I do get that not all education should be purely for economic reasons, but as an autodidact I feel that "learning for the sake of learning" does not need to come with the prices that people are paying for degrees.
According to Reddit [1] it was to discourage students from immediately declaring bankruptcy upon graduation.
I don't see why they couldn't have put a time limit on it though, if that was the reason. Say you can't declare bankruptcy for 7 years after you leave school.
[1] https://www.reddit.com/r/StudentLoans/comments/ufejjg/why_ca...
OTOH if you're still poor after those years and don't care about consequences of bankrupcy then maybe that's fair enough to wipe out the debt since the education clearly didn't provide value.
It wouldn't help at all as you are typically forfeiting all but essential assets by declaring it. The only people who benefit are those with nothing to their name except perhaps the home they live in and the car they drive to work everyday.
https://www.experian.com/blogs/ask-experian/credit-education...
premature optimization is the root of all evil. Seems like we shouldve actually shown that kids would do that before putting it into law
In American tradition, it was handled with the worst possible compromise that would enrich already monied interests.
It's obvious that bankruptcy costs the lender, but how that cost gets absorbed is very important here. A mortgage or a car loan are secured debts, where the lender can repossess and sell the collateral, to pay off most or all of the losses if the borrow defaults on the loan. A student loan is an unsecured debt, so any defaults have to come out of the interest of the rest of the borrowers serviced by that loan program.
The more borrowers default on their payments, the higher the interest rate is needed to cover the write-downs. Without any protections against defaulting, interest rates would have to be near those of credit cards, while limiting when student loans can be discharged limits how much needs to be written down, which keeps interest rates lower.
Higher interest rates would not only make student loans cost more, it would also reduce their availability and increase the default rate, which could create positive feedback, causing the rates to increase significantly faster than inflation. Combine that with incentivization for college attendance already causing tuition itself to increase significantly faster than inflation, which itself makes student loans increasingly necessary, allowing student loans to be discharged during bankruptcy could have compounding effects on the fragile system that currently props up college attendance rates.
That still leaves the question of why the government should incentivize a significant portion of their constituency to be in college, (more than 1 out of every 13 US adults are currently enrolled) but I'll have have leave that question for politicians or maybe even voters.
Otherwise you end up in this perverse situation where the consumer degree tuition will be priced as if they were economically productive, which ends up pricing out poor people.
It's one thing if you're in a crazy desperate situation and someone takes advantage of you, I could get that. But if you're not desperate and you took money from someone else and can't pay it back? Theft.
The rest is just how we manage to keep that low on an aggregate level in our society that takes care of our own - which we want to do.
It's not like bankruptcy is painless.
Sometimes it's better for both parties to cut their losses and move on to do better things.
Looking at this from the other angle: if value can be created out of nothing it can also disappear into nothing when investment fails.
Bankruptcy is a civil matter, not a criminal matter. Charging somebody with theft, whether appropriate or not, does not resolve the civil debt. So, they are convicted of theft and still haven't paid back their debt. Then what? Fine them? Seems pointless in a bankruptcy situation. Indentured servitude? Slavery is not ever a winning argument. Debtors' prison? That just shifts the indentured servitude to the state, has been tried extensively throughout history, and doesn't actually make things better. Bankruptcy as as solution acknowledges that the situation is unwinnable and starting over from nothing, with a public notice to others to be wary about extending credit, is likely the only way out.
> It's one thing if you're in a crazy desperate situation and someone takes advantage of you
In that kind of situation, declaring bankruptcy is likely not going to help you so much. Those people are going to come after you anyway.
I think you sort of fundamentally misunderstand this. Bankruptcy isn't thievery - it's a solution for people who get themselves into a bad situation and don't have a way forward. Say you bought a house with a mortgage, the value of the house has now dropped for some reason so you have negative equity, and you lose your job and can't afford to make the repayments any more. What should happen? You don't have money to pay what you owe, and you can't get it because your total net worth is negative. Saying that's theft doesn't help the question of what to do - society doesn't benefit from dumping on that poor person any more.
If bankruptcy was allowed then the obvious play would be to take the loan, max out credit cards right before graduation, then declare bankruptcy before you get your first job.
Lenders would respond by increasing interest rates dramatically and restricting loans to those who had assets. This would basically turn into loans being for people with wealthy parents or having eye-watering interest rates.
From the individuals' perspective, overusing uncollateralized debt to be discharged is a good deal. That loss is offset by the creditor by issuing higher interest to unsecured credit lines because people can default on their debts. From the creditor's perspective, it's risk adjusted for people who default.
It just logically follows. I can't help you understand past this.
I see you haven't heard of /r/churning. Although it doesn't involve bankruptcy, because then the sheriff comes down and takes your property from you...
Is it the low single digits of a student loan which is not easily dischargeable?
Or is it 18-30% like you’d expect from a loan where the recipient can discharge it more easily?
This proves the point.
