In this divided political climate, we have the Bernie Sanders wing of the Dems wanting to forgive all student loans and make college free. On the other side, we have the Republicans who are vehemently opposed to any such thing.
But who would like to disagree with my modest proposal in the title of this thread? I think it is an eminently sensible thing, which should at least start to address the issue of rising college costs and government accountability for them.
Further, I don’t know why student loans should be treated any differently than other forms of debt. It is fair that Citibank, for example, should have to eat $60k of credit card bills that a debtor runs up when that debtor files for bankruptcy, so why should the government not have to eat $60k worth of student loans?
Also, this would be a modest proposal because it allows those who are financially suffering to get the relief they need while those who benefited from the loans repay as they agreed. The discharge comes at the high cost of a damaged credit rating for many years.
What are the arguments against this and why should student loans be so special in bankruptcy?
The main argument against this is that a typical student graduating at age 22 who has student loans would typically have no assets having spent them to get through college. If you could discharge student loans through bankruptcy, it would be very tempting to get a lot of student loans and declare bankruptcy as soon as you graduate, and many students would likely do so. To break even, lenders would need to charge very high interest rates to have the profits on the few loans that did pay off offset the losses on the defaults. And remember the loss one default would be many times the interest profit on those that did not. And the profit is not the entire amount of interest paid. The lender could get that on any much safer loan. The profit relative to that is only the extra interest charge for the risk. Student loans would probably become one of the very riskiest types of loans.
I’ve heard that, but is that necessarily true? After you graduate, you are probably looking to get married, start my adult life, buy a house, buy a car. You can’t buy those things if your credit is in the dumps.
Further, bankruptcy cases have trustees that oversee this stuff. If a person graduates, get a good job, and just wants to declare bankruptcy to shed the student loan debt, the trustee should look at the petition and say, “You are not bankrupt. You can easily make student loan payments with your salary. I’m recommending a dismissal of this case.”
And at the risk of opening another line of debate, perhaps the trustee’s role would provide information to the student loan industry. If he/she looks at the petition and says “Yes, you took out $120k in student loans, got a degree in basket weaving and now can only make a salary of $30k so you are bankrupt and cannot make these payments” then perhaps these court cases would inform the industry not to loan so much money to people getting shitty degrees.
It would protect the lender and the borrower. New standards. No we will not loan you $X per year to get a gender studies degree because we won’t get paid back. If you want to pay out of pocket for a worthless degree, then fine. But if the taxpayers are on the hook, shouldn’t we demand value for money?
Making student debt dischargeable is essentially ensuring that nobody will get a student loan without security. Your parents will have to take out a second mortgage or something. If they can’t, or won’t do that, well, sux to be you.
This would do more to put downward pressure on university costs than fiddling with bankruptcy. The university has already collected its fees - what do they care if the bank gets stiffed? Whereas if the average student can’t pay $50K a year by working a job during college, then either the university can defer the tuition until after graduation, and take their chances on getting paid, or make tuition affordable.
Encouraging people to borrow money they couldn’t pay back is how we got the last recession.
If you’re a student with $120k or more of student loan debt then graduating and immediately declaring bankruptcy is basically getting paid $120k (or more) for your first year out of school, not including interest payments. It would definitely make economic sense to put off that entry level job for a year or two while you go through the bankruptcy proceeding and have the debt discharged.
Taxpayers (I don’t think private student loans are a big part of the market) just lent a huge amount of money to someone with no assets, possibly no job, possibly no job experience, just a promise to pay and a claim on their future income stream.
Think about it this way – you’re the ultimate shareholder in yourself. You currently have no assets to speak of, and the law says you can essentially earn $120k or more, plus interest, by declaring bankruptcy – it would be wrong to your shareholder not to do the right economic thing.
“But employers look at your credit history” – yeah, well a few years into this, most of those employers would have done the same thing. They would be crazy not to.
Credit card companies don’t give you a $120k credit line when you’re right out of school. Banks don’t give you a $120k mortgage, unless you have collateral (the house) worth 1.25x that amount at least.
So, allowing student loan debt to be dischargeable would be tantamount to making that part of college free.
I could see making it dischargeable if you were making payments for at least 10 years or something – I could imagine an economic disaster happening in your 30s and you have to declare bankruptcy then, when you presumably have more to lose. But, you have to have been making payments all along, of course.
Note, I’m not saying that college is or isn’t too cheap or should or should not be free, because those things are for another thread. But, if you have a student loan system, I think making those loans immediately dischargeable through bankruptcy is a mistake.
The only reason that student loans are not dischargeable is because the lien holder is the federal government.
If it were dischargeable, there would be a lot less people going to college because a lot less people would be getting loans.
OR, College would be a lot less costly.
Take your pick.
Maybe these loans instead of no payments during them should be like interest only loans until graduation and then a balloon payment (or refinance). At least this gives agency to the person taking out the loans to begin paying it back and lets them know just how much they are borrowing…
I tend to think that there needs to be more oversight in the granting of loans; on one hand, it’s probably eminently desirable for a lender to loan a Harvard MBA student as much money as they need, but there’s got to be considerably more risk to loaning half or even a quarter of that amount to someone studying some sort of fluff liberal arts at a state university.
But, AFAIK/AFAIR, there’s no actual inquiry into what you’re studying, where you plan to live, what your plan is, what the job market is like in that field, etc… I suppose since Uncle Sam is holding the lien, neither the banks nor the schools care.
