Student Loans and Bankruptcy

The Dept. of Education has made a decision on how to handle these cases.

Department of Education Reaches Decision About Student Loans and Bankruptcy | Steve Rhode

 

It's 'way different here in Canada. Originally, there was no time limit. Former students could get out from under their Canada Student Loans via bankruptcy -- pretty well regardless of age of the loan. As of 1992, The Crown (i.e. Fed. Gov't) was no longer even a preferred creditor in case of assets, should there be any to distribute. Then (1997) a two-year limit was imposed - no discharge from the debt by bankruptcy before the person was at least two years out of school. Then (1998) that limit was raised to 10 years. As of 2008 it's been reduced to 7 years.

Student debt has increased here, but it's less of a problem than in the US. Canada Student loans outstanding are under 15.9 billion, vs. what? 1.1 trillion in the US? Since our population is about one-tenth of yours...well, you can do the math. :smile:

(Sigh.) So many things are bigger in the U.S.

J.

 

The inability (generally) to discharge student loans in bankruptcy is a shame. It was a gift to the banks issuing the loans (before the government took it over). There's no real reason for this--student loan debt isn't structurally different from other forms of unsecured debt.

Given the unfettered distribution of student loans with no outlook regarding the utility of the degrees issued, I fall in favor of the students on this one.

Personally, I think student aid should be limited to degrees and subjects considered necessary to the advancement of our economy--but that would take actual planning from the federal government. Fat chance.

 

I read about an interesting strategy one guy used to discharge his student loan debt a while back. I wouldn't advise anyone doing it, but I did have to admire his creativity. He refinanced his house and rolled his student loan into the new home loan. He used the money from the new loan to pay off his student loan...and then he just stopped paying the home loan. He walked away from it.

Creative? Yes.
A wise thing to do? Probably not.

 

Pay off your loan, from the comfort of your home -- and then lose it. :sad: I'm glad that nobody even has to think up such a strategy here, at least in regard to student loans.

 

I did something similar, at least the first part. Rolled my student loans into my home refi but then I sold the house at a profit, mostly due to sweat equity.

 

Here's a related story about the problems of the co-signers of those student loans.

http://www.nytimes.com/2015/07/11/your-money/student-loan-co-signers-face-a-tangled-path-to-a-release.html?ref=education&_r=0

 

Few want to verbalize it, but no student should borrow beyond their ability to repay the loan. Granted, good intentions may exist, but student loans have been far to easy to obtain and many students have borrowed not only for tuition and books, but also for lodging/meals/untold amenities/etc.

I obtained a student loan for half of my first masters and all of the professional doctorate; however, I borrowed for tuition only. Books and all other fees were paid out of pocket. Once I completed the professional doctorate, I paid the combined loans off within three years. I know everyone isn't able to do this, but I do believe far too many students borrow in excess.

 

We need a 'like' button. Great point. This also adds to the predatory nature of student loans.

 

Ah, but who determines that? Students? They're not (normally) a very experienced group and, especially with younger students, are borrowing against their futures and can't possibly calculate what is their "ability to repay."

In other lending situations, the lender exercises care in restricting the availability of loans to an ability to pay. But if lenders did that with students, almost none of them would be credit-worthy.

The other recent example we have of this predatory behavior is the housing bubble that popped last decade. With rocketing prices, lenders felt free to lend to just about anyone, confident that those houses they had to repossess would just sell again. Plus, all those dollars chasing houses drove prices even higher, fueling this bubble. Lenders were doing sub-prime loans, no-document loans (where lenders didn't even have to prove their incomes), interest-only loans, 100% (no down payment) loans, and anything else they could use to sell houses. Then....poof. It all came tumbling down, burning everyone who'd bought a house during that time, regardless of their individual creditworthiness.

This bubble is bad, too. And all those loaned dollars chasing degrees certainly drive up prices--for everyone. When this bubble pops, lenders are going to get burned, along with investors in student loans. Schools are going to see customers chased away and and enrollments will drop. The for-profits will offer "scholarships," which are just discounts. What? It's already happening? Of course it is.

This country needs a national HRD strategy. We need away to take the decision about where and on what students decide to spend loans subsidized by our tax dollars...away from individual students and towards collective decisions that benefit us all. The other decisions can go to the private market...or come out of students' pockets.

