| ▲ | dataflow 6 hours ago |
| > I feel like I have not really heard a compelling reason why student debt should not be dischargeable thru bankruptcy like (afaik) all other forms of debt. 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... |
|
| ▲ | Aurornis 4 hours ago | parent | next [-] |
| The full reason is that preventing bankruptcy is the only way to keep interest rates low and make the loans widely available. 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. |
| |
| ▲ | sethammons 2 hours ago | parent | next [-] | | > The full reason is that preventing bankruptcy is the only way to keep interest rates low and make the loans widely available "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. | | |
| ▲ | AnthonyMouse 26 minutes ago | parent | next [-] | | If a non-negligible proportion of people would discharge their student loans in bankruptcy then the rates would have to increase by a non-negligible amount to make up for it. 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? | |
| ▲ | kentm 34 minutes ago | parent | prev [-] | | In 1978 loans were made non dischargeable for the first 5 years and extended to 7 years in 1990. In 1998 the waiting period was eliminated making them non dischargeable in perpetuity. Private loans were made non dischargeable in 2005. So while student loans were technically dischargeable approx 28 years ago there were some big caveats. |
| |
| ▲ | AngryData 4 hours ago | parent | prev | next [-] | | If that was an actual problem wouldn't people be doing it without the college already? When I was in my early 20s I got non-stop credit offers and I could have easily pulled out tens of thousands in crappy debt. | | |
| ▲ | throw2ih020 3 hours ago | parent | next [-] | | > If that was an actual problem wouldn't people be doing it without the college already? 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... | | |
| ▲ | ashdksnndck 2 hours ago | parent [-] | | Churning is not about taking out debt and not paying it off. It’s about signing up for credit cards and spending money to earn rewards points, and paying off the balance soon to avoid owing interest. |
| |
| ▲ | reddozen 3 hours ago | parent | prev [-] | | Ok. And the interest on unsecured debts like credit cards are like 25%. Sounds like the risk is properly priced in. What's your point? | | |
| ▲ | AnthonyMouse 22 minutes ago | parent [-] | | On top of that, the amount of unsecured credit you can get with no/bad credit history is more like $500 than $250,000. |
|
| |
| ▲ | baq 4 hours ago | parent | prev [-] | | …and in effect tuition would go down. |
|
|
| ▲ | dlcarrier 5 hours ago | parent | prev | next [-] |
| That answer is still begging the question of why it matters that bankruptcy rates stay low. 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. |
| |
| ▲ | imtringued 36 minutes ago | parent [-] | | The positive feedback you're talking about depends on the degree in question. If the degree is economically worthless the interest rate will rise and tuition has to drop to make the degree affordable. 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. |
|
|
| ▲ | euroderf an hour ago | parent | prev | next [-] |
| > it was to discourage students from immediately declaring bankruptcy upon graduation. 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." |
|
| ▲ | theahura 6 hours ago | parent | prev | next [-] |
| > There is no evidence that students were actually doing this in any significant numbers. premature optimization is the root of all evil. Seems like we shouldve actually shown that kids would do that before putting it into law |
| |
| ▲ | true_religion 5 hours ago | parent [-] | | They wanted to permit/compel all students to get loans. When you set the bar on the floor like that, you need to handle the obvious case of people who are given loans that they could never pay off normally. In American tradition, it was handled with the worst possible compromise that would enrich already monied interests. |
|
|
| ▲ | CamouflagedKiwi 4 hours ago | parent | prev | next [-] |
| You can't really tell people that they just can't be bankrupt though. What are they supposed to do if they have debts they can't pay but they're not allowed to declare bankruptcy because they pinky swore they wouldn't do it seven years ago? |
| |
| ▲ | dansquizsoft 4 hours ago | parent | next [-] | | Yeah I had a big lol when I read “just don’t let people declare bankruptcy for 7 years after graduation” - how in the world could this be good public policy? | | |
| ▲ | bloak 3 hours ago | parent | next [-] | | It was expressed in a strange way but I assume what they meant was that if the former student goes bankrupt within the 7-year period then the student loan is not cancelled. | |
| ▲ | sethammons 2 hours ago | parent | prev [-] | | Why would it be better to not allow the debt discharged ever? That is the current situation. 7 years as a limit is better policy than "you owe this forever no matter what" |
| |
| ▲ | zo1 an hour ago | parent | prev [-] | | Bankruptcy is such an alien concept. Adults took out consensual loans from another adult and now they get to just say oops "take backsies"? 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. | | |
| ▲ | Muromec 5 minutes ago | parent | next [-] | | The goal of having laws is as much about being fair as it is about having a society that can function. Aka "the target amount of fraud is not zero". 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. | |
| ▲ | yardie 27 minutes ago | parent | prev | next [-] | | Well the alternative is people do rational things like self emolate, self defenestrate, suicide, and familicide. During the ‘08 financial crisis I was reading horror stories of Spanish debtors topping themselves because financial fuckups in NYC, London, and Madrid caused a problem other people had to pay for. | |
| ▲ | nixon_why69 an hour ago | parent | prev [-] | | The idea is that its better for society to hit the reset button, pay creditors what they can be paid out of liquidation, and potentially have a productive member of society instead of somebody with absolutely nothing left to lose and maybe some grudges. It's not like bankruptcy is painless. |
|
|
|
| ▲ | imtringued an hour ago | parent | prev | next [-] |
| You would have to prove that you are unemployable to achieve any meaningful reduction in debt. For degrees that are demanded by the job market you wouldn't be able to declare bankruptcy and you would first have to make a reasonable attempt at paying off your loan. Basically proving the point that the loan shouldn't have been given out in the first place. |
|
| ▲ | nibbleyou 6 hours ago | parent | prev | next [-] |
| I feel the interests would rise to accommodate for all the bankruptcies that inevitably happen exactly 7 years after |
| |
| ▲ | jjav 6 hours ago | parent | next [-] | | If bankrupcy is allowed some reasonable number of years later (not sure if that is 7 or 10, but some reasonable time) then if your education worked out and you're in a good career path and maybe close to buying a home, etc, declaring bankrupcy would probably hurt more than help. 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. | | |
| ▲ | fc417fc802 5 hours ago | parent [-] | | > declaring bankrupcy would probably hurt more than help. 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. | | |
| ▲ | dmurray an hour ago | parent [-] | | A house and a car are an enormous amount of assets for someone 7 years out of college. Leaving bankrupts with "only" enough assets to be in the top few percent of their peers is hardly a hardship. | | |
|
| |
| ▲ | tbrownaw 6 hours ago | parent | prev [-] | | I would think that in this case, credit would mostly go to people expected to not have negative net worth after that 7 year limit. |
|
|
| ▲ | 4 hours ago | parent | prev [-] |
| [deleted] |
