Bankruptcy affects your credit score for 7-10 years. Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
There is also the obvious drawback that if more people can discharge the debt, the interest rate goes up, and then everyone else has to pay for the people who took out loans they didn't pay back.
> Someone who graduates from college in their early 20s with six figures in debt could file for bankruptcy immediately and have it be off their credit history by the time they've saved up a down payment and want to get a mortgage.
So change the bankruptcy law? It’s a pretty easy fix. Create a whole new chapter if that’s what it takes. Make it dischargeable only after 7 years of nonpayment, do means testing… bankruptcy law already has these kinds of nuances built in.
> Make it dischargeable only after 7 years of nonpayment
You don't really want to give people an incentive for nonpayment.
> do means testing
Bankruptcy already does that. But what are your "means" the day you graduate from college and haven't yet found a job, or temporarily take a low-paying one on purpose to meet the eligibility requirements?
You would need something like, deferred payments while you're unemployed but if you subsequently find a job then you have to pay, instead of one-time permanently discharging the loans. Except that's how it already works.
> The law is not meant to cover every possible permutation of circumstances and motivations.
This isn't a permutations issue. We know the specific shape of the problem: 18 year olds from poor and lower middle class families don't typically have existing assets with which to secure a loan, so if they can't secure it with their future earnings, they can't get one, and then they can't afford to go to college.
> If student loans are dischargeable in bankruptcy, lenders will price it in or refuse to lend without a gurantor.
That's the problem. The inability to discharge them allows the borrower to get a much lower interest rate than they otherwise could for unsecured debt issued to someone with minimal credit history, or find someone willing to loan them the money to begin with.
It was set up this way so that people could go to college.
Imagine a world where lenders charged different interest rates depending on the risk profile of each school.
Lower interest rates for schools where graduates repay their debt, higher interest for schools where many people default.
Assuming it wouldn’t disproportionately affect disadvantaged populations, that could be an interesting way to incentivize schools to get their shit together and prepare students for starting their career
Don't have a dollar amount that you repay. Rather, your student loan payment is x% of (your income minus the average rate for those with a high school diploma) for y years. Forgiveness programs for certain fields go away--instead, the tab gets picked up perhaps with a multiplier. Disability, death? Irrelevant--a dead person generally makes nothing, the amount owed is $0. (Generally makes nothing because there can be ongoing income from something they produced. That would be subject to the loan repayment.)
Devils advocate: I don’t think this would work due to the cash flow uncertainty the models causes.
If universities don’t know how much they’re going to bring in over the next few years, they won’t be able to budget effectively.
And then there’s the question of whether it’s acceptable for the lender to collect more than what was borrowed. E.g. if I graduate college, start a company, and sell it for $100 million.. am I then paying my alma mater (or lender) millions? If so, would universities make more money from the commons or are they banking on a very small percent landing extremely lucrative gigs post-graduation? I don’t think we want the model to resemble startup financing, where nearly all fail and a small handful pay for the rest (that works for startups, doesn’t work for people’s careers)
I like the concept though. In 2010’s when I was entering college, I actually made a website trying to solicit someone to pay for my education in exchange for a percentage of my future earnings. I found no takers at the time.
That effect would be drowned out by all the people defaulting en masse because getting out of a six figure unsecured debt is worth more than a temporary hit to your credit score.
If that’s true, why isn’t everyone already doing it? Especially if 87% of student loans are forgiven during bankruptcy - maybe people just aren’t aware it’s possible.
"Possible" and "easy" are two different things. 87% is of the people who applied for it, but they would be the ones most likely to have it granted because there is little reason to pay lawyers to file a form which is likely to be rejected. But the more you relax the requirements, the more people do it, which is of course the problem.
There is also the obvious drawback that if more people can discharge the debt, the interest rate goes up, and then everyone else has to pay for the people who took out loans they didn't pay back.