I feel like I have not really heard a compelling reason why student debt should not be dischargeable thru bankruptcy like (afaik) all other forms of debt. I am curious what the ramifications would be if higher education institutions had to (in some form) co-sign the debt being issued.
I do get that not all education should be purely for economic reasons, but as an autodidact I feel that "learning for the sake of learning" does not need to come with the prices that people are paying for degrees.
> I feel like I have not really heard a compelling reason why student debt should not be dischargeable thru bankruptcy like (afaik) all other forms of debt.
According to Reddit [1] it was to discourage students from immediately declaring bankruptcy upon graduation.
I don't see why they couldn't have put a time limit on it though, if that was the reason. Say you can't declare bankruptcy for 7 years after you leave school.
The full reason is that preventing bankruptcy is the only way to keep interest rates low and make the loans widely available.
If bankruptcy was allowed then the obvious play would be to take the loan, max out credit cards right before graduation, then declare bankruptcy before you get your first job.
Lenders would respond by increasing interest rates dramatically and restricting loans to those who had assets. This would basically turn into loans being for people with wealthy parents or having eye-watering interest rates.
> The full reason is that preventing bankruptcy is the only way to keep interest rates low and make the loans widely available
"They are eating the dogs and cats." It simply isn't true. I got my student loans a quarter century ago. Back then the loans were dischargeable and low. My loans came in at like 4% interest at the time.
It is propaganda that it was a widespread problem and the "solution" was to legally protect banks from risk. Then rates exploded and regulatory capture kept people locked in.
In 1978 loans were made non dischargeable for the first 5 years and extended to 7 years in 1990. In 1998 the waiting period was eliminated making them non dischargeable in perpetuity. Private loans were made non dischargeable in 2005.
So while student loans were technically dischargeable approx 28 years ago there were some big caveats.
Fact: they were dischargeable. Fact: there was no crisis else rates would have already factored in. Else the argument is they were losing money overall. They wouldn't do that for literal decades.
Fact: after the loans were no longer dischargeable, banks were guaranteed their rates and stopped being competitive with them and rates increased.
It is impossible that you paid 4% interest on (easily) dischargeable student loans. Any lender would be insane to do that with zero risk premium, and the risk would be substantial given it’s an unsecured loan. Possibly there was a clause stating something like “if you are permanently disabled and unable to work forever, you can have this loan discharged.” That’s not what I would consider dischargeable, it’s just the lender acknowledging they can’t squeeze blood from a stone and writing of the debt lets them recover a portion of the money they lent via writing of off.
You are simply misremembering. If it’s true, scan and upload the loan agreement. I just don’t believe it based on how lenders operate.
Loans are still dischargeable under certain conditions.
You claimed that "a quarter century ago" student loans could be discharged in bankruptcy, but that's not really true either. The restrictions started in 1978 with waiting periods and those waiting periods were eliminated in 1998 for government loans and shortly after that for private loans.
The period in which you got this 4% loan was within the period where bankruptcy protections were in place, not before it.
If a non-negligible proportion of people would discharge their student loans in bankruptcy then the rates would have to increase by a non-negligible amount to make up for it.
If a negligible proportion of people would discharge the loans as you suggest then the need to do it is the "eating the dogs and cats" in this case, since it doesn't matter a whole lot if nobody can do something nobody would have done anyway.
Which is it? Greed by banks. They were functionally fine up through the late nineties. The rules changed because banks wanted all their money instead of nearly all their money.
This is not market economics. This is regulatory capture. Market economics suggests they were more market based when there was risks to banks. The risks are removed and they can print out debt.
> Which is it? Greed by banks. They were functionally fine up through the late nineties.
Except the regulations for student loan discharge started with government loans, not private loans.
Congress restricted discharge of government loans first, because they were trying to protect the continued existence of the program and the low interest rates.
You've had incorrect facts all throughout this thread and you're refusing to acknowledge all of the people trying to bring real facts into the discussion.
> The rules changed because banks wanted all their money instead of nearly all their money.
You're not understanding how interest rates work.
Banks aren't charities. They don't give people money and hope that it gets paid back. They set the interest rate in accordance with the risk.
There are two ways this can work:
1. The debts are easy to discharge in bankruptcy. Banks do their analyses, estimate how many will be lost ot bankruptcy, and increase interest rates until the net result makes lending justifiable.
2. The debts are hard to discharge. The analysis shows a higher recovery rate. They can lower interest rates because the risk of default is down.