"They are eating the dogs and cats." It simply isn't true. I got my student loans a quarter century ago. Back then the loans were dischargeable and low. My loans came in at like 4% interest at the time.
It is propaganda that it was a widespread problem and the "solution" was to legally protect banks from risk. Then rates exploded and regulatory capture kept people locked in.
So while student loans were technically dischargeable approx 28 years ago there were some big caveats.
Fact: they were dischargeable. Fact: there was no crisis else rates would have already factored in. Else the argument is they were losing money overall. They wouldn't do that for literal decades. Fact: after the loans were no longer dischargeable, banks were guaranteed their rates and stopped being competitive with them and rates increased.
Loans are still dischargeable under certain conditions.
You claimed that "a quarter century ago" student loans could be discharged in bankruptcy, but that's not really true either. The restrictions started in 1978 with waiting periods and those waiting periods were eliminated in 1998 for government loans and shortly after that for private loans.
The period in which you got this 4% loan was within the period where bankruptcy protections were in place, not before it.
You are simply misremembering. If it’s true, scan and upload the loan agreement. I just don’t believe it based on how lenders operate.
If a negligible proportion of people would discharge the loans as you suggest then the need to do it is the "eating the dogs and cats" in this case, since it doesn't matter a whole lot if nobody can do something nobody would have done anyway.
So which one is it?
This is not market economics. This is regulatory capture. Market economics suggests they were more market based when there was risks to banks. The risks are removed and they can print out debt.
Except the regulations for student loan discharge started with government loans, not private loans.
Congress restricted discharge of government loans first, because they were trying to protect the continued existence of the program and the low interest rates.
You've had incorrect facts all throughout this thread and you're refusing to acknowledge all of the people trying to bring real facts into the discussion.
> The rules changed because banks wanted all their money instead of nearly all their money.
You're not understanding how interest rates work.
Banks aren't charities. They don't give people money and hope that it gets paid back. They set the interest rate in accordance with the risk.
There are two ways this can work:
1. The debts are easy to discharge in bankruptcy. Banks do their analyses, estimate how many will be lost ot bankruptcy, and increase interest rates until the net result makes lending justifiable.
2. The debts are hard to discharge. The analysis shows a higher recovery rate. They can lower interest rates because the risk of default is down.
There is not a 3rd scenario where banks keep interest rates low and eat the losses from bankruptcy.
If you think that a business wanting "all of their money" is greed then you don't understand how business works. If loans became a money-losing proposition, they just wouldn't loan the money! Though honestly there are some good arguments that we shouldn't be lending money to people who might not pay it back, but there are a lot of people who dislike this idea that we should only give loans to people pursuing careers that pay well.
Why should banks not accept risk at all? Why was 7 years protection not effective? I have seen no evidence that the previous protections banks had were insufficient.
Moreover, interest isn't just about risk, it's the time value of money. If you put money in a CD at a major bank which is FDIC insured, the risk of you losing that money is as close to zero as anything reasonably gets, but you still get paid interest.
The risk premium is on top of that. And the higher the risk, the more interest people have to pay.
The Bankruptcy Reform Act which introduced restrictions on discharging student loans was introduced in 1978, a full quarter century before your experience.
Loan dischargeability was further restricted in subsequent years.
If you got your loans a quarter century ago, you were deep into the time when it was hard to discharge loans. You are remembering wrong.
Yes, this was a thing in (IIRC) the late 70s / early 80s, and the fed crackdown on the non-dischargeability of school loans in bankruptcy was enacted very quickly in response.
I myself got my bachelors in '79 and read about this idea and did not try it cos it was so incredibly unethical (and it sounded risky). In the words of the infamous Vince Lombardi, "Nice guys finish last."
Basically proving the point that the loan shouldn't have been given out in the first place.
The justification for student loans being exempt from bankruptcy is simply that there is no asset to be repossessed. Car loans, mortgages, and HELOCs are different. Credit cards have very high interest to pay for the higher risk. I guess we could have student loans with 29% interest, would that be preferable?
No, they wouldn't. Source: go back a couple decades, and student loans had low interest rates and were dischargeable in bankruptcy. It was an option. And, in fact, practically nobody did that.
Simply, people were not playing the game that way in any serious way. I am pretty sure I have never met a single person who declared bankruptcy purely to avoid a student loan.
Student loans are still dischargeable in bankruptcy to this very day, but there are restrictions.
Those restrictions started being introduced in 1978, so more than a couple decades ago.
It also should not waste tax payer’s money of worthless degrees
The US has as many aircraft carriers as the entire rest of the world combined, and thats not because NATO requested it. Nor does NATO demand the US produce 20 million dollar a piece missles.
I personally would want to see it with greater student participation/testing. The US education has been watered down to be so easy specifically because failing reduces LTV of a student. They want to just crank out degrees to as many people as they can. I personally think we need to figure out the healthy balance of education we need, because college for all isn’t it. Then just pay for them to learn at a high expectation level. Private schools will still exist to pump out full price degrees and that’s fine too.