bankruptcy and student loans

maelstromscup · 10-07-2009, 03:41 PM

Do you think that student loans should be discharged when you declare bankruptcy? It doesn't make sense to me why everything but them are... a lot of people really can't pay them even if all their other debt is discharged. Some people ONLY have student loan debt.

JustAMomOf4 · 10-07-2009, 03:59 PM

They are not and there is good reason. We can't have kids running up thousands of dollars of student loans and then escaping payment for bankruptcy after graduation.
Remember Student Loans are not secured. The federal loans (Stafford, Perkins) don't require good credit or any credit. This makes them more risky. With decent credit - any parent/student can borrow any amount to cover the cost of education. For this opportunity - there needs to be a trade off.
Any student/parent who undergoes the entrance counseling is aware of this when they agree to accept the money.

mom2collegekids · 10-07-2009, 04:09 PM

I think that the entire Student Loan idea would fall apart if they could be discharged thru bankrupcy.

Kids would borrow $250K and then declare bankrupcy after graduating.

Kids need to strongly consider how they are going to pay back their student loans BEFORE grabbing that dangled carrot.

maelstromscup · 10-07-2009, 04:11 PM

Tradeoff? Opportunity? College degrees are a dime a dozen and completely overpriced!

mom2collegekids · 10-07-2009, 04:19 PM

oh please.

A student can get an education w/o racking up a gazillion dollars in unaffordable student loans.

Kids need to be careful about choosing majors that will get them a PAYING job. Instead, kids will major in silly majors that result in no job prospects - and then they want to discharge their loans??? NO! They need to use some discernment!

I see students taking out big loans for pricey privates to get education degrees. That's crazy since teachers don't get paid a lot of money!

If a person can't afford to pay their student loan after 7 years, then that person probably chose a silly major and/or chose a school that was too expensive for that major.

We need to encourage responsible decisions and responsible loan acquisition.

worried_mom · 10-07-2009, 04:20 PM

No, I don't think student loans should be discharged in a bankruptcy. As justamomof4 pointed out, student loans are very different from other loans since pretty much anyone can get them.

If student loans were easy to dump, literally thousands of starry-eyed students would be taking out huge loans each year to attend expensive private schools that they really can't afford. But they would try to rationalize it by saying a degree from that school would surely guarantee them a six-figure salary so it would be easy to pay off the loans.

The last time something like that happened, it was called the "sub-prime mortgage crisis."

cptofthehouse · 10-07-2009, 04:24 PM

It's not a question of whether you or anyone thinks that student loans should be exempt from bankruptcy. The fact is that they are.

notrichenough · 10-07-2009, 05:14 PM

You can make a reasonable argument that government-provided student loans should not be dischargeable through bankruptcy - this is our tax money after all. It should be treated just like back taxes. (Even taxes can sometimes be settled for less than you owe if the IRS decides they will never collect - the "you can't squeeze blood from a rock" theory.)

However, there is no justifiable reason why private student loans should not be dischargeable through bankruptcy. In fact, there would be several enormously valuable benefits:

1) faced with the potential of losing money though bankruptcy, the loan companies would take a much harder look at the credit and potential future earnings of the borrower and their potential co-signers. Then maybe that Medieval History major would find it impossible to borrow $40K/year to go to Amherst, and they'd either get a real major or go to a school they can afford. Its way too easy to get the loans.

2) lack of virtually unlimited loans in virtually unlimited amounts would put severe downward pressure on college costs. You could make a serious case that the availability of easy loan money has led to the run-up of college costs at twice or more the rate of inflation for the last several decades (it is exactly analogous to how sub-prime and option mortgages had a major role in the real estate bubble we are going through). When schools know that all their students can just borrow however much they need, they have zero incentive to hold the line on costs and be more efficient. This might even put a number of schools with shaky finances out of business, and this might not be a bad thing either.

3) the private loan companies (hello, Sallie Mae) are seriously abusive towards their "customers", there are any number of web sites that detail their misbehaviors and outright lies and fraud in many cases. Having the hammer of bankruptcy over their heads might inspire them to some minimal level of customer service, and to actually work with their customers.

The consequences of declaring bankruptcy are severe enough that you won't see many kids immediately declaring bankruptcy after they graduate. It would be extremely difficult to get a place to live on your own, get credit cards, get other loans such as car loans (forget about buying a house), and even more importantly get a job - many many employers run credit checks on their prospective employees now, and bankruptcy would be a huge red flag about how responsible and trustworthy you are. Your life is a mess for seven years at least.

The *only* reason student loans are not dischargeable is because of a superior lobbying effort by the loan companies, and IMO you are kidding yourself if you think there is any other reason. There is no implicit or moral reason why a student loan should be treated any differently than any other debt such as a mortgage or car loan.

worried_mom · 10-07-2009, 06:07 PM

With a mortgage or a car loan, you have a tangible object to secure the loan and to serve as a limit on the amount of money to be borrowed. What do you have with a college loan?

owlice · 10-07-2009, 06:10 PM

Agree with notrichenough.

I think making college loans dischargeable through bankruptcy would stop the rampant upward spiral of college costs. Right now, banks have NO disincentive not to lend money to students for education. None. I think some disincentives would do the industry, and students and colleges and society as a whole, some good.

owlice · 10-07-2009, 06:12 PM

What do you have with meals put on a credit card, or gambling costs put on a credit card? There's nothing tangible there, no asset to secure the loan.

maelstromscup · 10-07-2009, 06:16 PM

Well said notrichenough.

JustAMomOf4 · 10-07-2009, 06:56 PM

Quote:

What do you have with meals put on a credit card, or gambling costs put on a credit card? There's nothing tangible there, no asset to secure the loan.

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

If anyone thinks a college degree is overpriced then get a cheaper one. If student loans were dischargable through bankruptcy there would be far less money to lend. Some kids might not be able to get any loans.

romanigypsyeyes · 10-07-2009, 07:50 PM

I don't think you should be allowed to. It is your choice to go to a school where you need to take exuberant loans. I wanted to go out of state, but with a family making ~20k a year, unless I went to a full need school, I'd be taking out lots of loans. Instead I went to a state school where I would have to take very little, if any, loans. So, this is telling me that I could have gone to a "better" school and just declared bankruptcy after a while rather than paying the loans? Sounds like irresponsibility is being rewarded IMHO.

I have a friend at Columbia in Chicago who is taking out nearly 40k a year in loans. She got into a school here where she would've only had to have taken out around 3k a year in loans. She made an irresponsible choice and she should have to deal with that and not be able to just declare bankruptcy IMO.

maelstromscup · 10-07-2009, 08:45 PM

And people get into credit card debt because they're stupid, too. Should we just ban bankruptcy altogether and bring back debtors' prison?