There is not a 3rd scenario where banks keep interest rates low and eat the losses from bankruptcy.
If you think that a business wanting "all of their money" is greed then you don't understand how business works. If loans became a money-losing proposition, they just wouldn't loan the money! Though honestly there are some good arguments that we shouldn't be lending money to people who might not pay it back, but there are a lot of people who dislike this idea that we should only give loans to people pursuing careers that pay well.
In all the cases you mentioned, the banks have risk. Normal lending falls into normal economic rules. We've (effectively) removed the risk for banks with education loan. Wanting "all their money" is a translation of "accept no risk." The risk is required for economic rules to apply.
Why should banks not accept risk at all? Why was 7 years protection not effective? I have seen no evidence that the previous protections banks had were insufficient.
"No risk" is not a thing. For example, someone could borrow $250,000 from the bank and then get hit by a bus the day after graduation.
Moreover, interest isn't just about risk, it's the time value of money. If you put money in a CD at a major bank which is FDIC insured, the risk of you losing that money is as close to zero as anything reasonably gets, but you still get paid interest.
The risk premium is on top of that. And the higher the risk, the more interest people have to pay.
> It simply isn't true. I got my student loans a quarter century ago. Back then the loans were dischargeable and low.
The Bankruptcy Reform Act which introduced restrictions on discharging student loans was introduced in 1978, a full quarter century before your experience.
Loan dischargeability was further restricted in subsequent years.
If you got your loans a quarter century ago, you were deep into the time when it was hard to discharge loans. You are remembering wrong.
Good catch, sorry. Was trying to put it in terms of the parent comment's "quarter century ago" claim. They didn't realize that the student loan protections had gone in a full quarter century prior to their experience, which contributed to their 4% rate.
If that was an actual problem wouldn't people be doing it without the college already? When I was in my early 20s I got non-stop credit offers and I could have easily pulled out tens of thousands in crappy debt.
This has to just be an IQ gap or something. Is it actually impossible for you to view agreements from different perspectives?
From the individuals' perspective, overusing uncollateralized debt to be discharged is a good deal. That loss is offset by the creditor by issuing higher interest to unsecured credit lines because people can default on their debts. From the creditor's perspective, it's risk adjusted for people who default.
It just logically follows. I can't help you understand past this.
> If that was an actual problem wouldn't people be doing it without the college already?
I see you haven't heard of /r/churning. Although it doesn't involve bankruptcy, because then the sheriff comes down and takes your property from you...
Churning is not about taking out debt and not paying it off. It’s about signing up for credit cards and spending money to earn rewards points, and paying off the balance soon to avoid owing interest.
To be fair, there would likely be fewer total slots for college education in aggregate. However, this probably isn't a bad thing as the marginal college degree probably isn't a practical one.
That answer is still begging the question of why it matters that bankruptcy rates stay low.
It's obvious that bankruptcy costs the lender, but how that cost gets absorbed is very important here. A mortgage or a car loan are secured debts, where the lender can repossess and sell the collateral, to pay off most or all of the losses if the borrow defaults on the loan. A student loan is an unsecured debt, so any defaults have to come out of the interest of the rest of the borrowers serviced by that loan program.
The more borrowers default on their payments, the higher the interest rate is needed to cover the write-downs. Without any protections against defaulting, interest rates would have to be near those of credit cards, while limiting when student loans can be discharged limits how much needs to be written down, which keeps interest rates lower.
Higher interest rates would not only make student loans cost more, it would also reduce their availability and increase the default rate, which could create positive feedback, causing the rates to increase significantly faster than inflation. Combine that with incentivization for college attendance already causing tuition itself to increase significantly faster than inflation, which itself makes student loans increasingly necessary, allowing student loans to be discharged during bankruptcy could have compounding effects on the fragile system that currently props up college attendance rates.
That still leaves the question of why the government should incentivize a significant portion of their constituency to be in college, (more than 1 out of every 13 US adults are currently enrolled) but I'll have have leave that question for politicians or maybe even voters.
The positive feedback you're talking about depends on the degree in question. If the degree is economically worthless the interest rate will rise and tuition has to drop to make the degree affordable.
Otherwise you end up in this perverse situation where the consumer degree tuition will be priced as if they were economically productive, which ends up pricing out poor people.
> it was to discourage students from immediately declaring bankruptcy upon graduation.
Yes, this was a thing in (IIRC) the late 70s / early 80s, and the fed crackdown on the non-dischargeability of school loans in bankruptcy was enacted very quickly in response.
