Hacker News Reader

Comment by ericmcer | Hacker News Reader

I’m totally opposed to predatory student loans, but your point seems kinda light on logic. If the number of student loans being discharged was “infinitesimally small” and we can assume prohibiting bankruptcy drove the number of delinquent loans down even lower, why are student loan repayments considered a huge issue?

View on HN

Since it's nearly impossible now to discharge student loans in bankruptcy, lenders have 0 incentive to do any due diligence on borrowers. Quite the opposite, their only incentive is to get students to take out heaps of loans that will keep them in debt servitude for a lifetime. This is why you have cooking schools, where most jobs barely pay more than minimum wage, charging many 10s of thousands of dollars but all students can get loans.

If bankruptcy was a possibility lenders would be much more cautious about tuition rates and potential for a borrower to actually pay it back.

I guess I forgot the human element when thinking about it, that banks will readily pounce on loans with guaranteed repayment and that people will sign up for them.

I assumed culinary institutes were more for prospective chefs who actually have to know all that stuff than line cooks.

Entry level jobs for a chef often start near minimum wage and many of them will never make it over $30/hour. It's not a career that pays well.

That's a shame. A high stress, high-knowledge job like that should pay accordingly.

Still pretty low paying jobs.

If bankruptcy was possible, couldn't every student declare bankruptcy after graduation since that point they have nothing to lose?

Under bankruptcy, you don’t necessarily get everything wiped clean and a fresh start. A court will determine how much you can pay and to whom and assets will include a percentage of your future income. On top of that, your ability to get credit will be severely impacted for at least seven years meaning good luck getting a car loan at non-usurious rates, credit cards, etc. You may even find that getting something like a simple checking account becomes rather difficult (I had to sell my first house in a short sale in the 90s and even though the consequences were less dramatic than bankruptcy,¹ it still impacted my financial prospects for a long time afterwards).

⸻

1. I went to a credit counseling agency in the midst of that financial distress and the counselors all insisted that I didn’t want to go through bankruptcy although in retrospect, that was exactly what I should have done. What I didn’t know then was that the credit counseling agencies are all run by the credit card companies.

In the US context there are already provisions for this, abusive debtors can be forced from a schedule 7 to a schedule 13 bankruptcy, and in any case if the creditor protections aren't sufficient there are ways to bolster those protections without just allowing the creditors to have debt slaves.

For instance, you can disallow discharging debts for a period of years after the education ends. The status quo is pretty corrupt.

I guess allowing bankruptcy after N years might make sense. By that time the bankruptcy judge gets a good idea on future income potential.

It didn't happen that way when it was legal. Also, people tend to try to be honest and do the right thing.

Declaring bankruptcy immediately after graduation was last legal in 1976, when private school tuition could be paid for with 20 hours/week of minimum wage labor. Even for an amoral profit optimizer, explicitly planning to have zero assets and maximum debt at graduation and immediately declaring bankruptcy was not yet a particularly compelling idea.

I don't think it'd really be a thing today either, but the circumstances are clearly very different.

Private school tuition at about $1600/year? Public university tuition was well under that, but my recollection is that private university tuition was about double that.

Despite this being true, it's probably bad in the long term to build a society where being honest and trying to do the right thing is a losing strategy.

I'm guessing that possibility kept a lid on predatory lending, especially by for-profit colleges. For instance, if you know that your students have an option to discharge, then you'll make sure not to charge them enough that they see that discharge and stain of bankruptcy as better than just paying off the loan. It was a (dramatic, drastic, and undesired) weapon that consumers had in their back pocket.

Get rid of the safety valve, and then see what happens as the colleges realize there's no balance of power... you get the current situation.

This is also a salient point. When these lenders know that they can lend out money, it will be back completely by the federal government, and it can’t be discharged in bankruptcy, they have very little incentive not to lend. That completely destroys the standard economics and considerations behind any type of credit

> When these lenders know that they can lend out money, it will be back completely by the federal government,

Even with nondischargeability for student loans in general, only loans participating in specific federal programs (which have limits, both as to institutions and amounts) were eligible for federal guarantees, and the part of those programs that lenders other than the federal government itself participated in was ended in 2010.

You can't just file for bankruptcy if you are making money. I guess the mass numbers of people filing where not making any money. That is the real issue. Why weren't they making enough to at least get forced into a repayment plan?

Being unable to discharge a loan means you can offer them to people who you expect to go bankrupt.

Rather than trying to limit losses it’s an attempt to expand the industry.

The legal changes started in 1976 and got progressively stricter. Since then, college costs and student loans have skyrocketed.

