4 ms·

It works in America because student loans are non-dischargeable. It doesn't matter if you are penniless and have filed for legal bankruptcy, the lender can stil

by kyllo 14y ago

It works in America because student loans are non-dischargeable. It doesn't matter if you are penniless and have filed for legal bankruptcy, the lender can still keep coming after you and even garnish your wages for the rest of your life. It is extremely difficult to escape an American student loan obligation, basically you will pay it off, with interest, unless you die first. This system is what enables American universities to put such high price tags on education, and also what allows the students to actually get approved for such large loans. Almost all of the risk is assumed by the borrower. Even if the graduate cannot find sufficiently gainful employment to repay the loan, the lender still eventually gets a return on their investment. If they were forced to take a loss, that would cause lenders to make their approval processes more stringent, and would limit most students' ability to attend these universities. So it becomes a political issue because no politician wants to be perceived as being responsible for limiting students' access to higher education. The fact is that the risks and costs must be absorbed by someone--under the current system it is the students' future selves. (My personal opinion is that this is a form of modern indentured servitude and should be outlawed.)

smsm42 14y ago
Dischargeability does not matter if the person has no income to pay it. You can't take 2K per month form a person that earns 2.5K per month before taxes. In fact, unless you have six-figure salary, 2K per month will bankrupt you very quickly, since you also need to pay for shelter, food, utilities, etc. and with income that allows to pay 2K per month you will get no welfare. So repayment of the loan is linked to the person having substantial income. Actually, as far as I know most of education loans are now government loans, so there is zero incentive of changing the requirements, and zero incentive to reduce the costs. If these loans are losing money, we can just tax the rich and have more money, can't we?
- kyllo 14y ago
  The non-dischargeability of student loans matters because it significantly reduces the lender's risk of taking a loss. Even if the student doesn't have the income to service the loan debt within 5-10 years after graduating, the lender will still recoup their investment, with interest, if the person ever makes enough income to pay it down in their entire lifetime. And the lender is near the front of the line for collections (just behind things like the IRS and child support). So the only case in which the lender takes a loss on their investment is if the borrower dies before they can pay it off. In the aggregate this is a very small risk. Student loans are not all government loans, maybe 70% are Federal Student Aid loans. Both FSA loans and subsidized private loans are subsidized by the government, which only means that the government pays the portion of the interest that would be due while the student is still in school. But it does not matter whether the lender is the government or a bank--the loans still carry an interest rate and are still non-dischargeable. The government cannot "just tax the rich" to pay off students' loan balances, the government does not work that way.
  - sjg007 14y ago
    The gov't ends up buying the deliquent loan in full and then they chase you down. Extreme hardship is the only way to get it dismissed and that is very unlikely. They do have a 20 year minimum payment plan and then will forgive the remainder. Not sure if that becomes taxable after the fact. They also have principal forgiveness plans for government or teaching service.
    - kyllo 14y ago
      Forgiven debt is taxable as ordinary income and the lender will send you a form 1099 for it, but in the case of principal forgiveness plans where "you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation," that is not taxable as income. Source: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation- http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt...

by kyllo 14y ago

smsm42 14y ago

Dischargeability does not matter if the person has no income to pay it. You can't take 2K per month form a person that earns 2.5K per month before taxes. In fact, unless you have six-figure salary, 2K per month will bankrupt you very quickly, since you also need to pay for shelter, food, utilities, etc. and with income that allows to pay 2K per month you will get no welfare. So repayment of the loan is linked to the person having substantial income. Actually, as far as I know most of education loans are now government loans, so there is zero incentive of changing the requirements, and zero incentive to reduce the costs. If these loans are losing money, we can just tax the rich and have more money, can't we?

kyllo 14y ago
The non-dischargeability of student loans matters because it significantly reduces the lender's risk of taking a loss. Even if the student doesn't have the income to service the loan debt within 5-10 years after graduating, the lender will still recoup their investment, with interest, if the person ever makes enough income to pay it down in their entire lifetime. And the lender is near the front of the line for collections (just behind things like the IRS and child support). So the only case in which the lender takes a loss on their investment is if the borrower dies before they can pay it off. In the aggregate this is a very small risk. Student loans are not all government loans, maybe 70% are Federal Student Aid loans. Both FSA loans and subsidized private loans are subsidized by the government, which only means that the government pays the portion of the interest that would be due while the student is still in school. But it does not matter whether the lender is the government or a bank--the loans still carry an interest rate and are still non-dischargeable. The government cannot "just tax the rich" to pay off students' loan balances, the government does not work that way.
- sjg007 14y ago
  The gov't ends up buying the deliquent loan in full and then they chase you down. Extreme hardship is the only way to get it dismissed and that is very unlikely. They do have a 20 year minimum payment plan and then will forgive the remainder. Not sure if that becomes taxable after the fact. They also have principal forgiveness plans for government or teaching service.
  - kyllo 14y ago
    Forgiven debt is taxable as ordinary income and the lender will send you a form 1099 for it, but in the case of principal forgiveness plans where "you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation," that is not taxable as income. Source: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation- http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt...