bankruptcy and student loans - Page 2

owlice · 10-07-2009, 08:45 PM

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the bank is assuming all the risk, not the government.

The government isn't assuming the risk of the private loans, nor should it, and making the private loans dischargeable in bankruptcy won't make the government responsible for them. Banks should assume risk for private student loans just as they do for credit cards.

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Some kids might not be able to get any loans.

Indeed. So they would have to go to less expensive schools. And I think it very likely there would be more "less expensive schools" if loans were harder to come by. I'm okay with that!

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I have a friend at Columbia in Chicago who is taking out nearly 40k a year in loans.

If the loans were dischargeable through bankruptcy, she wouldn't be able to take out so much money. It's only because bankruptcy doesn't make the loans dischargeable that she is able to borrow so much.

sk8rmom · 10-08-2009, 06:42 AM

I agree with notrichenough and would like to see student loan reform to end abusive practices and escalation of student loans by the private lenders, particularly Sallie Mae, similar to the credit card reform act. If these loans were included in a court approved reorganization plan my guess is that they could usually be paid off - just basing this on individual stories I've read on Project on Student Debt's site. There's often no way to keep up with loans that have doubled or tripled during a period of disability or unemployment and the private lenders seem to be particularly nasty and unwilling to work with their clients. It sounds like a horrible way to live and I can imagine that it would affect every aspect of the former student's life - including their ability to house, feed, and support their children.

The House Judiciary Committe recently held a hearing on this - the webcast is here:
Hearing on: an Undue Hardship? Discharging Educational Debt in Bankruptcy

notrichenough · 10-08-2009, 09:58 AM

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She made an irresponsible choice and she should have to deal with that and not be able to just declare bankruptcy IMO.

She's a kid who doesn't have any idea in concrete terms what this debt is going to do to her, and apparently whatever network of people she has around her that can advise her are not financially savvy enough to understand what this is going to mean to her. Unless she is going to be a doctor or go into some other very high-paying career, she is in for a world of hurt.

Most 18-year-olds do not have any understanding or appreciation of what it means to have a $500, $1000, $1500, $2000/month loan payment for 10 or 20 years. It's just a meaningless number, and it doesn't even sound that big. It is a general failing of our educational system that we don't require any instruction in personal finance so that kids might understand this, but that is a different topic.

Sometimes a third party has to step in and save you from yourself. Even people who are smart enough to get into an Ivy league school. Unfortunately in this case the third party (either the school of the bank) is the equivalent of a drug dealer feeding your habit, and you can never escape them.

Kudos to you for being smart enough to understand this at your age.

And btw, while it is easy to toss off a phrase like "declare bankruptcy", it's not as simple as saying "I declare bankruptcy!" and poof! your debts are gone. The actual process is quite time consuming, invasive, and humiliating, there are lawyers and courts involved, you might have your paycheck garnished, and the effects will turn your life upside down for at least 7 years. And your debts may not be completely eliminated - if you have a reliable income, you will most likely be put on some sort of payment plan.

People don't enter into bankruptcy lightly or willingly in the vast majority of cases. It's no walk in the park.

mom2collegekids · 10-08-2009, 10:37 AM

>>>>
She's a kid who doesn't have any idea in concrete terms what this debt is going to do to her, and apparently whatever network of people she has around her that can advise her are not financially savvy enough to understand what this is going to mean to her. Unless she is going to be a doctor or go into some other very high-paying career, she is in for a world of hurt.

Most 18-year-olds do not have any understanding or appreciation of what it means to have a $500, $1000, $1500, $2000/month loan payment for 10 or 20 years.

Sometimes a third party has to step in and save you from yourself.
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Exactly....that's why I hate student loans for undergrads. It's like a candied carrot dangled in front of "brand new" adults who have legal responsibilty, but not the discernment, wisdom, judgment, or experience to realize the long-term financial obligation.

Seriously, if 18-22 year olds were required to get their parents to co-sign these loans, many wouldn't ever happen. (see quote's last sentence)

Or, if these kids were required to listen to some video of recent graduates who are now surprised and overwhelmed to learn that their "great job" doesn't pay enough for rent, food, car AND student loan payments. (again, see quote's last sentence)

owlice · 10-08-2009, 12:06 PM

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if these kids were required to listen to some video of recent graduates who are now surprised and overwhelmed to learn that their "great job" doesn't pay enough for rent, food, car AND student loan payments.

