Inside Financial Services

Dick Durbin’s Dumb Proposal

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Did you hear Dick Durbin’s latest brilliant idea? Now he wants to make private student loan debt dischargeable in bankruptcy. “There is no reason why private student loans should get treated differently from other private debt in bankruptcy.” Durbin said at a congressional hearing last week, American Banker reports. “In many respects, private student loans are just like credit cards-except unlike credit card debt, private student loan debt cannot be discharged in bankruptcy.”

If Durbin keeps this up, eventually there won’t be a banking industry for him to torment. His student-loan proposal is a terrible idea. Durbin’s nutty statement above notwithstanding, private student loan debt is not like credit card debt. Card lenders have substantial flexibility in changing the terms of their loans-notably, by raising and lowering lending limits-as the balances age and the borrower’s circumstances change. In the case of student borrowers in particular, lenders often grant a low limit initially and then increase it as the borrower establishes a reliable payment history.

Student lending is of course nothing like that. The initial loan balances are much larger than they are with cards, for starters. And the borrower doesn’t begin to repay them until he’s earned his degree, four years hence. The lender thus has no idea which of its credits are good and which are bad until it has already loaned them, in many cases, tens of thousands of dollars.

All of which is to say, education lending is an awfully risky business. The New York Fed reports, for instance, that fully 25% of the $870 billion of outstanding student debt is delinquent. So it’s not for no reason that Congress decided to make student loans undischargeable in the first place.

But if Sen. Durbin gets his way and borrowers have the option to have their debts wiped clean, the risk to lenders will go up even more-which in turn will mean higher rates for borrowers. Credit would dry up entirely for borrowers who couldn’t muster up a co-signer.

You’ll get no argument from me that that $870 billion in student loan debt is a huge burden, much of it on the backs of people who are least able to service it. If Congress wants to have a start at fixing the problem, one place it might begin is by looking at ways to slow tuition inflation. (Another fun idea: put colleges themselves on the hook for a portion of unpaid private balances. That would concentrate the minds of admissions departments across the country. It would likely cut down on the availability of, say, majors in Peace Studies as well.) But allowing current borrowers to get off the hook would only make private student loans scarcer and more expensive. I doubt that’s the outcome Sen. Durbin has in mind.

What do you think? Let me know!

18 Responses to “Dick Durbin’s Dumb Proposal”

  1. Erich

    put colleges themselves on the hook for a portion of unpaid private balance. This is the first rational idea I have read attributed to you.

  2. puredakota

    Recognizing unintended consequences have not been one of Sen. Durbin’s strengths.

  3. grover13

    I agree with Tom on this one. The risks are even higher than he outlined here….if students are able to wipe the slate clean with bankruptcy, you would basically be encouraging students everywhere to take out student loans to finance their education, then file bankruptcy when they graduate. As they are in no position anyway without meaningful employment to buy a home, car, etc…..they can live for a few years after college with Mom & Dad without any serious repercussions, as they don’t really need a decent credit rating for a few years anyway. There is little incentive to actually pay the loan back. A BK only impacts your credit for five years….you can graduate at 23 years old, file BK, and still buy your first home at 28. No sweat.

  4. dectra

    You haven’t even seen the proposal from Senator Durbin. The details of how soon and who could write down a student loan are not carved into stone simply because the idea of considering this point was raised.

    Something you’re not adding to the consideration here is that if students were at some point able to declare bankruptcy and remove student loans that were unmanageable, it may have the practical effect of forcing schools to lower the cost of education.

    A final point is that a percentage of students, though admittedly small, do begin paying on their loans before they graduate.

  5. sw pilgrim

    Next, they’ll want a compulsory ethics course to counter the renegers. All aboard for Sc_mB-g U.

  6. Alfred M. King

    A medical student graduating may have a total of $200 K in debt. Supposing they declared banrtuptcy the day after graduation? They would get their credit rating back in a couple of years, just as they entered their high-income years. If Durbin’s idea becomes law the unintended consequences will be substantial. Fewer loans, fewer doctors?

  7. rivvir

    i’ll go along with the thought on this one. To a point. Something should be done for those that it really is impossible for them to fend off being overwhelmed by their debt with continually mounting interest and have the rest of their lives destroyed almost before life has started for them. It’s gonna take some severe thinking out of the box to get there. Imo that eliminates both Tom and durbin from the solution process. Both are too locked into their partisanships to get to where we need to go. Durbin at least has an excuse. He’s a congressman, thus evidently was born lacking. What’s your excuse Tom?

  8. Dope

    What could you expect- this country is being lead down the road to centralized government by
    our DEAR LEADER-not the one in N>KOREA, but the one in washington!!!! Durban is just one of
    his flunkes!!