By eliminating the ability to discharge bankruptcy, they enabled lenders to lend far more money to the point of turning students into modern day indentured servants. Once you sell all these moneylenders their slaves, it causes economic problems when you try and free them.

Well I didn’t have 25 pages to give you the full thesis. I mean, there’s a lot wrong with student loans, including predatory lending in the first place. But one subset of story you hear about are people who are followed for their entire lives by student loans because things never worked out for them in terms of income generation on their degrees. Those stories can be mitigated with proper bankruptcy protections.

There’s 1000 other things we need to fix with the system too.

The primary problem with student loans is needing them in the first place.

We as a society (and taxpayers) should not help people pay rip-offs, whether they be those perpetrated by colleges or those perpetrated by insurance companies. We should be stopping the rip-offs themselves.

> We as a society (and taxpayers) should not help people pay rip-offs

The solution here appears to be that the government should not be involved with subsidising or backing student loans at all. Then you have a free choice - invest in student loans if you want to "help people pay rip offs" or don't if you don't.

As a country, particularly one with an advanced economy, we need to subsidize education in order to remain competitive. Generally the left would have preferred to just directly subsidize schools by giving them money, but instead we have the compromise plan of student loans. And boy is our system compromised!

We have the compromise plan of transferring future cash flow of students and taxpayers in the case of defaulted borrowers into the pockets of college administrators.

All under the guise of “helping” students while keeping taxes low.

There's more. Colleges that perpetrate these rip-offs should lose their tax-exempt status. Otherwise, we all continue to subsidize them.

A lot of these schools wallow in obscene endowments and own a shitload of prime real estate, while paying no taxes and bringing in loads of money on sports. It's time to bring them to heel.

> The primary problem with student loans is needing them in the first place.

Exactly. Education should be fully provided by the government for every person.

How failure to generate income on their degrees is a lender's problem? Clearly,there is an issue with inflated costs of getting a degree and finding a job with a low-demand degree, but why try solving it at the lender's expense?

And how is it related to the friendly fraud issue?

I never said it was the lenders fault. I’m just saying our bankruptcy system allows people to discharge debt. Whether you took on the debt responsibly or irresponsibly, we have a bankruptcy system that allows you to discharge that debt and get a clean slate, generally speaking. I’m not here to argue the merits of our existing bankruptcy system.

Your comment could apply to any kind of debt that people get discharged in bankruptcy. Credit card debt, judgments from courts. The person or organization on the other side of the dead might not have done anything wrong (indeed, if we are talking about a judgment from a court, the person that you owe that money to might’ve actually been harmed by you). However, these debts are subject to the bankruptcy code. But not student loan lenders. (I know this is an oversimplification, see my * on another comment)

The relationship to the friendly fraud issue is pretty straightforward. Simply put, I believe Visa is over stating the costs and risk of friendly fraud the same way that the industry did with regards to discharge of student loans. We see this in other contexts as well. Government actors are often trying to strip fundamental rights to privacy and from unreasonable searches in the name of protecting us from terrorism or child pornography predators. I’m not denying that those risks exist, the same way that the risk for friendly fraud exists. I’m simply saying that the proponent of the “corrective measure“ is probably over stating the threat.

> why try solving it at the lender's expense?

Why should the lender be completely insulated against a borrower's inability to repay? Why should a lender be able to lend for education without any diligence on borrower's ability to repay, but not in other domains?

>why try solving it at the lender's expense?

All that is being proposed is the cessation of the government providing services to creditors where they chase down some disabled person with student debts from 30 years ago and shake them down for money and garnish their wages. It's simply not nessecary and not in the interests of the government's stakeholders to provide such services to creditors.

If this means that schemes where a debtor lends out so much money that they will go broke unless they end up milking people for decades aren't viable anymore, so be it. If a debtor goes broke due to such regulatory changes, they should not be compensated, as it's not reasonable to expect zero risk given how unpopular the debt bondage is. Normally one wants to only make such changes with compensation, in order to give lenders confidence their contracts will be enforced or at least they will be compensated, but the status quo around student debt is so extreme and exceptional I don't think that's necessary here. Outside of student debt, prison labor is the only other form of legal slavery I can name in the United States.

> How failure to generate income on their degrees is a lender's problem? Clearly,there is an issue with inflated costs of getting a degree and finding a job with a low-demand degree, but why try solving it at the lender's expense?

