardless of what warnings they receive
- dragonwriter 5y ago
  > It's because the debt is owed directly to the US Treasury, No, it's not; it predates direct loans existing, much less being the only form of federal student loan, and applies to private, non-government-guaranteed student loans, as well. > Same reason they can collect the debt using wage garnishments and property liens, methods that aren't available to most creditors. Property liens and garnishment are available to most creditors after securing a judgement against a debtor. > This is only explained to some students (it was to me). It’s good that only some students are subject to that complete fabrication, though it would be better if none were.
  - hooande 5y ago
    Such pedantry. The Treasury is still accountable for federally backed loans. And you still can't discharge them like you can other loans. Private loans were included in this later, for market purposes as I understand. The government does not need a court judgement against a debtor before garnishing wages, withholding returns, etc. This is why the majority of these actions are for child support and student debt, not for consumer debt. The rules for student debt repayment started with the premise that a different process was in use for money owed to (or backed by) the federal government

300bps 5y ago

Because if you allow bankruptcy to discharge them that would make the interest rate 3-4x what it is today and people couldn’t afford it.

rdtwo 5y ago
This is a good thing not a bad one. Colleges would have to trim down prices significantly

alisonkisk 5y ago

It sounds like you are saying that education should be funded by the state. Which is a fine idea, much better than playing crazy financing games that turn education into (US) healthcare /insurance. But also, the ambitious and valuable people are the ones who can pay back their loans.

landemva 5y ago

If you look at the ramp in college costs, prices started climbing immediately after Clinton signed this into law. It was a gift to the bankers who get to make loans on a higher priced product and the loans are difficult to not repay because they typically get parents to co-sign.

sjg007 5y ago
I think you mean Bush. It was GW who did this.
- mdorazio 5y ago
  Nope. 1998 - it was Clinton [1]. [1] https://thehill.com/blogs/congress-blog/economy-budget/283625-how-the-clinton-administration-made-it-harder-on-student https://thehill.com/blogs/congress-blog/economy-budget/28362...

coliveira 5y ago

Student loans are a gold mine for banks. There is no other kind of loan that cannot be discharged on bankruptcy. Think about business loans: every business loan can be discharged on bankruptcy by definition.

mandevil 5y ago
The ACA (Obamcare) revamped student loans such that banks no longer got government guarantees for loans they originated. (The GOP unanimously opposed this "Government Takeover" of the student loan system.) This has created a system where the Department of Education makes the vast majority of loans, and offers other companies a small fee for servicing the loans, but they don't originate or profit from them directly- that's all the USG. Private lenders do try and cherry-pick the very best borrowers out of the federal system; my wife graduated 5 years ago with a doctorate in Pharmacy and >100,000 in debt, and she got many advertisements to refinance her education loans because she was a pharmacist who was paying enough to finish off her loans in 5 years- she was a great bet to pay off her loans in total, so SoFi, Navient and a whole bunch of their competitors wanted her to refinance through them, but only the DoE was interested in paying for her at the beginning of grad school.
- coliveira 5y ago
  But even without this guarantee, this doesn't change the fact that the loan cannot be discharged during bankruptcy (at least not easily). This make such loans much more draconic than business loans.

Panzer04 5y ago

Because then they simply wouldn’t exist. If they did, interest rates would be stratospheric, with most of the money coming from the successful borrowers subsidising everyone else.

sjg007 5y ago
This is not true.
- kiklion 5y ago
  What’s the difference between a student loan that can be discharged in bankruptcy and a personal loan? Sure, the student loan can only go to a school but neither has any collateral which makes them the most similar loan products. So go get any 18 year old to try to get a $20,000 personal loan without any credit and see what the rates are and if lenders would even give it to them.
  - sjg007 5y ago
    There are plenty of alternative solutions.

