Flipping channels over the weekend I stumbled on the fabulous Suze Orman’s TV show. I could only stand watching for a few minutes, but in that time I got to see her give an overwrought soliloquy on the outrage that student loans are not dischargeable in bankruptcy. She is working to fix this, she tells us.
I do not think she has as much pull in Washington as her followers imagine. But I am happy to throw my weight behind the effort too. I imagine that Suze would be alarmed at my motivations, but on this particular issue I find myself agreeing with her. Could be a first.
Discharging debt is the essence of the bankruptcy process. What the bankruptcy petitioner owes is either wiped out entirely (in Chapter 7) or has its terms and/or amounts modified (in Chapter 13.)
However, there are a few exceptions. Actually, more than a few.
Most obviously, mortgages and other loans that are secured with an asset get a claim on that asset. So if you owe $2K on the car you are not going to be able to make the debt go away and keep the car too.
And there is a list of types of unsecured debt, 21 of them to be exact, that you cannot get out from under in bankruptcy. Several forms of debt you owe to a government, including most taxes, are prominent on the list. Alimony and child support are also exempted. As are condo fees and what you owe for damages you caused while drunk. And student loans.
The list of non-dischargeable debts is not exactly coherent, so it is hard to back out consistent logic as to why something is or is not dischargeable. Before 1976 student loans were as dischargeable as credit cards. Then student loans made or guaranteed by the government became non-dischargeable. That fits with the no getting out of money owed to the government theme. (But even that is not entirely consistent. Income tax debts that are old enough can be discharged.)
Then in the mid-1980s Congress made all student loans, both government sponsored and private, non-dischargeable. How did this make sense? I am not sure it did. But then why condo fees are special is also beyond me. The truth is that non-dischargeable status is fairly arbitrary.
I suppose you could make the argument that student loans need to be a special case because most college students are, for most practical purposes, insolvent. In theory, they could declare bankruptcy late in senior year, point to a mountain of debt, with no income, and get the court to vaporize the whole thing.
On the other hand, in the 1970s and 80s student loans were typically much smaller, more like starting life with an extra car loan rather than an extra mortgage. Today new graduates routinely carry six figure debts which they often are still paying off in middle age.
Which is why Suze and I are against having student loans being non-dischargeable. Of course, I am pretty sure ol’ Suze has not quite thought this one all the way through. I think making them dischargeable in bankruptcy is a good idea because it will make them harder to get and more expensive. (Also, I think it would be wrong to change the rules on existing loans. That would just be stealing from lenders. I am talking about future loans.)
When Suze says that she thinks student loans should be dischargeable, she is saying that more of them should be allowed to default, meaning that the non-defaulters will need to pay higher rates. That is obvious, right?
I believe that the ease with which teenagers can borrow great heaps of money with only the vaguest of theories on how they will pay it back is a very bad thing. It is bad for the young person, who may soon regret spending what could turn out to be three or four years salary on that degree in history.
And it is even worse for the country as a whole. It is a major contributor to the increasingly absurd spiraling of college tuition. We have made university customers flush with cash. So of course prices keep going up. And it fuels the credentials bidding war, not just allowing but forcing ever more kids to get ever more degrees.
Making student loans non-dischargeable largely relieves the lender from worrying about the economic realities of what the money is being used for. $100K for a marketing degree from a middling school? Loaned to a kid with no credit history at all? Well, as long as he can never ditch the loan in bankruptcy and it will follow him around for the rest of his life until he pays it off, who cares if the degree is worthless? He will be around for another 50 or 60 years.
A while back I discussed the question of whether or not college was a good investment, even at the current astronomical prices. And the answer was yes, on average. Degrees for the top schools have clear economic value and thus loaning money to students to get them will probably always be good business.
But for the schools at the other end of the spectrum, the marginal ones that offer degrees of questionable value, it ought to be much harder to get those degrees financed than it is now. It is as if banks were happily writing mortgages on condemned houses.
Obviously, the primary responsibility for borrowing money to pay too much for something rests with the borrower. But these are kids, and kids often make foolish choices. No need to make that any easier for them.
[Photo – Kit]