I myself got my bachelors in '79 and read about this idea and did not try it cos it was so incredibly unethical (and it sounded risky). In the words of the infamous Vince Lombardi, "Nice guys finish last."
They wanted to permit/compel all students to get loans. When you set the bar on the floor like that, you need to handle the obvious case of people who are given loans that they could never pay off normally.
In American tradition, it was handled with the worst possible compromise that would enrich already monied interests.
You would have to prove that you are unemployable to achieve any meaningful reduction in debt. For degrees that are demanded by the job market you wouldn't be able to declare bankruptcy and you would first have to make a reasonable attempt at paying off your loan.
Basically proving the point that the loan shouldn't have been given out in the first place.
If bankrupcy is allowed some reasonable number of years later (not sure if that is 7 or 10, but some reasonable time) then if your education worked out and you're in a good career path and maybe close to buying a home, etc, declaring bankrupcy would probably hurt more than help.
OTOH if you're still poor after those years and don't care about consequences of bankrupcy then maybe that's fair enough to wipe out the debt since the education clearly didn't provide value.
> declaring bankrupcy would probably hurt more than help.
It wouldn't help at all as you are typically forfeiting all but essential assets by declaring it. The only people who benefit are those with nothing to their name except perhaps the home they live in and the car they drive to work everyday.
A house and a car are an enormous amount of assets for someone 7 years out of college. Leaving bankrupts with "only" enough assets to be in the top few percent of their peers is hardly a hardship.
Bankruptcy must be filed with a court and the creditors get a say. You don’t just wake up and say “I declare bankruptcy!”. A judge would look at your income and tell you to get bent, or at best set up a payment plan. They aren’t going to let a financially solvent person get out of debt. Here’s a quick summary:
You can't really tell people that they just can't be bankrupt though. What are they supposed to do if they have debts they can't pay but they're not allowed to declare bankruptcy because they pinky swore they wouldn't do it seven years ago?
Yeah I had a big lol when I read “just don’t let people declare bankruptcy for 7 years after graduation” - how in the world could this be good public policy?
It was expressed in a strange way but I assume what they meant was that if the former student goes bankrupt within the 7-year period then the student loan is not cancelled.
Why would it be better to not allow the debt discharged ever? That is the current situation. 7 years as a limit is better policy than "you owe this forever no matter what"
Bankruptcy is such an alien concept. Adults took out consensual loans from another adult and now they get to just say oops "take backsies"?
It's one thing if you're in a crazy desperate situation and someone takes advantage of you, I could get that. But if you're not desperate and you took money from someone else and can't pay it back? Theft.
The rest is just how we manage to keep that low on an aggregate level in our society that takes care of our own - which we want to do.
The idea is that its better for society to hit the reset button, pay creditors what they can be paid out of liquidation, and potentially have a productive member of society instead of somebody with absolutely nothing left to lose and maybe some grudges.
They don't really "just get to say" that. Declaring yourself bankrupt is a fairly major thing that will have long-term consequences. It clearly isn't desirable to do casually, we don't see it often (at least not in the personal sense; businesses can be a bit different).
> It's one thing if you're in a crazy desperate situation and someone takes advantage of you
In that kind of situation, declaring bankruptcy is likely not going to help you so much. Those people are going to come after you anyway.
I think you sort of fundamentally misunderstand this. Bankruptcy isn't thievery - it's a solution for people who get themselves into a bad situation and don't have a way forward. Say you bought a house with a mortgage, the value of the house has now dropped for some reason so you have negative equity, and you lose your job and can't afford to make the repayments any more. What should happen? You don't have money to pay what you owe, and you can't get it because your total net worth is negative. Saying that's theft doesn't help the question of what to do - society doesn't benefit from dumping on that poor person any more.
Well the alternative is people do rational things like self emolate, self defenestrate, suicide, and familicide. During the ‘08 financial crisis I was reading horror stories of Spanish debtors topping themselves because financial fuckups in NYC, London, and Madrid caused a problem other people had to pay for.
> But if you're not desperate and you took money from someone else and can't pay it back? Theft.
Bankruptcy is a civil matter, not a criminal matter. Charging somebody with theft, whether appropriate or not, does not resolve the civil debt. So, they are convicted of theft and still haven't paid back their debt. Then what? Fine them? Seems pointless in a bankruptcy situation. Indentured servitude? Slavery is not ever a winning argument. Debtors' prison? That just shifts the indentured servitude to the state, has been tried extensively throughout history, and doesn't actually make things better. Bankruptcy as as solution acknowledges that the situation is unwinnable and starting over from nothing, with a public notice to others to be wary about extending credit, is likely the only way out.
