Bring Back the Bankruptcy Process for Student Loans

We had this right back in 1989. All the changes to student loan bankruptcies in the 90′s and 2000′s need to get rolled back if we want to stop a wave of defaults from dragging down the recovery.

Eric Pianin:

Bankruptcy lawyers have a frightening message for America: They’re seeing the telltale signs of a student loan debt bubble that is placing increased financial pressure on families struggling with their children’s mounting debt. According to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80 percent of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.

In most cases, those clients could not meet the federal hardship standards that are necessary to discharge a student loan through bankruptcy proceedings. Instead, many of these parents or guardians who co-signed the student loans face the prospect of losing their life savings, cars or homes to collection agencies for aggressive private lenders.

William Brewer, head of NACBA, has said, “This could very well be the next debt bomb for the U.S. economy” — something akin to the housing mortgage loan crisis that triggered the U.S. financial crisis.

Comments

  1. John says:

    How do you figure that defaults alone would weigh down the recovery, but discharging them in bankruptcy (which involves default) would not?

    Your bad student loan (how many are for worthless Liberal Arts degrees I wonder?) is not the taxpayer’s fault, so why should we eat it (again) so you can skate free of your obligations? Get in a car, drive to Marcellus Shale country or the Dakotas for oil, and go to work so you can pay your bills.

    • Jon Geeting says:

      Bankruptcy is the process we use to write down bad debts of every other kind. There’s no reason it shouldn’t also apply to mortgage debt and student loan debt. It’s not young people’s fault that they’re graduating into a terrible economy, it’s Congress’.

  2. John says:

    Not government subsidized debt we don’t.

    I’m fine with restructuring these debts in light of the economy, but no way should it ever be forgiven. You borrowed the money, you pay it back. Real simple.

    • Jon Geeting says:

      Debts go bad. The lender is more to blame than the borrower. It’s easy to find any idiot to borrow money. We rely on lenders to be discerning about who to lend to. If they screw up and make bad loans, they should eat the losses.

  3. John says:

    No, the Federal Government is to blame for offering student loan guarantees as well as dictating who would qualify. As usual, the government wanted most everyone to get loans and would penalize banks who didn’t operate by their rules.

    Sorry junior, can’t lay this one off on the lenders it was the Federal Government all the way. If the banks had to hold the risk alot less people would have gone to college (and it would have been cheaper – guaranteed loans were a big driver in tuition increases).

    • Jon Geeting says:

      Then some combination of lenders + taxpayers should take the hit, not students.

      • John says:

        So lenders who did what the government told them to do, should take a hit for no other reason than they are there and have cash. And taxpayers, who are innocent bystanders in this budding fiasco, should take a hit as well because they are there and have cash.

        The Federal Government, who caused this fiasco, just goes on and causing more fiascoes – did you see the $400 million solar guaranty to Abound Solar blow up? Obama is developing a hell of a track record in green investing.

        And the student who got the education that they chose of their own free will, should walk away scot-free.

        Yep that makes sense.

        What color is the sky in your world?

        • Jon Geeting says:

          Students shouldn’t have their futures ruined because Congress let aggregate demand fall off a cliff. The federal government chose to take the risk of guaranteeing this debt, so taxpayers should be on the hook when the loans go bad. Nobody forced lenders to make those loans. They lent freely in good times, and they should be on the hook when the loans go bad. Students bear the least blame of any party involved. Their credit should take a hit in bankruptcy, and we should retain the 5-year nondischargeability, but that’s it.

  4. GDub says:

    I think you first have to answer the question on how something could annually become so much more expensive even though there is 1) overcapacity that 2) keeps getting larger. Guaranteed loans have a lot to do with that, as does an educational policy of using an institutionally expensive model to do every silly thing for a person after he turns 18.

    I think the question you have to address is what happened in 1989 to change the policy? Was there really no problem before?

    • Jon Geeting says:

      Conservative ascendance in American government is the thing that changed. We also didn’t have a massive financial crisis that created a bunch of bad debts that needed to get written down.

      • GDub says:

        Come on, you can do better than that. Who was in charge of Congress in 1989? Not everything in life happened because of talk radio.

        I am shocked that a preferred client (higher education) and a serving interest group (SallieMae and student loan lenders) could lobby for a system in which taxpayers directly pay for bloating the administrative side of universities and guarantee 7 percent a year.

        • Jon Geeting says:

          There’s two separate issues here. One is that you don’t think some colleges deliver enough value for the money. I agree.

