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.
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.