debtfreer's comments

During the private student loan heyday circa 2000-2007, anyone with a decent bank affiliation could spin up a "private student loan" company, write up thousands of loans, and sell them off to the bigger banks and trust portfolios, with very little regard to the student's ability to repay. It was a very fly-by-night operation with sketchy advertising practices.

When the credit crisis hit, these companies were one of the first to cut off the tap. And it was a literal overnight cessation of loan originations.

Buried within these promissory notes were odd mechanisms for calculating variable interest, accounting fees, and cosigner releases. Despite the variable rate moving very little on a month-to-month basis, students in repayment would see 20% of their payment applied to principal one month, then 8% applied the next month. Some servicers would not apply extra payments to principal, opting to apply payments to the next month's payment (which results in maximum interest for the bank) unless the debtor followed a convoluted trail of paperwork to force the bank to apply the extra payments correctly. Co-signer releases would be advertised at "24 months of on-time payments" but by the time the debtor reached that mark, they'd receive letters informing them that the promissory note had a clause that allowed the servicer to change terms, and the co-signer release was now 36 or 48 months.

Even servicers of the federal student loans would engage in sketchy practices, such as charging the debtor an fee to enter into a hardship forbearance. You can Google which servicers were fined heavily for these practices by the CFPB during the last administration.

Can I try to change your opinion?

Thousands of people are filing for bankruptcy every day which – by implication – are getting a break on loans that you would otherwise pay.

The issue is where debtors, who cannot presumably discharge their defaulted student loans in bankruptcy, begin to lose their savings, investments, and ability to stave off financial dependency on the government and become financially dependent on government programs now and into their retirement.

By saying that since you were able to pay your loans in 2018 and therefore most other people should be able to pay is like looking at any bad investment. If you allow people to remain indentured and fall into perpetual dependency on government programs (welfare, SNAP, Medicaid) due to their default or judgment-debtor status, the overall cost of that is projected to be much higher than if they could have been eligible for a partial or full discharge of the debt in 2018.

A bankruptcy prevents a bank from collecting interest. A judgment-debtor on financial assistance from the government is taking far more tax dollars from you than the bank is getting from the tax write-off on the charged-off debt.

Obviously, banks want their money, so they lobby for bankruptcy provisions to keep people indebted. They don't particularly care if the side-effect is the government demanding higher taxes from you to pay for government welfare programs.

1. The money is in the form of a loan, which by virtue of our fractional reserve system, is created upon signing a promissory note. This is the basic form of money creation in the United States. Repaying the loan extinguishes the principal balance and "destroys" that money. However, interest owed remains and the debtor must "seek" out that money in the economy (which, consequently for many people, is in the form of another debt from some other person or company).

2. An economy where a major portion of debtors are unable to discharge their loans (due to the laws presuming student loans as ineligible for discharge), debtors will fall into a cycle of inability to pay debt, inability to qualify for a home, apartment or a vehicle, and potential inability to qualify for a job (credit check) and become increasingly dependent on government programs to stay afloat. This can put a strain on government resources beyond what a simple bankruptcy would do, which is the forced cancellation (discharge) of a debt. Basically, the cost of a bankruptcy (to the economy) is smaller than the cost of an otherwise capable judgment-debtor on welfare/Medicade/SNAP/others.

3. Private student loans, which are effectively no different than unsecured debt, should be presumed dischargeable in bankruptcy. Federal student loans are actually structured quite nicely, except many debtors do not understand the complexities of the multiple forms of loans they carry (perkins, plus, university-managed, subsidized, unsubsidized, private) and rules for one loan type do not necessarily apply to the other.

Colleges would actually benefit from student loan reform, since they could better educate students and parents on standardized loan packages, rather than the large array of loan options available now.

Default usually occurs around 120 days after the last payment has been made.

Federal student loans typically have mechanisms (deferment, forbearance, income-based repayment plans) that make it nearly impossible to truly default on the loans.

Private student loans are similar to unsecured consumer debt. Once the unpaid mark crosses 120 days or so, the loan is effectively collected like any other debt (though debt collectors, collection attorneys, and lawsuits).

Student loan debt is presumably not dischargeable in bankruptcy, unless the debtor can prove that the debt would create an undue hardship and other factors which are very difficult to achieve (see the Brunner Test for most jurisdictions or the Totality of the Circumstances test for the 8th Circuit).

Some students experience circumstances that can place them into a bind, only to run into the presumed non-dischargeable nature of student loans. Third year students that are unable to qualify for additional loans to meet expected family contribution and then withdraw due to lack of funds, medical students that are unable to achieve proficiency but are sacked with hundreds of thousands of dollars in debt. The student loan corporations know this is an easy avenue to maintain a growing list of young people in indentured servitude.

Granted, the government has tightened the rules around private student loans and encouraged students to pursue federal-only loans (which offer a ton of benefits compared to private loans), but if you look at the loan practices in 2000-2008, private lenders were effectively fly-by-night and doing everything they could (including questionable advertising) to encourage students to apply for private loans.

Most consumer debt is not in the form of a hard money loan (actual dollars) but rather by the money creation mechanisms (money multiplier) of our fractional reserve system. The money created by the loan was effectively "materialized out of thin air" although the debtor does enjoy enrichment from the receipt of the money.

Banks, on the other hand, won't be suffering if reforms are made; they will simply not be able to realize as much interest from the loans they issued.