I'm all for "learning for the sake of learning", but the federal government doesn't need to subsidize it. Losing federal aid is not the same as not permitting colleges to run the programs at all. Supply/demand is still alive and well.
You could say the same about all government programs, including pensions and defense. Yet somehow popularly-elected governments keep finding themselves maximizing public utility. A curious property indeed.
Also if they do subsidize it it should be in the form of public goods (libraries, publicly available research). There's some overlap there with loans to individuals but it's weak.
What would stop graduates from declaring bankruptcy early in their careers to discharge their debt, before they use their education to build a lifetime of earnings and assets?
Bankruptcy is still inconvenient. But mostly, people would be less able to get loans and then colleges would get to pick between reducing prices or having only a few rich students.
Because then the normal thing to do would be to graduate, declare bankruptcy when you have nothing to lose in life because you are just starting out, work for 7 years and you’re in the clear by your late 20s. Everyone would do it.
No, they wouldn't. Source: go back a couple decades, and student loans had low interest rates and were dischargeable in bankruptcy. It was an option. And, in fact, practically nobody did that.
Spherical cows. You are applying economic theory in a vacuum. Sure, we joked at the time we could just declare bankruptcy and keep the degree. However, show me sources showing that this was a real problem. It wasn't.
Simply, people were not playing the game that way in any serious way. I am pretty sure I have never met a single person who declared bankruptcy purely to avoid a student loan.
People might not do it for a $15k loan (accounting for inflation back then), but they definitely will for $100k today. School was much cheaper back then.
Maybe not everyone, but certainly lots of unethical people would do it, and there are lots of those. They'd post unbearably smug posts on LinkedIn about it too, calling everyone a sucker who didn't walk away from their $200k in student loans via bankrupcty.
The justification for student loans being exempt from bankruptcy is simply that there is no asset to be repossessed. Car loans, mortgages, and HELOCs are different. Credit cards have very high interest to pay for the higher risk. I guess we could have student loans with 29% interest, would that be preferable?
Student university edication shouldn't even be a loan. The vast majority of student loans are financed by the government itself. The US spends trillions procuring defense (or war), it should also procure an educated workforce without saddling the citizenry with all the extra red tape and misery of collecting back a loan
Any restrictive administrative loop is always hopelessly behind on what degrees are "valuable". I think colleges should be required to provide information on salary and employment info for a graduates given degree from the university, but otherwise let the choice be open. All the proscription of "value" is useless cost increasing administrative theater
What does the US spend towards NATO that it wouldn't spend if NATO didn't exist?
The US has as many aircraft carriers as the entire rest of the world combined, and thats not because NATO requested it. Nor does NATO demand the US produce 20 million dollar a piece missles.
Because its usually tax payer money that is used to fund these loans. If people started declaring bankruptcy tax payers would mandate that federal student loans stop existing as a matter of principle. People hold the value that its good to help students as long as they pay back at least what was given to them (adjusted for inflation).
We could also just decide to provide people higher level of education as a right. And, put some Medicare level pricing in place for colleges and universities to get cost in check.
I personally would want to see it with greater student participation/testing. The US education has been watered down to be so easy specifically because failing reduces LTV of a student. They want to just crank out degrees to as many people as they can. I personally think we need to figure out the healthy balance of education we need, because college for all isn’t it. Then just pay for them to learn at a high expectation level. Private schools will still exist to pump out full price degrees and that’s fine too.
I agree. College is not for everyone. Also, we already have an option for those of us who want to provide higher education for people who can't afford it: charities. The advantage of giving my money to a charity instead of the government is that if the organization mismanages the funds it takes me 2 minutes to switch my monthly donation to a different organization. If government mismanages funds it takes between 2-6 years for an election cycle, and even then my candidate may not win or take my needs as a priority.
Charity is fine, but the scale I’m talking about usually makes sense as a social program that we all participate in and that’s usually where governments come into the picture
Well, yes, and I agree, but that means colleges would need to do some considerable belt tightening. There’s plenty of fat to trim, mostly as a result of the last quarter century of student loan policy.
Yes, they can’t be expected to do so voluntarily though so I think the economic pressure to force them to decide how to prioritize their spending is a good thing
I do get that not all education should be purely for economic reasons, but as an autodidact I feel that "learning for the sake of learning" does not need to come with the prices that people are paying for degrees.