[newbie12]

Student loans are unsecured, so if they could be discharged, the market rate would be akin to a credit card with a huge balance-- 15% to 20% a year in the current interest rate environment. Plus if they could be discharged, such action would become commonplace, a rite of passage at graduation.

[jellicle]

That's a fine prediction. And yet, student loans were only made so hard to discharge due to changes in the law in 1996 and 2000. And prior to 1996 and 2000, student loans were offered at much less than the exorbitant rates you predict, and lenders made nice fat profits on them even so. And no, there was no significant abuse of the system - after all, there's always a judge involved in bankruptcy proceedings, who has the authority NOT to discharge debts if there's any reasonable prospect of them being paid off.

So... your prediction is wrong.

[7Figures2Commas]

You cannot simply look backward to assess what would happen to interest rates on student loans going forward if a) the federal government significantly reduces its role in the market and b) allows for discharge of student loan debt in bankruptcy.

There are way too many factors that cannot be ignored, but that you choose to ignore. You need to look at the interest rate environment (which determines the cost of capital), banking regulations (which have changed dramatically in the past several years), the unemployment rate (you might have noticed we're in the slowest "recovery" since the Great Depression) and inflation-adjusted wage growth (hint: there basically is none), amongst other things.

Finally, you fail to note that the federal government was a participant in the student loan market well before 1996, so you cannot look at the history of private student loans without understanding that the government has influenced the market to varying degrees for some time.

If you want to assume that private lenders would rush to provide student loans at low rates at the same pace the federal government has in this economic environment and without the discharge restrictions currently in place, I'd love to introduce you to someone looking to sell you his 100 year J.C. Penney bonds. They yield over 11% and you can buy them at ~70 cents on the dollar - a great deal!

[philwelch]

Obviously there are zero confounding variables in the late 1990's and this is a perfectly controlled experiment.

[danielweber]

such action would become commonplace, a rite of passage at graduation

Good.

Then people will stop lending students tens or hundreds of thousands of dollars. Then schools will lower their prices.

[7Figures2Commas]

> Then people will stop lending students tens or hundreds of thousands of dollars...

Let's make your comment a little more accurate:

Then the federal government, which is responsible for ~85% of the student loan market, will have to stop lending students tens or hundreds of thousands of dollars, and there will be no end to the cries that millions of young Americans are being denied a college education by well-to-do politicians who are out-of-touch with the economic realities of the average American.

[RougeFemme]

But credit card debt can be discharged; why not student loan debt? The inability to discharge it is relatively recent, I believe - a compromise reached when the private banks were pulled out of the federal student loan loop. Also, if they could only be discharged during bankruptcy - as was the case before - there would be no concern about it becoming a rite of passage.

[7Figures2Commas]

The official overall unemployment rate for recent college graduates has been as high as 9.4% in the past three years. There is still significant underemployment, and many employed college graduates are in roles that don't even require college degrees. Most of the post-2008 college graduates who are fortunate enough to be employed are projected to have lower earnings than their pre-Great Recession counterparts.

As I noted in another comment, one in five federal student loans outstanding is already in default or delayed default, and that number does obviously not include the number of loans that are in deferral still accumulating interest. Put simply, there are a lot of people out there who likely could and would consider filing for bankruptcy if it allowed them to discharge this debt.

We can't have it both ways: if you want everybody who wants a college education to be able to obtain one, the federal government has to be in the lending business and it has to be all but impossible for borrowers to discharge their debt.

[RyJones]

Bankruptcy for newly-minted medical doctors and dentists used to be a rite of passage. The law was changed because of this. What comes around goes around.

[7Figures2Commas]

Exactly. It amazes me how many people seem to believe that the solution to the student loan debt problem is to allow for discharge in bankruptcy.

Not only will this necessarily force lenders to increase the cost of these loans to borrowers, a lot of folks apparently don't understand that the biggest lender in this market is the federal government. Of the more than $1 trillion in student loans outstanding, about 85% have been provided by the federal government. Just over one in five federal student loans is already in default or delayed default. If the law is changed to permit discharge of these loans in bankruptcy, Student Loan Debt will become Mortgage Market 2.0.

[avenger123]

Why would this be a bad thing?

if loans are able to be discharged the federal government wouldn't be handing them out like free candy to anyone that wants it.

It's exactly that there is no downside for the government that the situation is the way it is.

[toomuchtodo]

My house was secured, had a 5% interest rate, and the bank lost over $150K when I walked away from it. People still default their mortgages when they're as little underwater as $10-15K, yet, the interest rate on mortgages has not shot up. Go figure.

[danielweber]

I overall agree with you, but the vast majority of mortgages are being backed by the Federal government right now.