College Guide
Blog
One of the more troubling aspects about the rise in student loan debt is that, unlike other forms of debt, this generally isn’t dischargeable in bankruptcy. When someone files for bankruptcy he gets relief from creditors. But that doesn’t work for student loans. People are still responsible for payments on those debts, crippling interest rates an all, even if they file for bankruptcy.
It’s time to change that. According to an editorial in the New York Times:
Legislation is pending in both houses of Congress that would make private school loans dischargeable through bankruptcy, as most of them were before Congress changed the law in 2005. It had long been the case that federally backed student loans were protected during bankruptcy proceedings. That is reasonable, since those loans were backed by taxpayer dollars and flexibly structured so that borrowers could receive deferment in tough times and resume payments when their finances improved.
The country has a compelling interest in making it as difficult as possible for student borrowers to elude payment for federal loans. There was no reason for extending that protection to private lenders of student loans.
There is, from a student-interest perspective, no reason at all to prevent the indebted from discharging their loans in bankruptcy. The moneylenders, however, are very interested in keeping this provision in place, since it allows them to lend money to very risky people without worrying about getting their money back.
Under normal circumstances banks have a disincentive to loan money to people who are credit risks; if the debtors can’t pay their money back they file for bankruptcy and don’t have to. This is obviously something banks want to avoid. But student loans are a real bonanza for money lenders; even if students can’t really afford to make payments on their loans the law forces them to do so. Let’s see if the banks and their lobbyists will allow this interesting situation to change.
Facebook
Twitter
khoa on August 30, 2011 6:59 PM:
At the same time though, doesn't the fact that banks are willing to make riskier loans make college accessible to more people? If banks regard creditworthiness as a criteria for making student loans, wouldn't that preclude a lot of people from obtaining higher education, since much of that is financed by private loans, and many graduate applicants tend to have little to no credit history?
I'm totally for the discharge-ability of student loans since I'm struggling to pay mine, but I thought it'd be good to offer that consideration.
hank on August 30, 2011 8:09 PM:
> it allows them to lend money to very risky people
> without worrying about getting their money back.
The people aren't necessarily risky. Some of the "schools" are making their owners rich, at public expense:
http://chronicle.com/article/To-Get-at-College-Value/128511/
looks at the "variation in borrowing-to-credential ratios across sectors of higher education. The average ratio for public four-year colleges was $16,247, compared with $21,827 at private four-year institutions and $43,383 at for-profit colleges."
$PROFIT$
Jimo on August 30, 2011 9:04 PM:
Of course, one way to get rid of the debt based structure of student loans would be for a lender to take an equity position in students - a fixed percentage of earning for a fixed term. Perhaps 1% for 30 years? For every hundred wash-ups you'd get an investment banker.
(Or even go completely radical and be content with the idea that society at large benefits from education and forget the idea of charging for it by any means other than taxation.)
paul on August 31, 2011 12:39 PM:
The provision was enacted, iirc, at a time when college and postgraduate education were pretty much irrevocable tickets to a middle-class wage and lifestyle. It made sense, then, to ensure that young doctors, lawyers and middle-managers didn't opt for a few low-salary years and a quick legal proceeding as a way of stiffing the public.
Yeah, those were the days.
WASP on October 26, 2011 8:19 PM:
We paid our student loans for 20 years but then the Great Recession forced us out of work, ate up all our savings, then came the health conditions without medical care, and finally destitution. Now we're all on IBR deferrments and unable to pay. We should be able to file bankruptcy and wash these out rather than have them climb every year and be unable to do a thing about it in this economic place and time. Mine's $50k now. I'll never repay it without a miracle. I'm a broken down rhematoid arthritic with 2 master's and a bachelor's of science and can't get a job as a Mexican dishwasher. No is hiring middle-aged men with deformed fingers.
I wonder how high it will climb before I die. $200k?