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Is it true that you cannot default on a collage loan in US? How is it legal? Isn't it the root cause of the problem. (I'm not American, my knowledge is limited

by lukasm 11y ago

Is it true that you cannot default on a collage loan in US? How is it legal? Isn't it the root cause of the problem. (I'm not American, my knowledge is limited)

wyclif 11y ago
You can't discharge a college loan via bankruptcy. You can certainly default on the same loan, but those are two different things.
smil 11y ago
IIRC student loan debt was made non-dischargeable by bankruptcy when the government started guaranteeing all student loans. This is the reason why tuition has been increasing so dramatically, because for the banks, making a loan is free of risk. Because supply of money is basically unlimited, schools can increase tuition each year.
- jimhefferon 11y ago
  > Because supply of money is basically unlimited, schools can increase tuition each year. While I am not an expert on the matter, I do work at a college and in my experience there is more to it than that. Just to name one, when I went to school in the late 70's we lived in cinder block dorms and ate in a cafeteria that basically had one dinner choice, while if we offered that today students would not come here. All that stuff costs money, also. Plenty of blame to go around.
  - bryondowd 11y ago
    Room and board is generally separate from tuition. The college I went to charged obscene amounts for it's dorms. You could get a studio apartment to yourself twice the size within 15 minutes of campus for about the same price as having to share a tiny dorm room. The on-campus apartments were worse, since the amount the four people sharing an apartment were paying combined would be enough to rent a good sized house nearby with money left over. I'm sure they get enough charging for the rooms that it isn't affecting tuition price.
Happydayz 11y ago
You can't discharge a student loan in bankruptcy. This makes sense. If you borrow money to purchase a car or a home the lender always has the option of repossessing the goods as a last resort. You cannot legally repossess someone's human capital. So the current law is set to avoid the moral hazard of someone borrowing $100k in student loans and then declaring bankruptcy right after graduation.
- analog31 11y ago
  But it promotes the moral hazard of the bank offering you a loan when they know that the human capital is likely to be worthless.
- dragonwriter 11y ago
  > You can't discharge a student loan in bankruptcy. This makes sense. If you borrow money to purchase a car or a home the lender always has the option of repossessing the goods as a last resort. Non-secured debt of other kinds are generally dischargeable in bankruptcy, so that principal isn't generally applied outside of student loans.
thomaskcr 11y ago
In addition to what others said -- it gives the ability of someone with no financial history the ability to get a loan. I would be very fortunate, my parents are both capable and willing to cosign a loan with me -- but there are a lot of people not in that position. This is another way of "evening the playing field" a bit. Otherwise unless your parents or someone related to you had good financial standing and were willing to cosign for your loan you'd have no shot at getting one.

by lukasm 11y ago

Is it true that you cannot default on a collage loan in US? How is it legal? Isn't it the root cause of the problem. (I'm not American, my knowledge is limited)

wyclif 11y ago

You can't discharge a college loan via bankruptcy. You can certainly default on the same loan, but those are two different things.

smil 11y ago

IIRC student loan debt was made non-dischargeable by bankruptcy when the government started guaranteeing all student loans. This is the reason why tuition has been increasing so dramatically, because for the banks, making a loan is free of risk. Because supply of money is basically unlimited, schools can increase tuition each year.

jimhefferon 11y ago
> Because supply of money is basically unlimited, schools can increase tuition each year. While I am not an expert on the matter, I do work at a college and in my experience there is more to it than that. Just to name one, when I went to school in the late 70's we lived in cinder block dorms and ate in a cafeteria that basically had one dinner choice, while if we offered that today students would not come here. All that stuff costs money, also. Plenty of blame to go around.
- bryondowd 11y ago
  Room and board is generally separate from tuition. The college I went to charged obscene amounts for it's dorms. You could get a studio apartment to yourself twice the size within 15 minutes of campus for about the same price as having to share a tiny dorm room. The on-campus apartments were worse, since the amount the four people sharing an apartment were paying combined would be enough to rent a good sized house nearby with money left over. I'm sure they get enough charging for the rooms that it isn't affecting tuition price.

Happydayz 11y ago

You can't discharge a student loan in bankruptcy. This makes sense. If you borrow money to purchase a car or a home the lender always has the option of repossessing the goods as a last resort. You cannot legally repossess someone's human capital. So the current law is set to avoid the moral hazard of someone borrowing $100k in student loans and then declaring bankruptcy right after graduation.

analog31 11y ago
But it promotes the moral hazard of the bank offering you a loan when they know that the human capital is likely to be worthless.
dragonwriter 11y ago
> You can't discharge a student loan in bankruptcy. This makes sense. If you borrow money to purchase a car or a home the lender always has the option of repossessing the goods as a last resort. Non-secured debt of other kinds are generally dischargeable in bankruptcy, so that principal isn't generally applied outside of student loans.

thomaskcr 11y ago

In addition to what others said -- it gives the ability of someone with no financial history the ability to get a loan. I would be very fortunate, my parents are both capable and willing to cosign a loan with me -- but there are a lot of people not in that position. This is another way of "evening the playing field" a bit. Otherwise unless your parents or someone related to you had good financial standing and were willing to cosign for your loan you'd have no shot at getting one.