To anyone who ever thinks as a lender, it's obvious. Why would I loan you $40,000, when you have no real disincentive to declare bankrupcy and not pay back a dime?

I think the best thing for students and student loans would be to treat them like any other loan.
You want me to loan you $40k?
Ok tell me why, what major, what your grades are, what your expected income is afterwards?
It will force kids to actually look at the practical side of college, instead of looking at it just as where can I best party for 5 years, like many do.

So I didn't quite get the point of this post.

It seems that the argument being made is that: Government regulation and interference in credit markets is bad. Except of course when it benefits large banks by doing things like making student loans non-dischargeable. …In which case it's good.

In other news crony capitalists accuse president Obama of being a: communist, fascist, Muslim, atheist. Who simultaneously wants to start a war on religion and impose sharia law.

Oh I forgot to add. Before 1976 all student loan debts were dischargeable. Then between 1976 and 1984 only loans from a non-profit institution were non-dischargable. Finally after 2005 all student loans, including those made by private institutions (banks) were non dischargable.

So was there a student loan market before 1976? What about before 1984? Or even before 2005? Of course there was. We already know what happens when you allow student loans to be discharged, because we've already done it. Our experience shows that the student loan credit markets function just fine.

Now you may argue: 'Wait a minute if we allow student loans to be discharged consumers will have to pick up the tab for any defaults!!'

Well that's a fine argument as far as it goes. But that's true with any credit defaults. So if that's your position; then why not make all debt non-dischargable?

We have a bankruptcy process in place for a reason. If you believe that the process needs to go away, then feel free to make that argument. But it should apply equally to everyone. We have a little concept in America called equal protection under the law, that many people seem to pay lip service to; but blatantly ignore when it benefits them to do so.

By the way I don't have any student aid debt, and never have. So I don't have a dog in this fight either way.

Mike Hunter,

It may or may not be a good thing in the long run to make student loans dischargeable like other forms of consumer credit. In the short run, however, current college-bound high school students will not be able to obtain a student loan. Full Stop. I'm pretty sure the argument that's being made is that there is no Pareto-superior action to be taken.

Either way, allowing student loans to be discharged would also be a massive transfer payment to a portion of society who will be or are currently high-income earners.

Don't miss the key point of making a student loan dischargeable: telling students they don't really have to pay.

As it is, no financial advisor wants you to co-sign for anything. All of the risk, none of the reward. And if you do this for a student loan, your student can thumb their nose at you and go do what they want.

No one with nothing to lose is worth anything.

> …In which case it's good.

Cynical.

> Before 1976 all student loan debts were
> dischargeable. Then between 1976 and 1984 only
> loans from…

Gotta cite? I'm sincerely curious.

> allowing student loans to be discharged would
> also be a massive transfer payment to a portion
> of society who will be or are currently
> high-income earners.

Damn... Who are you guys? This is a good argument.

Federally-guaranteed student loans are not dischargeable in bankruptcy because the federal guarantee reduces the risk to the lender and gets the borrower a lower interest rate than the market would give him.

With a bankruptcy, the outstanding loan amount is not recovered, so the taxpayer-financed risk reduction becomes little more than a government-mandated wealth transfer to college students.

Your credit card interest rate takes the risk of you declaring bankruptcy into account (one reason they're so high). Your federally-guaranteed student loan interest rate does not.

I'm confused. A mere seven years ago there was not an onslaught of students discharging debt with a bankruptcy, yet they passed a bill to prohibit such. Now it's a major concern? Is it because the cost of going to school has doubled and tripled in some places, while the government has done its share trying to push as many kids into college as possible?

My sister is currently an undergrad at the school where I went to grad school. She's paying more as an undergrad per year than I did as a grad student. I graduated in 2004. That's completely ridiculous.

Then after being told that you are nothing and have no future unless you go to college, you go, only to not be able to find a job, or find one that doesn't cover the cost of living AND your student loan debt - all set in motion by the Department of Education.

Most people don't go to college because they want to spend money and they have nothing better to do with their life. However, in the last five years, defaults have gone from 12% to 80% of former students (graduates and dropouts). I have a friend who works for a collection agency for the DOE.

What do you expect them to do? Not me, I make enough to cover all of my expenses. We have stopped valuing the plumber, electrician and mechanic. We've said the only way to get ahead is going to college and people trust the government. Should they? Probably not. But they do. And then it's the government who keeps them in the poor house.

