112th Congress Proposes Relief for Student Loan Borrowers Forum

[AreJay711]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

[Verity]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

+1. They should make public loans super cheap and hefty, which would compete with private loans and bring down their rates. But then...

[sambeber]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

I guess the idea is when price goes up, people won't take on private loans or if they have to, will think extra hard about whether they will be able to make the payments. Isn't it a net positive that lenders have to really factor in the default risk, and make it a more accurate interest rate vis-a-vis default probabilities?

[ToTransferOrNot]

You missed his point. He was talking about how forgiveness is not really forgiveness because of the huge income you have to report creating a big tax liability after the 25-year discharge of debt.

I get it, but as long as you're not a total fuckhead, there are many more ways to avoid getting to that point. Take advantage of the loan repayment plans, defer due to hardship and look for a job, consider working for a non-profit so the loan will be forgiven, etc.

Aside from the credit hit, the difference between this and allowing a default + lien on 15% of your (obviously low) pay is what, exactly? And if you have $167k in debt and you're making, for example, $62k a year (which is actually pretty high - many people aren't getting jobs that pay even that much) you have negative amortization on IBR. It is true that the negative amortization never capitalizes unless you leave IBR/leave a partial economic hardship, but then you're facing down the 25-year DOI issue.

Also, you make it seem like getting 10-year-forgiveness-eligible jobs is easy. It's not.

Like I posted above, right now the only benefit private loans have is that they potentially have lower rates of interest than federal loans (I wish I had looked into them more closely for my own educational debt - I could have gotten loans at about 4.5-5.5%, which is a significant contrast from my 6.8-8.5% loans I now have). Making them dischargeable will destroy that benefit, which will drive private lenders out of the market, and result in an effective federal lending monopoly. That, in turn, could result in greater pressures on the "forgiveness budgets," pressures to raise the federal interest rates, and greater taxpayer exposure to student defaults.

[Verity]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

I guess the idea is when price goes up, people won't take on private loans or if they have to, will think extra hard about whether they will be able to make the payments. Isn't it a net positive that lenders have to really factor in the default risk, and make it a more accurate interest rate vis-a-vis default probabilities?

That logic worked out great for the housing bubble.

[albusdumbledore]

Dumb. The problem is the government backed loans. Not the private ones. I guess it's a step in the right direction at least.

[fatduck]

the obvious solution is to require collateral for student loans

[Ersatz Haderach]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

[fatduck]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

because when someone defaults on a house the bank can take the house. the bank can't take your degree.

[ToTransferOrNot]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

Higher interest rates on those who are paying. Federal lending monopoly. Etc.

Edit: Also, the lenders did not "get into a stupid business" - they relied on applicable law in making their lending decisions. That is the exact opposite of being in a "stupid business." Are homeowners who paid for their houses on the strength of the mortgage interest deduction being stupid? It's the same freaking thing.

[albusdumbledore]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

because when someone defaults on a house the bank can take the house. the bank can't take your degree.

Then the bank should be accountable for lending for a degree. There's no check on lenders. And that's the issue.

[fatduck]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

because when someone defaults on a house the bank can take the house. the bank can't take your degree.

Then the bank should be accountable for lending for a degree.

except our policymakers don't believe access to education would be broad enough under those circumstances. that's sort of the whole point of federal student loans.

[albusdumbledore]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

because when someone defaults on a house the bank can take the house. the bank can't take your degree.

Then the bank should be accountable for lending for a degree.

except our policymakers don't believe access to education would be broad enough under those circumstances. that's sort of the whole point of federal student loans.

And that's where they're wrong. There'd be more access if tuition wasn't artificially inflated from the loans in the first place. It's a vicious cycle. Plus there's no value in a college degree if everyone has one.

[sambeber]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

I guess the idea is when price goes up, people won't take on private loans or if they have to, will think extra hard about whether they will be able to make the payments. Isn't it a net positive that lenders have to really factor in the default risk, and make it a more accurate interest rate vis-a-vis default probabilities?

That logic worked out great for the housing bubble.

One difference is that a big issue in the housing bubble was artificially low "teaser" loan rates, with the borrower presumption that they could refinance before the rate reset due to property values increasing. The setup isn't quite the same for student loans.

[fatduck]

except our policymakers don't believe access to education would be broad enough under those circumstances. that's sort of the whole point of federal student loans.

And that's where they're wrong.

excellent argument.

[albusdumbledore]

except our policymakers don't believe access to education would be broad enough under those circumstances. that's sort of the whole point of federal student loans.

And that's where they're wrong.

excellent argument.

I threw in an edit just for you fatduck.

