Student loans and bankruptcy

[Deo_Gratias42]

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.

In Canada, this started in the late 90s early 2000s because too many students were opting to just declare bankruptcy rather than pay off their loans. Now there is a very long waiting period before they can be cleared through bankruptcy.

 

[Deo_Gratias42]

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.

Yep. That’s what I was told.

 

[styrgwillidar]

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.

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.

Good points, with the government (i.e. the taxpayer) backing the loans it provides perverse incentives to the lenders to loan to anyone and to educational institutions to raise their tuitions/fees. Then the government turns around to theoretically protect the taxpayer by making the loans exempt from bankruptcy, resulting in a lot of folks under debt that can’t be resolved.

In some ways a bookkeeping scam, the government hasn’t lost the money since they’re still assets on the books carried at face value, however, they’re really almost worthless if the debtors have no hope of paying them.

 

[mommy_k]

For what it’s worth-our kids in college all had to have a cosigner for loans. I would think this is true for most kids these days. If the student goes bankrupt-well-guess who pays?

There are different rules for govenrment loans and private loans. Read the fine print on the application.

 

[1ke]

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.

Nope. See The Student Loan Law Book, published by the NCLC.

First, you’re giving legal advice IMHO, and that alone is a no no.

Nope again. I am stating facts. I have not advised anyone to file BK, that their situation qualified for BK, etc. I am stating well known and easily Google-able facts.

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.

Again, nope. And see NCLC books references above. It is in fact a small number, and as I indicated the Brunner test is the most used standard by judges. And, with the addition of REPAYE starting Dec 2015 I would guess it will be even less likely in the future.

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.

Here you go:

papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445

This paper studied successful student loan discharges with a sample of those cases filed in 2007.

 

[1ke]

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.

Since 2010, the U.S. government IS the lender. The FFEL program ended in 2010. The governments has a policy agenda at odds with using credit worthiness factors such as credit scores, income, collateral, etc.

But as Ridgerunner pointed out, having loans guaranteed by the government without oversight removes the incentive to do that.

Not since 2010. The only studen loans available now are directly from the government, who is the lender.

That might result in some students not being able to get the loan they wanted for the school they wanted

Which isn’t the policy agenda that Ed is trying to advance.

 

[1ke]

For what it’s worth-our kids in college all had to have a cosigner for loans. I would think this is true for most kids these days. If the student goes bankrupt-well-guess who pays?

Cosigners are needed for private loans, which ARE based on credit worthiness. Private loans also have to meet the same tests in BK court, if they were qualified education loans used to pay education related expenses.

Federal student loans do not have cosigners.

 

[Theo520]

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.

What you are really saying is the economy isn’t producing good jobs.

I’d suggest dialing back our H1B visa program, these are decent paying jobs in STEM areas.

 

[DarkLight]

What you are really saying is the economy isn’t producing good jobs.

I’d suggest dialing back our H1B visa program, these are decent paying jobs in STEM areas.

Yes and no. Our economy is more and more putting the good jobs behind a barrier where you need a certain level of education to access many of the good jobs - even jobs that don’t really need the education. It’s not like it used to be where you could take a job in a factory and use the money you made to pay your tuition. The kinds of jobs that an 18-20 year old with a high school degree and no job training or experience can get aren’t going to make much of a dent in modern college tuition.

Adding on, we’re expecting 18 year olds to pick a major that defines their opportunities for years to come. I know at 18 there were a lot of things I didn’t know, both about the job market in general and about my field specifically. I’m not sure I would have made the choices I did had I had the information about those things that I do now.

 

[mikekle]

They will have to do something different in the near future in regards to student loans, so many people are defaulting now, plus, Ive read quite a few articles about people making massive student loan payments only to have their balance go up, one college grad upon graduation owed something like $60K, but 8-10 yrs later, his balance was over $100K, even though he had made all the payments, there are countless other individuals just like this!

I think part of the problem is every parent wants their kids to get a traditional college degree, even though jobs are scarce for most grads, and they snub their noses up at suggesting going thru a vocational school, which is much less expensive and depending on the trade, good jobs are waiting for them right at graduation.