          The issue I am concerned about is that US public policy took a sharp turn in favor of creditor interests, and against borrower interests, in the 90′s and 2000s. That’s a political choice, and it lines up with the political ideological interests of the Republican Party and conservative New Democrats.

        • Jon Geeting says:

          The crisis we are experiencing is not that college got too expensive and now graduates can’t afford to pay back the debt. It is that people are graduating into a terrible economy and are having to delay the onset of normal adulthood because the jobs aren’t there. No job + no income to pay debt = default on student loans. Lenders won’t work with people to modify payments, or tie payments to a percentage of income. There is currently no orderly process to sort this out. I’m saying, bring back the bankruptcy process and let’s write down the bad debts so we can move on. Lenders take some losses, taxpayers take some losses, and students take a hit to their credit rating.

          • John says:

            So it’s the government’s job to guarantee that when you graduate from college you’ll step in to a highly paid position?

            You also have no idea how the guaranteed student government process works. Lenders have absolutely no ability to make decisions on approval. The Federal government sets the standards, and they are low so that more people would qualify. Yes, lenders were required to make bad loans by the Federal Government.

            So tell me again why lenders should take a hit?

          • Jon Geeting says:

            It is the Federal Reserve’s job, and Congress’ job, to create full employment conditions in the labor market. Individuals are responsible for finding work at the micro level, but Congress and the Fed are responsible for the macroeconomy. The problem we are having right now is weak demand, and that’s a political failure.

            Lenders aren’t stupid. They know there’s some downside risk in making these loans even with the government guarantees. Nobody put a gun to their head.

  5. John says:

    So in your mind the government must guarantee that all college graduates receive high paying jobs right out of school, or are entitled to relief from their loans?

    That’s beyond stupid.

    On the loans, there was NO downside risk BECAUSE of the guarantees! That’s how a guarantee works, it transfers the risk to the guarantor. Do yourself a favor and mix in a contract law course to the policy wonk crap you’re taking.

    And you do understand that lenders were REQUIRED to follow the Federal Government’s directives on underwriting standards and had NO ABILITY WHATSOEVER to turn down a bad loan if it qualified?

    • Jon Geeting says:

      Nobody said anything about “high paying” jobs, just jobs. The jobs aren’t there. It’s Congress and the Fed’s fault, not students. Ruining students’ futures because Congress is fucking up is much more stupid than writing down bad debts in bankruptcy.

      There was always the tail risk of a big wave of defaults. Doesn’t happen in normal times, but here it is. That’s the downside risk lenders take on when they lend money. If the guarantee means the government’s got to eat the loss, then so be it, but this is not the students’ fault.

      • John says:

        The downside risk was taken on by the Federal Government through the guarantee, at least you finally understand that.

        Now if we can get you over the ‘personal responsibility’ hump we’ll have made real progress today. This one will be tough as you don’t believe in accountability for your actions, but here goes… No one had a gun to a student’s head when they applied to college. No one had a gun to their head when they chose their major. The student made their choice and got cheap money. They knew the terms – including the fact that it was not dischargable in bankruptcy – when they signed up.

        It is therefore their responsibility to pay the loan. I’m all in favor of restructuring student loans given the economy, but to blow the debts out and trillions more in costs onto taxpayers is ludicrous.

        • Jon Geeting says:

          I don’t think students should bear any responsibility for Congress and the Fed’s failure to stabilize nominal spending the past 3 years. That’s not their fault or their “responsibility.” There is literally nothing they could have done about that.

          • John says:

            So an education that, in theory, would benefit a student for their entire life would be free in return for not having a high paying job for 3 years?

            Continues to make a whole lot of sense.

          • Jon Geeting says:

            My first order preference is for banks to actually work with borrowers to arrive at a monthly payment that the borrower can afford to make before sending the debt to collections – a percentage of income, preferably. They’re not doing that. It’s the whole payment, or nothing. Partial payments don’t bring the loan current, so there’s no use in even trying to pay. If you can’t afford to pay the full amount, your only option is to wait until it goes into default and eventually they garnish your wages. It’s unbelievably stupid. We need a real process for dealing with all these defaults.

  6. John says:

    You keep trying to blame banks – banks cannot modify the terms of the loans without the Federal Government, as guarantor, agreeing to the changes. If they did it would void the guarantee and the bank would now be carrying the full risk.

    • Jon Geeting says:

      I don’t know why they’re not modifying monthly payments, but they’re not. Somebody should do something about it. Probably Congress.

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