That wouldn't be enough to stop many, probably most, of those who borrow irresponsibly for school.

I think it's right and proper for business -- in this case, banks/lenders -- to carry reasonable and usual risks for their business. Lending money carries risks, unless those risks are artificially done away with as has happened with student loans because of great lobbying.

goaliedad · 10-08-2009, 12:25 PM

Looking at this thread, I am starting to sense that the OP is a troll - starting his/her first thread with a known controversial topic and pouring on strong opinions. Or perhaps one of those who bit off more student loan than s/he could chew.

In the end, for student loans to be a viable business (one that pays for itself and doesn't become the next mortgage-debt government bailout), there has to be a certain degree of lenders taking on known risks with calculable returns, in order for there to be certainty in the market.

My best suggestion for this is to require schools offering loans as part of their FA package to supply a percentage of that (depending upon how much debt - the greater the debt, the greater the percentage being held by the school) from their endowment.

Reputable schools go to great lenghts to measure (and tout) their graduates success. They know better than anyone else what the typical engineer or history major from their school earns and what level of debt that should be able to support. They can also put in terms to make sure the struggling freshman gets cut off quickly (limiting losses) by putting GPA requirements on subsequent term loans.

As with any business, schools that make poor choices about who and how much to loan will be quickly punished by a lack of revenue to support their operations.

And with this system when a school offers a student a loan, it is a vote of confidence in their choice and keeps them interested in keeping that choice successful.

And while the returns on a student loan portfolio may not match what some money managers can return, with the stock-market meltdown we saw, there could be something said about having your investments where you control the spending.

poetgrl · 10-08-2009, 05:02 PM

Student loans are financial aid for colleges and not for students. They allow the colleges to artificially inflate costs and then they say it is "aid" for the kid, but it is not. Colleges who claim to meet 100% of need but do so with loans are giving themselves financial aid and not the student.

jamma · 10-08-2009, 11:09 PM

Student loans are not the only debts non-dischargeable in bankruptcy, as the OP alleges. Congress has made a series of debts non-dischargeable based on its view of public policy. For example, alimony and child support payments are not dischargeable in bankruptcy because Congress does not want children to go hungry. Intentional torts (punching someone in the nose, for example) are not dischargeable because Congress does not believe people should get out of judgments based on such actions. The list goes on. As for student loans, Congress feared a long line of doctors, lawyers and other professionals on the cusp of making big salaries running to bankruptcy court just after graduation to discharge their student loans just before taking their lucrative first jobs. For those students not in this position, they may petition the bankruptcy court to discharge their student loan debts based on extraordinary circumstances.

The bottom line is that this rule does make sense.

notrichenough · 10-09-2009, 12:27 AM

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As for student loans, Congress feared a long line of doctors, lawyers and other professionals on the cusp of making big salaries running to bankruptcy court just after graduation to discharge their student loans just before taking their lucrative first jobs.

I think the idea that huge numbers of doctors and lawyers were going to file for bankruptcy is a nice bit of scaremongering. By the time these people finish med school and law school, many are married, have bought houses, have other significant assets and salaries. And the courts aren't stupid - if they see you have a high salary or an expectation of one, you will not be able to just walk away from your debts.

And there would be ways to mitigate this risk - for example, you have to wait for at least 3 years after you get out of school before you can attempt to discharge your loans.

Bundle · 10-09-2009, 03:36 AM

I totally agree with those who state that some kids just don't understand what they are getting themselves into by taking out large student loans. Some of the teens I talk to believe that they will just be able to borrow,say, $20,000 (yes, one I know mentioned that number) a year if they don't get enough aid, and have no problems owing $80,000 (they forget about interest) when they are 21 years-old.

sk8rmom · 10-09-2009, 07:40 AM

Bundle is right...I've talked with so many kids who have no concept of what it's like to make a payment evey month for years and juggle living expenses too. Unfortunately, personal finance is an optional elective in high school and too many parents just never teach their kids anything about money management. In my family, it is a "must take" class for seniors to make sure they've heard everything at least twice!