[ToTransferOrNot]

The sollution is obviously to tie interest rates/lending caps into job placement somehow. Exactly how you do that is pretty hard to figure out, though.

[Verity]

I still think basic finance makes this a bad idea. When lenders have to really factor in the default risk the price will necessarily go up and people will have to pay more for these loans basically forcing the people who do repay to subsidize the people who don't repay. Why is that ever a good thing?

I guess the idea is when price goes up, people won't take on private loans or if they have to, will think extra hard about whether they will be able to make the payments. Isn't it a net positive that lenders have to really factor in the default risk, and make it a more accurate interest rate vis-a-vis default probabilities?

That logic worked out great for the housing bubble.

One difference is that a big issue in the housing bubble was artificially low "teaser" loan rates, with the borrower presumption that they could refinance before the rate reset due to property values increasing. The setup isn't quite the same for student loans.

Who's to say such a thing won't creep up in private student loans? The banks know how big and potentially profitable this market is. One way or another, they're going to look for ways to capitalize. Student loans incite the same hopes to achieve the American dream as home ownership, even more so because it's almost necessary today. No matter how educated, they'll fall for it.

[sambeber]

The rational basis for agreeing to a teaser rate is that you can refinance before the reset. I don't know a ton about finance, but how could a student loan be refinanced if there is no underlying asset? That's a real question, if someone has an answer.

[albusdumbledore]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

This is the answer. I know I've said this before but there are other countries where you can bankrupt student loans, and they have significantly lower tuition (Canada). Someone can correct me if I'm wrong, but from what I understand it's pretty much all private loans but tuition is reasonable. In the US, there is only accountability on one side of the equation. The burden always ends up back on the student, with no risk to the lender.

[sambeber]

The sollution is obviously to tie interest rates/lending caps into job placement somehow. Exactly how you do that is pretty hard to figure out, though.

It can be done, and was just done to for-profit institutions.

http://www.post-gazette.com/pg/11159/1152216-100-0.stm

[ToTransferOrNot]

The rational basis for agreeing to a teaser rate is that you can refinance before the reset. I don't know a ton about finance, but how could a student loan be refinanced if there is no underlying asset? That's a real question, if someone has an answer.

Theoretically the reset time could be around graduation, and the rate you could refinance at would be based on projected income, etc - particularly if you're going into law where bankruptcy really is not a realistic option (unless you're looking to end your career anyway,) or your projected income puts you outside the Chapter 7 ambit.

[Verity]

The rational basis for agreeing to a teaser rate is that you can refinance before the reset. I don't know a ton about finance, but how could a student loan be refinanced if there is no underlying asset? That's a real question, if someone has an answer.

Theoretically the reset time could be around graduation, and the rate you could refinance at would be based on projected income, etc - particularly if you're going into law where bankruptcy really is not a realistic option (unless you're looking to end your career anyway,) or your projected income puts you outside the Chapter 7 ambit.

Plus, we're forgetting the fact that a lot of students will never think about it this prudently, on a 'rational basis.' They'll just see the low rate and take it. The idea of "refinance" will never never occur to them, and then they'll be stuck with debt that's much more than they bargained for.

[Ersatz Haderach]

Sorry, but why don't we just restore bankruptcy as an option? The Lenders got into a stupid business and benefited from misleading information. Screw them. Frankly, some of the borrowers probably shouldn't get full forgiveness, either.

I have a little twinge of sympathy for the hardcore bailout opponents, but I don't want a generation of students in debt slavery. Some semblance of justice however, would be, I don't know, a refreshing novelty.

Higher interest rates on those who are paying. Federal lending monopoly. Etc.

Wait, I'm a stupid knee-jerk Internet critic. They *are* proposing restoring bankruptcy, just not for federally-guaranteed loans.

Current Law: Discharges under this, that, and the other thing shall not discharge a debtor from any debt....
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for--
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Changes to

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or an obligation to repay funds received from a governmental unit as an educational benefit, scholarship, or stipend;

So they struck 'nonprofit institution' from (A) and eliminated (B) 'any other educational loan...', meaning commercial loans. Hmm.

[Gecko of Doom]

There'd be more access if tuition wasn't artificially inflated from the loans in the first place. It's a vicious cycle. Plus there's no value in a college degree if everyone has one.

Absolutely.

Also, the government needs to make up its mind on student loan policy. The whole reason bankruptcy wasn't allowed as an option was to expand access to loans. Allowing bankruptcy runs counter to the intended policy of expanding access to education. Either stop messing with the situation altogether or stick to your guns and do it the way that (sort of) works.