$200,000 in debt for a bachelor's degree

The main problem is the fractional reserve banking system. The private banks are loaning money that doesn't exist.

 

No, because if the loan is obviously unaffordable and risky -- like lending $200,000 to a sociology major -- then lenders simply won't approve it in the first place. Lenders will be picky about whom they lend to -- just as they are with any other type of loan.

Lenders normally face certain risks, and take appropriate precautions, when they lend money. This applies in every type of lending situation -- except when it comes to student loans. Why should the laws be completely different for student loans? There is no good reason -- unless you happen to work in the student loan industry.

In theory, a crooked student could declare bankruptcy immediately after graduation, and thereby wipe out his student loan debt. But there are simple and effective ways to discourage this practice:

(1) Allow student loans to be discharged in bankruptcy -- but not immediately after graduation. Enforce a waiting period of 7 to 10 years. This is exactly what Canada does, as noted by others in previous posts. It works fine.

(2) Or if that's not strict enough, schools could actually revoke the degrees of those who default on student loans. Such students will, of course, still have whatever knowledge they may have gained during their college years -- it can't be purged from their heads. But the inability to legally claim a degree would obviously represent a major career liability. People are unlikely to declare bankruptcy after graduation -- if the penalty is loss of the degree that was just earned.

 

Back in 1974 (when I was a young one) Teddy Kennedy proposed that federal student loans be repaid not as a set amount per month, but as a percent of income. I didn't think it was a bad idea then, and I still think it's not a bad idea.

Of course, private student loans are a whole different kettle of fish.

 

That's the way it works in the UK. Basically, repayment is geared to income. ( Repayment = Nine percent of income, once an individual's earnings reach the monthly threshhold.) Here are the details:

How student loan repayments are worked out (courses starting from 1998) : Directgov - Education and learning

Johann

 

9% is pretty steep, but that's not a bad idea.

 

Hi Michael -

Re: 9% of income. (Repayment on UK student loans.) I think we should remember:

(1) These loans often have (comparatively) high balances and carry interest.
(2) No borrower wants his/her loan to be a lifetime commitment.

There has to be a reasonable payment schedule to ensure liquidation. Too low and the debt becomes perpetual (like Government debt!)

Another reader said that these loans are "not like credit-card debt." I agree, they shouldn't be.

Recently, Canadian credit card companies were required to disclose to their individual cardholders the length of time it would take to pay their present balances with interest, if they paid the minimum required. (Credit counsellors have been doing this for years!) People I know were shocked to find that it would take 45 years or more in some cases to pay their current credit card balance at the minimum rate.

I think the British plan of 9% payments on student debt offers hope of liquidation of these interest-bearing loans in a less-than-lifetime period. Adjust it too far downwards and well... you know what could happen.

Just my take ... no big thing.

Johann