Student loans and bankruptcy

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didymus

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Why can’t student loans be discharged thru bankruptcy? As far as I know these are the loans that can’t be. Businesses go thru “strategic” bankruptcies all the time, screwing suppliers and retirees. Individuals can declare bankruptcy either because they have crushing medical bills (understandable) or they went through all their money gambling.

Did this start in the 70s? If I remember right there were a lot of outraged news stories back then about doctors or lawyers who defaulted on student loans and then went on to earn six figure incomes.
 
The basic idea is it would be too easy - take out student loans, get out of college with no job, declare bankruptcy because you have massive debt and no job.
 
didymus said:
Why can’t student loans be discharged thru bankruptcy? As far as I know these are the loans that can’t be. Businesses go thru “strategic” bankruptcies all the time, screwing suppliers and retirees. Individuals can declare bankruptcy either because they have crushing medical bills (understandable) or they went through all their money gambling.

Did this start in the 70s? If I remember right there were a lot of outraged news stories back then about doctors or lawyers who defaulted on student loans and then went on to earn six figure incomes.
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Then they wouldn’t get the low interest loans in the first place, at least not without collateral.
 
In the 80’s the government began guaranteeing student loans to make college more affordable so people who normally were not able to get loans could. This guarantee was a subsidy of sorts, and like all subsidized things, it got more expensive. It has come to the point that not only can’t the financially disadvantaged afford school, but the average middle class student can’t as well.
 
didymus said:
Why can’t student loans be discharged thru bankruptcy?
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This is not exactly accurate.

Student loans can be discharged in Chapter 7 bankruptcy. It is, however, extremely difficult to do so.

First of all, it is an adversarial process, in other words you must bring a civil lawsuit. Most BK attorneys aren’t equipped for that. Secondly, you must prove undue hardship if they are to be discharged. If your other debts are already discharged, this is difficult to prove. Judges will use the Brunner test as the most common method of determining this.

You can also file Chapter 13 and the Chapter 13 plan can establish your payment amount.

However, with the current income based plans, where your payment can actually be as low as $0.00, I think you would have a difficult time proving undue hardship and Chapter 13 would be less advantageous than simply asking for an income based plan. (Parent Plus loans would be a different story as they do not qualify for the generous income plans).
 
First off, let’s not ignorantly spout off about “strategic bankruptcies” where businesses allegedly “screw suppliers and retirees.” That’s just anti-business, class warfare nonsense: When a business files Chapter 11 it keeps its doors open and its employees working; the alternative is that it closes; puts all its employees on the unemployment lines; and pays no one.

Further, 1ke, I have respect for a lot of your posts but I think you’re mistaken in a lot of ways as to this one. First, you’re giving legal advice IMHO, and that alone is a no no. Further, I think you are somewhat incorrect about how student loans can be discharged, simply because last time I checked, there was no reported instance in the US of a college loan being discharged since the bankruptcy laws were changed in 2005. If I’m wrong, I’ll say so, and I’d love to see a published case where this happened, but the fact that loans can be theoretically discharged (and they can be, in theory!) doesn’t mean judges have any sympathy for college students claiming hardship. Again, if I’m wrong I’ll say so, but I don’t think there are published cases where college loans have been discharged since the 2005 bankruptcy reform laws. If anyone can cite a published bankruptcy case since 2005 where this happened - then I’m wrong.
 
didymus said:
Did this start in the 70s? If I remember right there were a lot of outraged news stories back then about doctors or lawyers who defaulted on student loans and then went on to earn six figure incomes.
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This is exactly right.

It was a common abuse in the 70s. One of my guidance counselors even suggested that I do it.

From Fortune:

fortune.com/2015/03/12/student-loans-obama-bankruptcy/

The rule changed in 1978 for government student loans and was expanded in 2005 for private student loans.
 
Allowing student loans to be discharged through bankruptcy would make it harder, to impossible, to obtain student loans. There is no free lunch. When one exists, it doesn’t last for long.
 
pnewton said:
Allowing student loans to be discharged through bankruptcy would make it harder, to impossible, to obtain student loans. There is no free lunch. When one exists, it doesn’t last for long.
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Why doesn’t this same argument apply to loans in general? For example, could we say “Allowing capital improvement loans to be discharged through bankruptcy would make it harder, to impossible, to obtain capital improvement loans”.
 
LeafByNiggle said:
Why doesn’t this same argument apply to loans in general? For example, could we say “Allowing capital improvement loans to be discharged through bankruptcy would make it harder, to impossible, to obtain capital improvement loans”.
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Other loans have some sort of collateral, a history of good credit, or some other reason why the one loaning money can expect a reasonable chance of having the loan repaid. Bankruptcies are not that common and even then, they receive some back.

But then, the same principle does apply to other loans. If a company has proven insecure, or if the economic climate is poor, loans may cost a lot more or even be unavailable. Student loans are a cold but necessary lesson to young people that there is little in life that is free.
 
Almost all student loans are guaranteed by the government. So the lenders themselves didn’t care whether people filed bankruptcy or not. It was the government that cared.
 
pnewton said:
Other loans have some sort of collateral, a history of good credit, or some other reason why the one loaning money can expect a reasonable chance of having the loan repaid. Bankruptcies are not that common and even then, they receive some back.