mandevil 5y ago

In the 1970's a couple of doctors declared bankruptcy while they were residents (and thus getting paid peanuts) because of how large their school debts were and how small their income were at that moment. Since the law didn't include "most likely in the future you will be making a lot of money" as one of the factors they then got very good cram-downs of their debts and voila, soon were very wealthy doctors. The handful of people who did this attracted media coverage, and the Government stepped in. There was an immediate patch to this, and then longer term solutions as well. The basic, Econ101 level thought behind this is that if you go into debt to buy a car or a house or anything tangible and the debt proves too much the bank can take those assets back if you declare bankruptcy.[1] But how does that work for a degree or the knowledge in your head? What can they take from that? Another issue is fairness. If student loans paid attention to how likely they were to be paid back then, as a first approximation, they would only be offered to people with above average income attending elite schools and poor people would be cut out of college more completely than they currently are- and they would pay much more attention to your degree, school etc. Everyone who goes to a Ivy would get loans, many people who go to regional schools wouldn't, because they aren't good bets to pay off the loans (people who graduate, as a first approximation, pay off loans; people who drop out don't, and community colleges and regional schools which focus on non-traditional students who have real lives already have much higher drop-out rates than Harvard- this is different in practice because of Pell Grants but that's a different issue). The reason that they are offered student loans is because the government guarantees them, so they have lower interest rates (yes its higher than a mortgage, but its much lower than a credit card or payday loan, which are the other unsecured loans the average person has access to), ignore your school, major, etc. and are available to every US citizen. But if the government guarantees the loan, then isn't someone who defaults on this unsecured debt ripping off the American taxpayer? Easy to see how this can be gamed and the student portrayed as the bad guy, because of how the system works. Even those doctors at the beginning deserve a better system, but Americans first instinct wasn't 'let's fix this so that the doctors don't go into such debt' it was "lets make sure those cheaters don't profit off of ripping off the taxpayer." And that instinct is how we ended up here. [1]: Obviously if you buy a new car the debt will be greater than the value of the car (because the car loses so much value when you drive it off the lot) but they have fancy economic models to account for that, and the house has an appraisal to prove that it can be sold for more than they are loaning out.

dragonwriter 5y ago

> Why would you as a nation want to saddle your youngest most ambitious and most valuable people? That's why student loans shouldn't exist; if the federal government is going to subsidize higher education, it should be by grants, student out-of-pocket cost limits tied to accepting federal research and other funding, and other non-loan mechanisms, not forcing students into debt. (Private student loans, OTOH, should be dischargeable the same as other unsecured debt, and if lenders don't like it they don't have to issue loans.)

nicoffeine 5y ago

Because people in debt are easier to control. It's the same reason we are the only nation that does not provide healthcare as a right. Millions of people would quit tomorrow if they were sure their kids would have access to healthcare. For reference, visit any nation with these rights. You will find more small businesses, fewer franchised chains, and happier people.

sjg007 5y ago
People might be happier but there are not more small businesses. But I do agree that health insurance is a big part of it. Less since the ACA passed though since you can get health insurance at any income level now.

TigeriusKirk 5y ago

If they're that ambitious and that valuable, they should have no problem paying back the loans. That's the whole thesis behind making the loans in the first place.

colordrops 5y ago
They are ambitious and valuable as a class of people. Not every single person succeeds financially, and not everyone takes up work that makes a ton of money.

hooande 5y ago

It's because the debt is owed directly to the US Treasury, just like debts to the IRS. You can't discharge any debt you owe to the federal government, to my knowledge. Same reason they can collect the debt using wage garnishments and property liens, methods that aren't available to most creditors. This is only explained to some students (it was to me). But no one plans on not having money in the far future, regardless of what warnings they receive

dragonwriter 5y ago
> It's because the debt is owed directly to the US Treasury, No, it's not; it predates direct loans existing, much less being the only form of federal student loan, and applies to private, non-government-guaranteed student loans, as well. > Same reason they can collect the debt using wage garnishments and property liens, methods that aren't available to most creditors. Property liens and garnishment are available to most creditors after securing a judgement against a debtor. > This is only explained to some students (it was to me). It’s good that only some students are subject to that complete fabrication, though it would be better if none were.
- hooande 5y ago
  Such pedantry. The Treasury is still accountable for federally backed loans. And you still can't discharge them like you can other loans. Private loans were included in this later, for market purposes as I understand. The government does not need a court judgement against a debtor before garnishing wages, withholding returns, etc. This is why the majority of these actions are for child support and student debt, not for consumer debt. The rules for student debt repayment started with the premise that a different process was in use for money owed to (or backed by) the federal government