Our country needs to transform itself--away from an economy based on low-skill jobs (manufacturing, service, etc.) to one based on what the U.S. might be able to do better than anyone anywhere else. That used to be manufacturing and, to some extent, high-tech (computers, mostly). But those are done for much lower costs by people who don't have to be given workplace safety, health care, human rights, etc. If you're in those fields, you're competing with workers overseas operating under those conditions. To move us away from that, we need to provide people--especially people making career choices or changes--pathways towards uniquely American fields of work. In other words, tertiary education has to have some purpose, or schools will just continue to crank out graduates who are not prepared to compete on the world stage--and nor will this country be.

 

I think this is part of the issue. EVERYONE that starts thinks they'll graduate. EVERYONE thinks they'll land a great job. EVERYONE thinks it won't happen to them.

Even for the responsible borrower, it's a mess. I borrowed $5000 for grad school (I finished my degree in 2014) and my little payment is $51 per month (10 years), no problem. It started 6 months after graduation, I've never been late but I'm also only paying the payment amount. When I pay more, they say I'm paid ahead. I've went around and around with these clowns. So, I just looked at my 1 year statement, my principal balance is actually $100 higher than when I started. This is without fees of any kind, without neglect, without any "problems" that people assume surround students in crisis. Student loans are NOT typical. I am not a stupid person, but after dissecting my statement, multiple calls, and watching my account like a hawk- I still can't figure out the best way to pay this off or how the heck my principal balance goes up each month. So, I'm setting aside the cash and will make one lump sum payment in the fall; because it freaks me out. If that loan balance was $100k, like it is for many students, I frankly have no clue how you get on top of it.

 

The best way to deal with student loans, is not have one in the first place, lest we forget "the borrower is slave to the lender".

 

Of course it is, because the asset-- the education-- cannot be stripped by bankruptcy. If I file for bankruptcy, and was able to discharge my student loans, I would still be able to use my degree to make more money.

Since a degree cannot be discharged-- you will always have it-- there would be a distinct advantage to, say, a doctor filing for bankruptcy immediately after graduating medical school. It is true that his credit will be trashed for 7-10 years.

Its just basic match. The average medical student has $166,000 in debt. With interest, they pay over $400,000 for those loans over 30 years. Whatever they would lose from having horrible credit (rent vs buy of house, higher interest rate on cars by 2-3%, etc) would be much less than the $400,000 they would save by filing for bankruptcy.

If they could discharge student loans through bankruptcy-- it would be highly profitable for every new med grad to get a job, buy a house, quit, file for bankruptcy, and start over debt free. They'd still be a doctor, but without the debt.

 

This is an article on The Onion that is related to this discussion. Sadly, there's a lot of truth to it...

Online University Allows Students To Amass Crippling Debt At Own Pace - The Onion - America's Finest News Source

 

True. But that in itself doesn't make the loan a secured debt. It took special legislation to do that. What about a student debtor who never completed his/her degree? Is he/she different by not having a degree to make money from? With all the PhDs on food stamps etc. I keep hearing about, how can anyone say (with a straight face) "You can't discharge your student debt, because you have a (reverent pause) degree, so get out there and make money."

The argument is moot, here in Canada, because this type of debt IS classed as unsecured and dischargeable through bankruptcy. BTW education costs a bundle for Canadian medical students, too. They aren't declaring bankruptcy in any significant numbers, even though it's possible, seven years or more after graduation. By that time, I'm sure most of them have earned sufficient money to establish themselves, make quite a dent in their student indebtedness - and maybe get a nice Audi. They should! They're worth it! :smile: I don't think bankruptcies - education debt-related or not - by Canadian doctors are much of a problem. I worked in the credit business for thirty years and saw personal bankruptcies rise from about 400 country-wide per year to around 80,000. On the job, I read literally thousands of bankruptcy declarations in those years. I saw very, very few from doctors - probably a handful in all that time - and I can't remember any that looked education debt-related.

J.

 

Here's a kind of follow up story, or maybe a spinoff story about the hardship standard that's used to determine if the debt can be relieved.

http://www.nytimes.com/2015/07/18/your-money/student-loans/judges-rebuke-limits-on-wiping-out-student-loan-debt.html?ref=education

 

In a related story, spening on college increases 16%.

Spending on college soars 16% - Jul. 20, 2015