  9. Marko

    What an opportunity for bankruptcy attorneys and junk mail companies. Think of the revenue stream available by marketing bankruptcy to every newly minted college grad, followed by solicitations for credit cards and auto loans 6 months after the discharge. After all, they’ve already filed bankruptcy so they should be good risks for at least another 7 years!

  10. Roanoke

    Dfinitely agree- pu the schools on the hook – would likk those psido degrees that they hand out for “studies”

  11. Bill

    Hey, let’s just bring back indentured servitude! You file BK, spend 7 years working as Tiger Woods’ gardner. Perfect! 🙂

  12. david sedore

    amazing – you argue that congress should do something about rising tuition costs then you say colleges should be on the hook for some of the unpaid private balances, which would of course drive up tuition costs. and you say dick durbin comes up with some wacky ideas.

  13. Cm

    As one who repaid his loans long ago, I see this idea as another case of totally
    ignored unintended consequences by one of the annointed elites.
    Of course these kids who have/had no idea of a working future will default and
    escape responsibility through bankruptcy. Leaving the rest of us stuck for it.

  14. rivvir

    I see someone paid off his student loans long ago. Since “long ago” students could charge off, what makes you think going back to being allowed to declare bankruptcy will be any different? Is it because today’s kids are different than the kids back then? An old wail from each and every generation. Or is it because we’ve destroyed our kids work futures? I suspect today’s kids are not much different than when we were kids. I also suspect we’ve drastically changed the scenario and put obstacles in front of them we never had to face. When you can accept responsibility for that maybe you’ll then start thinking of ways to help today’s kids and not kill their futures before they’ve started to live one. By the way, as one who worked his way through college, i never had to take a student loan.

  15. Litch

    Stay with me here as I think Durbin knows exactly what he is doing, so follow me. Assume Durbin prevails, then you’d expect to see would be massive personal BK’s as many students attempt to dodge their debts. Unlike mortgage forclosures however, the LGD would be 100%. So, and as Tom points out, who would thence be silly enough make student loans when there are so many better R/R alternatives? (Btw, forget the schools, as even they are not silly enough to take on a portion of the repayment liability.) So, there then become only two ways to avoid waves of University bankruptcies: (i) use the Obamacare predecent of compulsion to force Universities to (effectively) co-sign all, or a portion of a pool of loans, or (ii) find an investor who is just down right dumb. item (i) is out as the Obamacare wound will be raw no matter what happens at the SCOTUS. So, bingo, you guessed it! We have one entity who is happy to accept unlimited loan losses, and that bozo is the Democrats who control the USG. What’s even better if you’re Durbin, once you become the only lender, you can’t stop and you can’t – in an economic sense – descriminate among those apply for loans. Presto chango, you have a new entitlement. Money flows out under the guise of a loan, gets discharged, and your new college grad with a “Peace Studies” major has become a lifelong Democrat. I realize that this is what happened when the Feds took over lending in the first place. It’s just that the auto-discharge will formalize what was intended back then. Btw, Tom, show them a time series chart of the Fed Student Loan book from say 1995 to present. The vertical line since 2009 is staggering.

  16. John Doe

    What would Tom Brown know about sutdent loans he’s a wealthy Hedge Manager who never had to take a student loan for his child. He should try to have a little compasion for people, for people who can’t afford to send their kids do college.

  17. gjghn

    I graduated from law school and I have done anything and everything possible to keep current on all of my loans. When companies like Sallie Mae tell you, however, that you have to pay 900 dollars a month with absolutely no other option of repayment it becomes quite difficult. My mother is disabled and my father has never been a part of my life. I took out these loans because I thought I would do well and i had no other choice if i was to complete law school. After all, education is key. Lenders like Chase were responsible in their lending and have been fair in their repayment expectations. Sallie Mae wants you to default and I have literally worked any and every job just to stay afloat. Professionals do not want to default on their student loabs let alone become bankrupt. It is embarrassing if you ask me but maybe if they were dischargabke in bankruptcy, Sallue Mad would be inclined to work with young professionals as they begin their careers in this tough economy so that we can continue to pay them when we reach our “earning peak.” Right now, they make unreasonable demands because they can and once students default they suck the very life and motivation out of them. Also, you might want to research how many of our own governors had their student loans discharged. There is no evidence to suggest that individuals who are financially able to make their payments wouldn’t but those who can’t would not wake up every morning considering suicide after working so hard to do “better” for themselves and their families. If student loans were to become scarcer and more expensive, they would probably be doing potential borrowers a favor.

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