Inside Financial Services

Student Borrowers Do Indeed Deserve Relief

Just not the kind Democrats have in mind

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Democrats in the Senate propose yet another giveaway:

President Barack Obama on Tuesday floated the idea of making it easier for student borrowers to get rid of some of their student debt through the bankruptcy process.

Thirteen Democrats in the Senate acted on that suggestion Thursday when they introduced a bill dubbed the Fairness for Struggling Students Act of 2015 that will treat student loans issued by private banks the same as other types of private unsecured debt in bankruptcy proceedings. [Emph. added]

Considering that the bill is being co-sponsored by the likes of Elizabeth Warren and Richard Blumenthal, you won’t be surprised that I think it’s a terrible idea. Which it is. Private student lenders underwrite on the basis that their loans can never, ever be discharged in bankruptcy. Changing the rules after the fact would be incredibly unfair, not to mention a financial disaster for lenders. Student loans are different from other loans in an important way: the borrowers needn’t service them for many years after origination—that is, for as long as the borrower is still in school, earning his degree. Under the Democrats’ proposal, then, nothing would prevent student borrowers from declaring bankruptcy the moment they graduate. In fact, that used to happen all the time, which is why Congress changed the bankruptcy law in 1978 to make federal student loans non-dischargeable, and then changed it again in 2005 to protect private student loans. Going back to the old rules would be moral hazard on steroids.

All that said, student loans can be a huge burden at a time in people’s lives when they’re at their most financially vulnerable. People can get into dire financial straits through no fault of their own, and can deserve relief. When that happens, why not make student debt dischargeable under certain circumstances? I’d be all for that–with the following provisos:

  1. Borrowers shouldn’t be allowed have their student debt considered in a bankruptcy for some set period after graduation, say ten years. After that, it would be eligible for forgiveness along with other types of loans.
  2. Make the institution that granted the borrower’s degree a co-guarantor for some portion of the debt. I’d say 20%, but am amenable to counteroffers. Putting colleges on the hook for student loans would make them more judicious in judging applications, and likely improve their pedagogy, as well.
  3. Why just private student loans? Have the federal government begin actively, prudently underwriting student loans (rather than its current practice of simply handing out money to all comers), and make federal student loans dischargeable in bankruptcy, too.
  4. Point 3, above, is of course preposterous. Government lending can never be properly underwritten for risk or de-politicized, which the legacies of Fannie, Freddie, the FHA, and the SBA, among others, have all proven. Better to get the federal government out of the business of direct student lending entirely. That would at least eliminate a potent driver of tuition inflation.
  5. All this would apply to only loans written after the rules are changed. Existing borrowers are stuck. Sorry.

These all strike me as reasonable and (except for my Point 4) politically doable. This is one area where Democrats and Republicans could reach some sort of agreement. It would be interesting to see them try.

What do you think? Let me know!

6 Responses to “Student Borrowers Do Indeed Deserve Relief”

  1. Tom Robertson

    I am not well versed in student loans, but I don’t think they can be refinanced. Many loans were made when interest rates were much higher than today. If they could be re-financed at lower rates, many of the problems would disappear. I may easily be wrong on this. Otherwise, you comments make sense.

    • Jaspreet

      If you are trying to start a buessins with no collateral and have no prior experience it will be very hard to get financing. Does this buessins include real estate? If it does then maybe a hard money lender will lend money to you. Remember their rates are extremely high. Usually around 15-17%. Also, do you have family members that may be able to lend you some money? Also, ask friends too. If you show them a buessins plan and show them that you are serious about the buessins then they will be more likely invest in you. Remember the most successful entrepreneurs are the ones who started off small. Maybe you can start without funds at first. If you are a service oriented buessins try getting the clients first. Or if you are trying to sell merchandise on line have the customers pay for the merchandise and send a reminder that it will take 4-8 weeks to receive the merchandise.

  2. Bill

    One more addition to your proposals which by the way I think are great is to make each student who takes a loan also take a class on finance and the dangers of debt. This would include student debt, home mortgages, credit cards and debts over the course of history and how debt shapes lives, countries and futures.

    • Nara

      This is simple, tanoitidarl french bread recipe:3 cups flour (all-purpose is best) (between 12 and 13 ounces / 350g)1 cup water (8 ounces / 225g)1 teaspoon salt (6g)1 teaspoon yeast (4g)Mix all together, and knead 15-20 minutes until dough passes window-pane test. Cover, let rest/rise approx 30 minutes (longer if you keep your house very cool. Punch down, cover, let rise again approx 30 minutes. Divide in half, and shape into baguettes (or make a single loaf or boule). Preheat oven during this final rise baguettes 500F/ 260C, or 350F/175C. Bake baguettes about 5-7 minutes, or loaf 30-45 minutes. Baguettes should come out with a very crispy brown crust and soft crumb, loaf will have a dark golden to brown crust. If you have an oven probe, the internal temp should be 205-210F/96-98C. You can pull them at 190F/88C, but you will have a less flavorful crust.Since this recipe contains no fats, sugars, or eggs, the bread will not keep for long, so you should try to eat it within 1 day.

  3. Anonymous

    I agree with your 1,2,3,(4),5 ideas — but at 6.8% (and TBills at 0.02%), these loans should be far more profitable that the initial TBill + 3.1% rate from early 90s. Increase the spread to 4% to cover the higher loss rates, but don’t use this as a subsidy for other departments of the budget.

  4. Mansoureh

    Depending on what state you live in, you can try Check Into Cash. You can call their online dvsiiion at 1(877)577-7977. I know what question is going through your brain. The answer is no, you don’t have to Tell em a friend sent ya! (yes, I am making fun of the previous poster that spams that message).You can apply online if they do, and it may or may not request that you send any documents over. Most companies that do NOT require faxes for any and all loans are not reputable and charge higher fees and have crazy policies.By the way, the interest on a loan is usually 15%. Let’s just go ahead and get your misleading interest out of the way.For a $100 loan, there is typically a $15 fee. So, that’s 15%. Now, the APR would be $15 / $100 = .15 * 365 days = 54.75 / 14 days = 3.9107 change that to a percentage and you get 391%. However, what that is actually representing is this: You took out a $100 loan on June 10, 2008 and agreed to pay $115 back on June 24, 2008, but you paid $15 every two weeks after already paying the loan and the interest after 14 days. Makes sense? No no one would ever do that that’s stupid.Now, IF you took out a $100 loan on June 10, 2008 and paid $115 back on June 24th, 2008 and continued to take out the loan, then you’d have the $390 ($15*26weeks)in fees for a whole year but you borrowed $2600 for the whole year. Which, $390/$2600 is still you can use a calculator, but you should be able to guess. Still 15%.You really can’t compare a two week loan’s APR to a student loan or a car loan. It makes no sense =/

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