 

[John_Lazarus]

Yes and no. Our economy is more and more putting the good jobs behind a barrier where you need a certain level of education to access many of the good jobs - even jobs that don’t really need the education. It’s not like it used to be where you could take a job in a factory and use the money you made to pay your tuition. The kinds of jobs that an 18-20 year old with a high school degree and no job training or experience can get aren’t going to make much of a dent in modern college tuition.

Adding on, we’re expecting 18 year olds to pick a major that defines their opportunities for years to come. I know at 18 there were a lot of things I didn’t know, both about the job market in general and about my field specifically. I’m not sure I would have made the choices I did had I had the information about those things that I do now.

I hear you. I had just turned 16 when I graduated high school. I had NO idea what I was going to do with the rest of my life. I was nowhere near ready for university when i went.

 

[signit]

Yes and no. Our economy is more and more putting the good jobs behind a barrier where you need a certain level of education to access many of the good jobs - even jobs that don’t really need the education. It’s not like it used to be where you could take a job in a factory and use the money you made to pay your tuition. The kinds of jobs that an 18-20 year old with a high school degree and no job training or experience can get aren’t going to make much of a dent in modern college tuition.

Just like what I always say.

If you get an education it might be an inconvenience paying for it.

If you don’t get an education that might not be a good thing either as there aren’t the kind of jobs out there anymore you can do with a high school education and support yourself comfortably.

And when the old-timers say, “Well, I worked my way through college!”, I say to myself that their situation was completely different.

Adding on, we’re expecting 18 year olds to pick a major that defines their opportunities for years to come. I know at 18 there were a lot of things I didn’t know, both about the job market in general and about my field specifically. I’m not sure I would have made the choices I did had I had the information about those things that I do now.

I hear you. I had just turned 16 when I graduated high school. I had NO idea what I was going to do with the rest of my life. I was nowhere near ready for university when i went.

Strongly agree.

I certainly regret the choices I made back then, giving in to hype from peers, parents, and others.

This is why I jump on the boards when somebody posts saying they want to study some liberal arts field but they’re concerned about paying for it and/or the job prospects. What people do is their business, of course, not mine; but I can respectfully ask someone to consider the financial aspects. A degree in this or that might not be worth it (to a particular individual) if it would mean eating ramen for a few years. I know from experience.

I think part of the problem is every parent wants their kids to get a traditional college degree, even though jobs are scarce for most grads, and they snub their noses up at suggesting going thru a vocational school, which is much less expensive and depending on the trade, good jobs are waiting for them right at graduation.

Agreed again.

Again, “hype.” Parents and (especially) peers hype the idea of a four-year college degree as being a guarantee to a “good job” and a comfortable middle-class life. It may have been in the 1950s; it certainly isn’t now.

And the four-year colleges hype themselves as well. They present the job prospects in a misleading way.

I remember joking with another out-of-work college grad that all the people we knew who went to secretarial school had jobs.

 

[1ke]

And when the old-timers say, “Well, I worked my way through college!”, I say to myself that their situation was completely different.

Yes, these are the stories indebted millennials like to tell themselves to make themselves feel better.

The truth is, however, that it is possible to “work your way” through college, economize, and save money. But you have to subjugate your wants for your needs.

My niece is a great example. Love her to pieces.

But she could have lived at home two years (free) and gone to the two year school that feeds into our 4 year system in our state (guaranteed transfer of all credits). The credit hours are cheaper. The room and board are free. She could have worked part time, too.

But, no. She wanted to go off to the 4 year school as a freshman.

She could also live at home and take online credits or go to the 2 year school in the summer at a cheaper rate to take her “basics”, but no she’s not going to do that.

She also could have worked at the job she had in high school over her month long Christmas break. But no, she didn’t do that.

So, yeah, I think many of today’s college students do it to themselves. They also major in things that won’t give them any return on their investment at all.

While I did go to a 4 year school all 4 years, I also earned a scholarship that paid for most of my tuition, I worked two part time on-campus jobs during the school year, I took summer classes at the junior college for my basics at a much cheaper rate, and I worked **full time **as a waitress in the summers on top of taking the junior college classes while living at home for free.

I also majored in something useful.

