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Comment by Auracle | Hacker News Reader

Cue everyone graduating with more than 50k in debt immediately filing for bankruptcy.

At which point the banks would respond by not writing pie in the sky loans for 18 year olds with median income earning prospects. And then colleges would respond by cutting back costs to reflect something more approaching reality instead of an artificially inflated market.

They'd still happily write them for kids who can get their parents to co-sign their loan though so you'd mainly just screw over poor kids.

In Canada you can discharge them by bankruptcy and this doesn't happen. Less than 15% of federal loans are even on a repayment plan, never mind in bankruptcy.

Why? There are consequences to declaring bankruptcy

How many are relevant for a 22 year old? Especially if most 22 year olds start doing it?

which is, iirc, why it was even made to be this way ("un-bankruptable") in the first place.

The "risk premium" on these loans likely would've been FAR higher (or rather, people might've just stopped making loans altogether) if people were just allowed to declare bankruptcy right after getting the education.

The “risk premium” is already jacked. I’m paying 6% on 10 year old debt that cannot be discharged. Shouldn't the risk be very low to lenders and have a much lower rate?

Why would the most secure debt have such a high interest rate? (Treasuries at the time were 2-3%)

I'm arguing that the current rate is without the additional percentages that the insane risk premium that would be attached to these loans, if they were made at all.

> is already jacked

If you're arguing why it's not the same rate as treasuries, I'm not sure what more I can say. There's more that goes onto pricing loans than just the risk premium. It's a part of it, but not the whole story ("why are government-backed MBSes not the same interest rate as treasuries?").

Furthermore, just look around: you sure there's no "risk" with these loans? You cannot in honesty argue otherwise.

I’m arguing that the rate is already artificial and borrowers are paying more than they should. So increasing lender costs would not necessarily increase rates since rates are set by something other than the market.

When I took out student loans in 2013, I got a 6.5% rate for 25 years. It can’t be discharged and any default is guaranteed by US Department of Ed (eg, I die, or use income based repayment for 25 years and discharge the balance). So to the borrower, the “risk” is that the USG defaults.

For comparison, I bought a house that year and got a 4.25% 30-year mortgage that has my house as collateral.

Why would a student loan that can’t be discharged have a higher rate than a mortgage?

I once had an undergrad tell me directly that her strategy for financing college was to get through on loans then declare bankruptcy right after graduation. Good grief, what could I say to that?

For a time, this was actually my health insurance plan - if something happened to me, I'd go into a lot of debt to take care of it, and then declare bankruptcy. Not saying it was a good plan, but you do what you have to I suppose.

I'd say this is basically everyone's healthcare backup plan, even if they have "insurance". The only thing that varies is the scale of what would be considered catastrophic.

"You'll realize it's not so easy when you actually get there"

This statement shows you don't know much about Bankruptcy. There is a process and a judge has to sign off on debt clears.

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