But then, the same principle does apply to other loans. If a company has proven insecure, or if the economic climate is poor, loans may cost a lot more or even be unavailable. Student loans are a cold but necessary lesson to young people that there is little in life that is free.
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Unfortunately, the trouble now is that we’re getting to where both college is essentially unaffordable based on the kind of money a young person can earn, and where opportunities are severely limited without college or another type of expensive education.
 
pnewton said:
Other loans have some sort of collateral, a history of good credit, or some other reason why the one loaning money can expect a reasonable chance of having the loan repaid.
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Student loans may not have something comparable to these things now, but maybe** that** is the problem. If student loans were done like mortgages, for instances, the lender would look at the quality of the education you were buying and your suitability to take advantage of that education. They would not loan you the money to go to a school with a high drop-out rate, for example. If the same care were exercised by lenders of student loans as is exercised for other kinds of loans, the lender could reasonably expect to be paid back. (But as Ridgerunner pointed out, having loans guaranteed by the government without oversight removes the incentive to do that.) That might result in some students not being able to get the loan they wanted for the school they wanted, but that might be a good thing, not a bad thing, especially if it allowed, as a side-effect, that under the right circumstances (such as catastrophic illness or other unforeseen tragedy), such loans could be discharged in bankruptcy, the same as any other debt.
But then, the same principle does apply to other loans. If a company has proven insecure, or if the economic climate is poor, loans may cost a lot more or even be unavailable. Student loans are a cold but necessary lesson to young people that there is little in life that is free.
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Yes, and that lesson should be learned upfront rather than on the back end after wasting several years of your life and incurring an undischargable debt. So it would be better if some student loans were harder to get if that meant they could, under the right circumstances, be discharged in bankruptcy. The purpose of learning a lesson is to benefit from the lesson. The lesson taught by finding yourself in a debt from which you can never escape is a lesson that comes too late to do much good.
 
LeafByNiggle said:
(But as Ridgerunner pointed out, having loans guaranteed by the government without oversight removes the incentive to do that.)
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Part and parcel with government guaranteeing student loans is that they cannot easily be defaulted on, with many penalties in the form of denied government services for those who do not pay them back.
Yes, and that lesson should be learned upfront rather than on the back end after wasting several years of your life and incurring an undischargable debt. So it would be better if some student loans were harder to get if that meant they could, under the right circumstances, be discharged in bankruptcy.
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There would be a lot of benefit to having the whole process privatized. Fewer people would be able to go to college, but I do not know that this would be a bad thing. Less demand has a way of lowering costs, and I have reservations that everyone need to go to college for any job. I am a big fan of higher education, but I think we have gotten a little snobbish about the blue collar worker in America. Your average carpenter or assembly worker will contribute more to society than the average lawyer or government analyst, as far as real “stuff” that actually contributes to our productivity.
 
pnewton said:
Part and parcel with government guaranteeing student loans is that they cannot easily be defaulted on, with many penalties in the form of denied government services for those who do not pay them back.

There would be a lot of benefit to having the whole process privatized. Fewer people would be able to go to college, but I do not know that this would be a bad thing. Less demand has a way of lowering costs, and I have reservations that everyone need to go to college for any job. I am a big fan of higher education, but I think we have gotten a little snobbish about the blue collar worker in America. Your average carpenter or assembly worker will contribute more to society than the average lawyer or government analyst, as far as real “stuff” that actually contributes to our productivity.
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Something one rarely hears in these discussions is the amount of education one can receive “on the job”. I don’t simply mean training that’s “in-house”. Lots of employers subsidize further education of their employees. Usually it’s specialized, like getting a degree or associate’s degree in agriculture, computer programming, utilities, human resource management, marketing, advanced degrees or certification in healthcare. It’s very common and very, very practical.
 
pnewton said:
Part and parcel with government guaranteeing student loans is that they cannot easily be defaulted on, with many penalties in the form of denied government services for those who do not pay them back.

There would be a lot of benefit to having the whole process privatized. Fewer people would be able to go to college, but I do not know that this would be a bad thing. Less demand has a way of lowering costs, and I have reservations that everyone need to go to college for any job. I am a big fan of higher education, but I think we have gotten a little snobbish about the blue collar worker in America. Your average carpenter or assembly worker will contribute more to society than the average lawyer or government analyst, as far as real “stuff” that actually contributes to our productivity.
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Maybe we should bring back the guild system. I know electricians have the apprentice, journeyman and master levels. Maybe we should expand that to more of the trades and along with it a respect for the blue collar trades.
 
Ridgerunner said:
Something one rarely hears in these discussions is the amount of education one can receive “on the job”. I don’t simply mean training that’s “in-house”. Lots of employers subsidize further education of their employees. Usually it’s specialized, like getting a degree or associate’s degree in agriculture, computer programming, utilities, human resource management, marketing, advanced degrees or certification in healthcare. It’s very common and very, very practical.
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^^^ This! My last employer made no effort to assist with further education for employees. In fact they made it somewhat difficult to do.

My daughter-in-law is starting her MSW this fall and while her employer isn’t providing financial support they are assisting her in giving her a flexible work schedule, letting her work few hours when she needs to, and guaranteed advancement when she is done and licensed as a Therapist.

She will have some student loans but she & my son both have great jobs and are extremely financially prudent so paying back the loans she did take shouldn’t be a problem at all for them.

Part of the problem is when someone applies for student loans they are often offered a lot of money. When I went back to school in my 30’s I applied for loans & grants. I was offered an obscene amount of money in the way of loans. Far more than school actually cost. I took every grant I was offered and only enough in loans to make up what my grants didn’t pay for. Then I worked to support myself & family. I ended up with just under $10,000 in loans for a 4 year degree. Easily paid back over the next few years.

I’ve known of people who borrow far more money than it actually costs for tuition, books, and fees. They take the money because one, they are often very young and really don’t have a good comprehension of financial responsibility, or two, they just don’t realize there are other ways to pay for school besides student loans.
 
Part of the problem is my generation basically got told “either go to college or end up working a minimum-wage job for the rest of your life.” It makes massive student loans a lot more attractive if you’re under the impression that the other option is making 8 bucks an hour.
 
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