Yes, I think companies making the choice not to loan or people deciding that they can't afford it is the free market solution to allowing student loans to be discharged.

> Then after being told that you are nothing
> and have no future unless you go to college,
> you go

People who live their lives "being told" stuff, or think that they CAN live there lives by "being told" stuff, are a big, big part of the problem.

A market economy works when all participants, on an individual level, watch each other's needs and budgets carefully. And when they see a chance to meet a need at an acceptable price, they move on it. And if they're watching more closely than the next guy, maybe they'll turn a little higher profit.

"Being told" has nothing to do with it.

Their. Sue me.

PS/Nikki- Cute baby.

More PS/Nikki- Except for being all twitchy about the "being told" part, I agree with your comment.

Education WILL be improved when the "nothing better to do with your life" people are chased away, right? How many people drift aimlessly into advanced study, and then deliver the kinds of brilliance that the rest of the community should be expected to pay for?

I assume not many, but am ready to be convinced otherwise.

"In the short run, however, current college-bound high school students will not be able to obtain a student loan. Full Stop. "

You say that like it's a bad thing. Seriously... the higher education market is massively over-inflated, much worse than the housing market. And, as in the case of the housing market, deflation to market prices is inevitable, and all that government intervention accomplishes is to delay the day of reckoning. Students are going to default, in fact if not in name. What are we going to do, throw them in debtors' prison? That won't get any of the money back. Fact is, the money is gone. Pissed away down ratholes, like Assistant Vice Provosts for Diversity and Climate. Students massively overpaid for a not-very-valuable investment. Wealth was destroyed. It's gone.

A lot of these students, if they ever hope to be gainfully employed, are going to have to go back and re-do their education. They can't do it under the current circumstances. Deflation of college tuition back down to market rates will make it possible for at least some of them to back through school on a pay-as-you-go basis. Otherwise, we've got a(nother) permanent dependent class on our hands.

@ Cousin Dave

I wasn't saying it would be a good or bad thing only that it will happen. Many who would like to see all student loans be dischargeable or institute, god forbid, a blanket college debt forgiveness cannot(choose not to) see past the first order effects(at my most cynical, I'd wager due to extreme solipsism and sense of entitlement). Those who would receive these benefits, obviously, gain at the expense of others, not only through a transfer payment from taxpayers, many of whom have never taken out a student loan but still went to college on their own dime, but also by destroying the opportunity for current high school seniors and juniors to obtain a loan.

I would think the market will equilibrate back to a point where student loans will be obtainable(at stiffer terms, which is fine), but it would not be instantaneous. There will probably be at least a two year gap where this type of financing will be impossible.

I agree completely that government intervention artificially inflated tuition prices by increasing the demand for higher education, and the only way for tuition to come back to not-so-crazy levels is to stop subsidizing it. But, again, there is no Pareto-superior option available. The question is, who should bear the brunt of the costs? Those who willingly took out the loan? Taxpayers? Prospective college students? Investors?

Allowing mass discharges seems to be boon to one very specific subset of society at the expense of everyone else.

"What needs to happen is that the government needs to get out of the student loan business," period, end of sentence.

The reason that tuition has risen to the levels it has is because the government has been involved.

Colleges have always had arts type degrees but usually they were minors, or tied into an education or some other type of degree that paid money. Or the students were the child of a rich parents that didn't need the degree. This is back when you could work your way through college or if you had a student loan it was based off the banker knowing you and your parents personally. At the same time the student investigated and chose the course based on their desires, abilities, and future career prospects because they knew they were on the hook.

In 1972, 1974, & 1976 the G.I. Bill and other college programs were added, adjusted, etc. that the government became more involved in the funding private educational institutions.

As the government starts getting more involved their is a divorce from the banks. Now the colleges can expand the degrees to many liberal arts degree with little expectation that it will pay off. Colleges start expanding degree programs into everything. But the loans are still privately funded, hence the non-dischargeability in bankruptcy. Over time they are fully funded by the government. The colleges also raise tuition and administrative fees.

Once you take the personal responsibility from the student to consider their decisions in respect to paying off the loan, you also take the deliberate thought from them.

What needs to happen is that those students already in the programs and have federally backed loans, should be allowed to continue getting them, change majors, etc. until they graduate or drop out. Those not currently enrolled are not allowed into federally backed programs.