I've played the Monopoly money game with my kids for years whenever they get "pie in the sky" ideas of how much money they/I have or will have, or to explain how loans, taxes, and savings work, so now they're very careful with their money and debts. Yesterday an acquaintance said her daughter will "just have to live at home til her loans are paid off"! That's $20K+/year, which they cosign and can't afford either, for a degree she could be getting at a better public school for half the cost or less. The kid doesn't even like her LAC and comes home every weekend! I just don't get it...

jamma · 10-09-2009, 11:09 AM

notrich: How many doctors and lawyers buy houses before they graduate? Regarding your claim "courts aren't stupid - if they see you have a high salary or an expectation of one, you will not be able to just walk away from your debts" the means test was implemented in October 2007. Prior to that, anyone could file for chapter 7 bankruptcy regardless of income. It's also important to understand that future income is not considered in chapter 7.

Your claim that "the actual process is quite time consuming, invasive, and humiliating" is incorrect. A typical chapter 7 is none of these. Once the petition and schedules are filed, the debtor has to spend only a few minutes in a meeting with his or her trustee. Although this meeting is conducted under oath and recorded, as long as the debtor listed all assets and liabilities, this meeting rarely last more than 5 minutes. The trustee simply verifies that the debtor listed all assets and liabilities. It isn't invasive at all. After that, a discharge is entered and the debtor is free and clear. It is a very easy, painless process for most chapter 7 debtors.

Also, most debtors file chapter 7 and in that chapter there are no payment plans, wage garnishments, or any actions whatsoever. Only in chapter 13 must a debtor have a repayment plan.

Lastly, there is no longer a social stigma to filing bankuptcy. In the 1960s, bankruptcy was considered shameful. By 2005, it was considered a financial strategy. This is why Congress passed the Bankruptcy Reform Act in 2007.

If student loans were dischargeable, no student in their right mind would repay their loans and the system would collapse.

mom2collegekids · 10-09-2009, 12:03 PM

>>>>
Student loans are financial aid for colleges and not for students. They allow the colleges to artificially inflate costs and then they say it is "aid" for the kid, but it is not. Colleges who claim to meet 100% of need but do so with loans are giving themselves financial aid and not the student.
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I completely agree. I have the term "Financial Aid" unless it's free money. When I go to the store and they try to get me to open a charge account so that I can shop there on credit, THEY DON'T CALL IT FINANCIAL AID!!!

I feel so sorry for the numerous students and parents who get misled by fancy school mailings that insist that they have "generous financial aid packages". To the naive person that means "free money" for a need defined by the family.

The sad thing is that many families don't realize any of this until it's too late. Spring comes with the F/A packages and the families then realize that if they don't take out the student loans their child won't go anywhere since it's now too late to look elsewhere.

Yes, a few qualify for grants and work study, but most do not. And, that isn't told up front.

Bundle · 10-09-2009, 07:28 PM

I agree with mom2collegekids. Having a "genorous finiancial aid package" doesn't really mean much if the package consists of 90 percent loans. I think that students and parents who need financial aid should seek out colleges that give most of their aid in the form of grants/scholarships, and ask colleges for specifics about the breakdown (grants/loans) of their "generous" aid.

mom2collegekids · 10-10-2009, 07:19 AM

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I have the term "Financial Aid" unless it's free money.
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Oops...typo in my #28 post...That should read...I HATE the term "Financial Aid" unless it's free money. LOL

<<<<<<<<<<<
I agree with mom2collegekids. Having a "genorous finiancial aid package" doesn't really mean much if the package consists of 90 percent loans. I think that students and parents who need financial aid should seek out colleges that give most of their aid in the form of grants/scholarships, and ask colleges for specifics about the breakdown (grants/loans) of their "generous" aid.
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The problem is people don't know what they don't know. If they think "generous aid" means free money, they aren't going to know that they need to ask for specifics. I see this all the time. And, here on CC, every spring there are parents and students who are shocked and dismayed to see that their F/A packages are just a bunch of student loans. Plus, many are shocked to learn their EFCs and realize they'll have to borrow to cover that, too. So, borrowing for F/A and borrowing to cover some/all of EFC..... All this bad news after getting pretty college mailings for months bragging about generous F/A.