Yeah, I've never really understood this logic either. If someone lends money from me to, let's say go buy a tow truck, and then is not able to repay the loan because there are too many other folks with tow trucks (or for whatever other reason), why should that be my problem? I gave money with the expectation that it would be paid back. That is by definition what lending is, yet student loans are somehow touted as an exception where repayment shouldn't be seen as compulsory.

The logic isn't that student loans are a special thing that shouldn't have to be paid back. The logic is that under normal circumstances the lenders has an incentive to evaluate the probability that the borrower will actually pay the loan back. They might raise the interest rate on higher risk loans or just refuse to lend. But with federally guaranteed loans that can't possibly be discharged, the lender's new incentive is to saddle all possible borrowers with as much debt as they can, regardless of their ability to pay.

The idea is that the lenders would stop lending to students who are likely to fail or who are studying something they won't be able to get a job in. The new reality would be: either study something with serious job opportunities, or pay out of pocket.

I think everyone agrees repaying money you borrow is the moral and right thing to do, but pragmatically bankruptcy acts as a governor on lending. In every other industry (including someone lending money for you to buy a tow truck) they need to weigh the possibility that you will never pay them back.

Individualistically, you're completely on point.

However, what does your intuition say when you try to think systemically? There is some percentage of people who get screwed by loans due to unforseen circumstances and no fault of their own. Student loans are universal enough that the stats make this number of people non-insignificant. If it's nobody's fault, who should shoulder how much of the burden?

So, say we make up a number and consider that we know around 10,000 people per year get student loans and eventually end up below the poverty line due to severely bad luck. The situation isn't their fault; it's also not the bank's fault. So what do you do as a policy maker?

What if you knew that, by forgiving student loans, 8,000 of those individuals would bounce back and become productive members of society, while only 1,000 would otherwise? What are negative and positive impacts on forcing banks to shoulder the burden of these defaulting loans? What about forcing individuals to shoulder the burden?

I mean, it sounds like you generally don’t agree with the bankruptcy system in our country then. And that’s a totally valid position. But I think that concern is somewhat irrelevant to the issue of student loans being treated different than other debt. I suppose, if you think that student loans being non-dischargeable is the first step in the right direction, then maybe it’s somewhat relevant, and you hope the rest of debt eventually becomes more difficult to discharge.

For what it’s worth, I would probably agree with that stance. You’re talking to a guy who had more than $100,000 worth of student loans and lived really cheap to pay them off as soon as possible. I’m not going to deny that a part of me cringes when they talk about student loan relief, because I’ll feel like a donkey for paying mine off.

Part of what you charge when you lend someone money is a risk premium, because there's a chance you won't be paid back.

If you lend money to tow-truck operators then it is absolutely possible for them to go bankrupt and for you to fail to recover the entire value of the loan. If you don't like that risk you instead can lend to safer borrowers, the ultimate being the US Government itself - and the quid pro quo is that you can't charge as much for those loans.

The most likely outcome in the tow truck case is that they repossess the tow truck and sell it at auction, only losing a small fraction of the money they loaned you. If someone can't afford a truck they borrowed, you still have a truck.

You can't take back someone's education, which is what makes this type of loan intrinsically riskier. Because you can never get rid of student loans, though, they don't have to do any risk analysis or say "no" to any students. They say "sure", no matter what the data says on the ability to repay for the type of degree that you're applying for. Since nobody is denied funding to go to college, colleges have no economic incentive to price degree programs by expected income. The result is that college becomes more expensive and less accessible to everyone.

It's a really bad situation.

Yeah. The dirty/ugly truth is that, economically, the real answer to this problem is not very pretty. Loans would be given out to people with demonstrated academic success, and with a pathway to a job with a proper income to support repayment. You would probably have parents cosigning for loans.

The practical affect would likely make college much more difficult to access for minorities and other individuals low on the socioeconomic status spectrum. It would likely have a net effect of slowing upward mobility and create a college aristocracy.

> You can't take back someone's education

Sure you could, you could rescind someone's diploma so that they no longer have the degree.

It really depends on whether the degree is actually relevant to their employability.

If one has a degree in winemaking or philosophy, does rescinding their degree have a significant impact on their employability? If not, then they could just tell the bank to rescind it while still getting the education.

Wanted to say thank you everybody for your nuanced responses, this has helped me understand the issue better.

So then no loans should be removed by bankruptcy then.

How is the lenders fault you lost your job and can’t pay your mortgage? What a genius justification.

Are you against all forms of bankruptcy in general? Or just when it involves student tuitions?

> we can assume prohibiting bankruptcy drove the number of delinquent loans down even lower,

Prohibiting bankruptcy doesn't drive delinquent loans lower.

Reply on news.ycombinator.com