Tuesday, May 30, 2023

Student Loan Debt – The Next Great Bubble

It is nearly impossible to discharge student loans in bankruptcy. The legal standard for discharge is “undue hardship,” but the legal code does not define what exactly constitutes undue hardship. So the judges in each district rule on it. They look at the “totality of the circumstances,” which is legal jargon for considering a number of factors in one’s situation, giving different weights to those factors, and deciding which way to judge. Typically, this means the debtor must have a disability and is unlikely to ever generate enough income to repay. If the debtor had a disability when the money was borrowed for school, the disability generally needs to be severe enough. Bottom line, it’s hard and the results are not standardized, which means they are inconsistent.

My own student loan debt is absolutely crushing. I am now back to school part time taking LLM courses just so I don’t have to pay what I already owe because I can’t pay and I’m trying to avoid default until my The situation does not improve.

The last bill introduced in the legislature to propose the discharge of student loan debt failed. Back in the days, student loans were dischargeable. As recently as September 2009, legislators were considering whether to consider a change allowing at least the forgiveness of private student loans. Private student loans are not the same as taxpayer-guaranteed federal loans. But this proposal is also strongly opposed and does not seem to be a priority at this time. Perhaps many more victims will have to fall before attention is paid and awareness is raised about the immense suffering caused by these easy loans to a growing number of people.

Some organizations are working towards changing the law and they give cogent arguments. One argument is that lenders recklessly lend money to anyone with a Social Security card. Default rates on student loans are tracked only up to one year post-graduation. It’s funny, because deferment, forbearance, and access to credit and support from family can usually help people get through that first year. What else would an examination of default rates of 4-5 years after graduation say.

An opinion shared by many is that what was going on in the real estate lending industry for the better part of the past ten years has been and continues to be going on in the student loan industry. Financial institutions package private student loan debt and sell them as investments. It very well could be the next bubble waiting to burst. This would be especially true if the economic recovery is slow, so that there are not enough wages or jobs to allow repayment of these loans. It’s not a stretch to think that the private student loan industry is a major factor in the unprecedented rise in tuition costs. What real estate lending did for the real estate market may very well be what private student loan debt is doing for the education market, contributing greatly to the 10-20% increase in tuition year over year.

There are arguments that if you change bankruptcy law to make it easier for student loan discharge, people will take advantage of borrowing and declaring bankruptcy shortly after graduation. This can be addressed by creating a time limit, for example requiring that student loans be at least 5 or more than 7 years old. Lenders may also require co-signing to better protect your investment. It may also mean that the potential student and co-signer (usually a parent) will consider the loan’s implications more deeply.

Another argument is that if you make the loans dischargeable, it will dry up the money for new students. This is probably correct. Although, perhaps it should be so. Lenders becoming more stringent about who and how much they are lending, will likely reduce the amount of money available to students. Yes, some populations will be hurt more than others, basically students from lower income groups. But, now consider the effect of borrowing too much on these same people. As a result, a generation of paupers is growing up. Arguably, it is also a drag on the economy as these debtors have little or no disposable income to make purchases that create other jobs and ultimately benefit us all. There’s also another possibility if funding dries up. Empty seats in classrooms may force education institutions to do something that benefits us all, lower tuition rates, making it more affordable to attend. The supply and demand principle may be driving this change.

Huge student loan debt is causing tremendous pain for ambitious hardworking people who borrowed thinking they were making a smart choice and a chance to improve their lives. Unbeknownst to them, most of them seemed doomed to a lifetime of financial suffering.

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