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Comment by bhupy | Hacker News Reader

Making education debts dischargeable in bankruptcy sounds good in theory, but against what collateral do you take out a college loan? Most bankruptcy includes collateral liquidation. What's to stop someone from obtaining a useless degree that doesn't contribute to the nation's economy, and then discharges the debt in bankruptcy?

I think a big part of the problem is that debt is so readily issued for degrees that overwhelmingly leave the recipient incapable of providing for society in gainful ways.

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> What's to stop someone from obtaining a useless degree that doesn't contribute to the nation's economy, and then discharges the debt in bankruptcy?

Nothing, and that's exactly why education debts need to be dischargeable like anything else.

Dischargeable loans makes loan companies have actual responsibility and consequences in deciding who to give loans to. Otherwise, they blindly give out loans (why not, there's no risk!), putting all that much money in the system, which college institutions are happy to absorb in higher tuition.

But it could lead to plenty of people making the smart decision to file for bankruptcy even when they have a good degree. Bankruptcy at 22 isn’t that big of a deal, generally.

I’m not sure what the answer is, though I think an economic approach is key.

If the lender can garnish future wages, I think the incentives are still pointing in the right direction. The only way the lender loses money is by lending too much to someone who will never be able to pay it back - which is what you want, presumably.

Bankruptcy negatively affects your credit score by a large amount, so it's not exactly an easy decision.

It would be a very easy decision I think. Can you rebuild your credit in less time than it would take you to pay off your loans?

If you're still going to be paying your loan off in 7 years, bankruptcy would be an easy choice.

What if you need do anything significant with your money in those 7 years? Like rent an apartment? Have a car to get to work?

The debt doesn't just magically go away. Chapter 7 requires liquidating assets, and chapter 13 requires paying some loans back anyway. And besides, I don't see why loan companies couldn't require cosigners to reduce risk on these college loans.

>Like rent an apartment? Have a car to get to work?

Then you rent an apartment or buy a car. Are you implying you can't do this after bankruptcy? It's much easier to do these with a bankruptcy on your "record" than with a $1000 monthly payment.

I'm implying that these things are affected by your credit score.

Cash is King

If you've got an 800 score and no money, no one will give you a loan. If you've got a trash credit score, but an extra $1000 that isn't going to loans, then you can 'afford' to get fleeced on 36% 72 month auto loans for 7 years until your credit is rebuilt.

Depending on the market, I can’t imagine it being easy/straightforward for someone with “trash credit” to find a landlord willing to lease an apartment at the market-rate.

That $1000 is likely getting spent no matter what, either in repaying loans, or paying a premium over the market rate to get a landlord to agree to lease you an apartment instead of someone with an 800 score.

Make 10% of the balance become dischargeable at the end of each year after graduation.

This is spot on. Currently there is very little accountability for predatory student lending. For my mortgage I had to talk to multiple people on the phone, show proof of income, and have a background check. For my student loan I just had to give my parents' socials and prove I was attending college. I know nothing about the laws around this, but I suspect it was set up this way with good intentions. Unfortunately changing this will probably require a nation-wide acceptance that not all degrees are created equal.

It would be interesting to see insurance companies have more skin in the game - we would probably start getting much more accurate breakdowns of ROI by major, degree, and school.

Agree, that’s a strong point.

This will increase inequality, people from richer background will get loans easily.

What America has now is a good system, where anyone can use these loans to pull themselves up.

What government or maybe banks need to invest is in more career counseling.

> What's to stop someone from obtaining a useless degree that doesn't contribute to the nation's economy, and then discharges the debt in bankruptcy?

I assume lenders would take the degree being pursued, institution at which it’s being pursued and applicant’s academic history (and this likelihood of completing it) into account.

Currently, there is zero incentive to do that work.

That's a great point.

Some commercial lenders do consider degree/program.

It seems like we should make the debt conditional on the degree pursued. How much you’re allowed to take out in federal loans ought to be a function of the pay associated with that degree. I’m sure it’s not a perfect system, but it seems a lot better than the status quo or solutions that involve burdening society with the economic liability of a glut of (economically) low-value degrees.

My suggestion to achieve this is to cap repayments (of non-dischargable loans), perhaps at 15% of taxable income, and written off 20 years after signing. That would make lenders very interested in the outcomes of various courses. And their offers to prospective students would convey useful career advice, too.

That seems reasonable.

Note that the average (mean, I assume) student loan payment is $393, according to the article. The median student loan payment is $222 (https://www.forbes.com/sites/zackfriedman/2020/02/03/student...).

$393 is 15% of $2620 which annualizes to $31,512, which is about the median personal income for full-time workers (whoops, before taxes). ($222 is 15% of $17,760 annual, about the poverty line for two.) That's not a wildly big change over the current state.

How about 10% of taxable income?

20% pretax deduction would probably be sufficient for repayment. Of course loan reform in general would probably be a good idea. If there are 10k graduating with a degree in a field with only 100 jobs/year needing that degree, or likewise paying less than $40k/year, should probably not be granting loans for those degrees in the first place.

10,15,20% all plausible figures, the point is just to ensure that it can't get so large that it gets in the way of living your life.

> 10k graduating with a degree in a field with only 100 jobs/year needing that degree

What I'd live very much to avoid is having a centralized body which makes such decisions. Under my scheme, lenders who identify such fields will be reluctant to grant loans, but how they decide what's in the field, and what exceptions to make, the can do however they like.

A few years ago, I read that at least two big-name U.S. universities announced plans to pilot something like this, where tuition was free, and they'd get a fixed percentage of employment income (wages plus bonus, etc.) for a fixed number of years after graduation.

The university takes on the risk, but they have much more information about their students and their degree programs than students, governments, or private lenders, so they're probably best placed to be making informed risk decisions. Under the current systems, the government and the student take on the risk, while the university and the private lenders get the rewards.

I mean, people got college educations before 1998, when student loans were made non-dischargeable except in cases of "undue hardship".

I never knew the date, 1998 sounds super-recent. But digging a bit, it sounds like that's the last step of many, with the first bankruptcy restrictions in 1976 (when the only concern imagined was medical & law degrees!)

https://www.savingforcollege.com/article/history-of-student-...

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