What will happen is that private banks will step up and fund the loans as long as they know they will paid back. Colleges will have to get back to realism that their tuition rates are sky-high. When you have endowments in the billions, you can afford to get real. (links below)

This is my thumbnail view on the issue, not 100% backed up on facts. But I bet you can find correspondence on all that I am mention if you look.

en.wikipedia.org/wiki/List_of_colleges_and_universities_in_the_United_States_by_endowment

en.wikipedia.org/wiki/College_tuition_in_the_United_States

Won't be able to get student loans? Good.

More money (or credit) chasing the same goods drives up prices. It's not a coincidence that the price of a college education is going up much faster than most other things. We now have an education bubble, and people basically living under indenture into their 40s. All this is driven by the ready availability of student loans. You should be able to get a college education primarily out-of-pocket, from reasonable family savings and summer jobs.

By reducing student loans, you reduce the amount of money chasing the good of education. Schools will still want to fill those seats. They will fill them at a lower price, the same way any business reduces prices to move product when customers are unwilling or unable to buy. This will leave the schools somewhat worse off, but it will only take them back to a historical norm. And students will also pay more of a historical norm.

This is no different than the housing bubble. It was fun while it lasted, but we're better off as a nation going back to the long-term sustainable trend line. Young families should be able to afford homes without resorting to negative-amortization mortgages, and young students should be able to afford an education without resorting to loans that they will be paying into their 40s.

I have absolutely no sympathy for people who run up huge student loans with no idea of how to pay them off. When I picked a college, I had one criterion in mind: which one is the cheapest? It's a tried and proven method of shopping for pretty much everything.

I borrowed money to go to grad school, but I knew I had a high probability of getting a high paying job after I graduated, so it was a reasonable risk. Plus, borrowing that money (at 13% interest!) made me worried, so I'm sure I studied even harder than I would have otherwise. I got a good job, lived frugally, and paid off all my loans in 3-4 years.

If you borrow $70,000 for a BA in English, then frankly you deserve to be a debt slave for the rest of your life.

You can also thank the Courts while you are at it. Griggs vs Duke Power made it almost impossible for private industry to administer aptitude tests for jobs that don't really require a college degree, but do require some smarts.

Now it's "degree required" nearly everywhere. Meanwhile the military still administers aptitude tests and trains people for these same high tech jobs (IT, electronics, etc) without a degree.

Looking to government to fix the problem it created never struck me as wise, but I'm a cynic.

...and gets the borrower a lower interest rate than the market would give him.

In theory, yes, but our interest rates are so low right now that people like my sister are paying higher than market share because their student loans are locked into the original rate.

It seems like a no-brainer to me that student loans should be treated the same as other loans. If that tightens the market, then maybe universities will have some incentive to cut back on spending. Of course, it seems like much of the fat is at the admin level these days and those are the very people who will be in charge of making cuts. Sigh.

"Allowing mass discharges seems to be boon to one very specific subset of society at the expense of everyone else."

I agree with that. I also agree with you that the loaned money is gone and there's no practical way of getting very much of it back. There's a further point to be made here: These students aren't just saddled with huge loans. They are also saddled with worthless educations. They're all going to have to go back to school, and somehow they're going to have to pay for that in addition to trying to pay back their loans. As has been pointed out, this will all delay these young people in engaging in the kind of economic activity that adults engage in -- buying houses and cars, taking vacations, etc. -- and that's going to have long-term effects on our economy.

I don't have a pat answer, but I do know these students can't pay all of it back. The money simply isn't there. I think there's going to have to be some kind of general write-down, like maybe 50% of the outstanding values. Additionally, there will have to be something done to get some of these young adults back to school and learning something that will actually be useful. A lot of the colleges that have the highest tuitions and have been handing out the most XYZ Studies degrees are also sitting on billion-dollar endowments. Since these colleges were a big factor in creating the problem, it's time to hit them up for some of that. Use some of the money to get some of these kids into vocational schools, or into degree programs that will actually lead to paying jobs.

And I forgot to add: As MarkD pointed out, Griggs v. Duke Power is a big part of the problem and must be overturned. Vocational training won't do much good if every single job requires a degree as an admission ticket.

Shut off the spigot of easy money which guarantees college and universities can get $2,500 to $5,000 per student per semester no matter the degree, the college, or the student.