Of course, we also don’t want to slowly turn our college system into one where we use public funds to subsidize engineering/science/tech/business stuff, and leave liberal arts to the people wealthy enough to study it without student loans either.
I’m not sure how you handle this; I do think there are a lot of people going to college and studying stuff that’s not actually going to result in any sort of career in that field, nor any sort of enhanced career prospects either. In other words, they might have been better off doing trade school, or enlisting in the military, or something else more career-focused.
But at the same time, there are people who might be bang-up guitar professors, or English lit. professors, or archaeologists, who can’t otherwise go to college without financial aid/loans.
I’d think they’d need to apply some analysis to the loans w.r.t. major, part of the country, school/tuition amount, etc… and see what shakes out. Maybe there’s some salient feature of people who would be good candidates for subsidies, versus those who just suck up loan money and then gripe about it on Reddit while working as a barista while having a BA in Gender Studies from Swarthmore or some such.
Another issue would be students changing majors after a year or two. If someone starts out as an engineer and switches to sociology their sophomore year do the terms of their loan change?
If I want to game the system, I just work at McDonalds and say I’ve been unable to find suitable employment to meet my basic needs and pay off student loans. This would be a very convincing ruse in recessionary times.
I favor this because I favor free student education, and you’re proposing a system that is easy to game. But really, if you want to put the government in the position of deciding who has means to pay for basic needs and who doesn’t, why not just skip all those intermediate steps and use higher marginal taxation to take money from those who obviously benefitted a lot from their education, and directly fund people who need tuition money right now?
I also think that the lenders should have some risk so they are more prudent when making the loans. This would also mean students would need do more to show that the loans would be paid back. However, I think that there should be a sliding scale as to what could be discharged. For example:
First $20,000: Not dischargeable
Next $20,000: Dischargeable after 15 years
Next $20,000: Dischargeable after 13 years
Next $20,000: Dischargeable after 11 years
…
The low-level loans are not dischargeable and the banks can be more certain to get those back. Those would be easier for students to get. But the more that is loaned out, the riskier that money becomes. The banks would put more thought into who they loaned money to. The higher loans would have a higher interest rate, so students would need to be more careful and thoughtful about taking out loans. And then if it doesn’t work out, the student can declare bankruptcy and have some of the loans discharged. This would put some natural market pressure on students and bankers to rein in excessive student loans that are unlikely to be paid back.
The collateral for a student loan is future earnings, not current assets.
I’m not lending you money because you have a really good job, or you have a valuable house, I’m lending you money because you will invest that money in an asset (yourself) that will provide long term income.
Allowing people to bankruptcy it away means they get to invest the borrowed money into the asset, falsely downgrade the asset to $0 value, eliminate the debt, then use the asset for long term income once the coast is clear. It creates a perverse incentive to game the system, with benefits well into the 6 figure range.
As much as I usually stand up for the little guy, this is a bad idea.
Have you seen the interest rates on other non-collateralized debt, like credit cards? So instead of students paying like 4% now, they would pay like 15%+. For the ones who get them. Many just never would be able to.
And more generally, that we subsidize education for those who, on average, will pay more in taxes to make up the difference, vs. those who, on average, don’t.
What we don’t want, or I don’t want, is to offload the risk of lending money to people who won’t pay it back.
I suppose one could make a case that an education in liberal arts/communications/gender studies/underwater basket weaving makes the student a better person in ways that can’t be measured in money. I’ve never seen such a case made, but I suppose it could be done. Asserted, yes, made, no.
It has to be quite a strong case - “give this person $80K and take my word for it that everyone will be better off” doesn’t cut it, IMO. You would actually have to show me how everyone is better off, and especially how everyone would be better off than if I got to keep the money and spend it on things that I know will make me better off.
Yes. Lenders have to charge higher interest on unsecured debt, because it is unsecured. So if the borrower defaults, there’s nothing to go after to collect any part of the debt.
I found this Planet Money episode to be intriguing - the concept was that a college would cover tuition for a student in exchange for a % of their future earnings (up to a certain point) - it was similar to the student “selling stock” in themselves to the college. This definitely ensured that the college had a vested interest in making sure the student was successful in the future. I’d like to see more universities and colleges offer this type of financial aid, but not sure if it should go any further than something that schools voluntarily take on themselves.
For one obvious thing, there are certainly plenty of lower-income (i.e. not able to pay out-of-hand for a liberal arts education) people who might be terrific English literature professors, music professors, artists, archaeologists, psychologists, sociologists, etc…
Why should some half-assed student get a loan to go study computer science or some other tech field, and a good student gets told to pound sand because they want to study political science? It’s entirely possible that the cs student may drop out and end up a cable monkey or help desk tech, and the political science student might end up a tenured professor.
I mean, it’s fine and dandy for the wealthy to fund whatever they want for their children’s educations, but it’s not fair to expect non-wealthy people’s children to only get help if they want to do what would amount to a sort of trade school.
The idea of giving a loan for a percentage of later income has been around for a long time, at least since I was in college – as I said a long time. There were different plans. Most had caps. Some grouped a class together and each in the plan paid a percentage of their own income until the entire class was paid off or until a student paid 10% (or some number I don’t recall) more than his or her own debt plus interest. I was pretty sure this was called the Princeton Plan. But there are too many different Princeton Plans it seems.
In any case it proved unpopular and those who planned to go into higher income careers opted for regular loans, as might have been expected.