 

[signit]

But she could have lived at home two years (free) and gone to the two year school that feeds into our 4 year system in our state (guaranteed transfer of all credits). The credit hours are cheaper. The room and board are free. She could have worked part time, too.

But, no. She wanted to go off to the 4 year school as a freshman.

She could also live at home and take online credits or go to the 2 year school in the summer at a cheaper rate to take her “basics”, but no she’s not going to do that.

She also could have worked at the job she had in high school over her month long Christmas break. But no, she didn’t do that.

Great post, thanks.

And once again, this goes back to what I said about hype.

Somebody doesn’t want to go to a two-year school because somebody else said people only go there as a last resort.

Somebody wants to “go away” to college because somebody else said they should get the “college experience.”

I know because I heard it all.

 

[JackVk]

Great post, thanks.

And once again, this goes back to what I said about hype.

Somebody doesn’t want to go to a two-year school because somebody else said people only go there as a last resort.

Somebody wants to “go away” to college because somebody else said they should get the “college experience.”

I know because I heard it all.

Amen. I went to community college and took distance/online classes over a 5 1/2 year period. Graduated with a business degree and no debt. My parents paid for it because I was living at home, keeping expenses low for them, and I was working the whole time.

And this was not a degree you can get from a matchbook. These were quality classes for a fraction of the cost (about $1000 a semester) of a state school. It’s why I am convinced my generation doesn’t go to state schools for education, but for partying, the “college experience”, and getting away from their parents to sow some wild oats.

One person here mentioned that student loans were issued by the government. Therefore, we have found the source of the problem. Scarily, there are many who think nationalizing college -giving more power to the entity that created this debt crisis in the first place- is going to magically make it go away.

Someone may object to this, saying that free college is “an investment in our future”. Not necessarily. When you have a bunch of people who gave degrees in sociology, literature, art, or liberal arts, you have a bunch of people who companies are not interested in hiring. It’s a grand myth that a college degree guarantees you gainful employment.

 

[Theo520]

I think too many students treat the loans as free money, and max out.

I went to a cheap State school and only took out loans so I could study abroad one semester. I recall many classmates who maxed out their loans every year to support a party lifestyle, though one guy invested his loans in the stock market.

This is not the whole problem but it does play a part in the debt reaching excessive levels by graduation.

 

[WillyAL]

…though one guy invested his loans in the stock market.

I had a college roommate who did this too. Maxed out his student loans, lived like a monk, and invested the left over proceeds of the loans in the stock market. While I’m not real comfortable with the ethics of what he did, financially he did well - very well. The day after graduation he walked into the financial aid office and wrote a check for the balance of his student loans.

 

[Theo520]

I had a college roommate who did this too. Maxed out his student loans, lived like a monk, and invested the left over proceeds of the loans in the stock market. While I’m not real comfortable with the ethics of what he did, financially he did well - very well. The day after graduation he walked into the financial aid office and wrote a check for the balance of his student loans.

Smart investors are the exception, most ‘invested’ their loans at the buckhorn bar or flying to Mexico for Spring Break

 

[JimG]

They will have to do something different in the near future in regards to student loans, so many people are defaulting now, plus, Ive read quite a few articles about people making massive student loan payments only to have their balance go up, one college grad upon graduation owed something like $60K, but 8-10 yrs later, his balance was over $100K, even though he had made all the payments, there are countless other individuals just like this!

I think part of the problem is every parent wants their kids to get a traditional college degree, even though jobs are scarce for most grads, and they snub their noses up at suggesting going thru a vocational school, which is much less expensive and depending on the trade, good jobs are waiting for them right at graduation.

Yes, and of course they also snub their noses at the idea of applying to enlist in one of the military services, and going to college after the enlistment term, using the GI bill benefits. They will have some real world experience, will have done some maturing, and have financial help for college, if they choose to attend college.

 

[DarkLight]

Honestly I think a lot of the problem is that we’re pushing going to college right out of high school and making huge loans available to 18 year olds.

18 year olds are technically adults but are still very young. They also tend to have very limited information about how the real world works - and many my age can attest that the story we got from our parents and teachers and professors turned out to not match up very well with what we found out later on.