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Thursday, March 12. 2015

Student loans and bankruptcy


Of course loans of any sort should be discharged in bankruptcy. That's why lenders have loan officers. Lenders are responsible, and count on their debtors to do what they say they will.


I oppose any sort of government-guaranteed loans, whether mortgages, student loans, loans to solar companies, or loans to car companies. Also, the SBA loans. Government is not a bank. Government-guaranteed loans put taxpayers on the hook for things they would never lend to, including dumb and unmotivated kids.


Bankruptcy rightly screws up your credit for a long time. Megan McArdle says Lending Bankrupt Students a Hand


Sure, as long as there is no government guarantee. Few things would raise the quality and lower the cost of higher ed faster than that.


Posted by The Barrister in Hot News & Misc. Short Subjects at 18:34 | Comments (5) | Trackbacks (0)

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I made a pretty good living back in the 90's selling recourse finance programs.

I would lend to end users through dealers/vendors. The dealer would always have some level of recourse on the program. There were a number of structures but typically the amount of recourse was capped at a percentage of the program amount. Successful programs would be renewed or extended. I'm sure you understand.

Colleges and Universities would be a gold mine for such a program. The school can create discounts, which allows for all kinds or monkeying around with the interest rate printed on the note and the actual yield to the lender. The marginal cost to the school of the next student is zero, so loan replacement (as opposed to coming up with cash to pay off a non-performing loan in the recourse pool) would be easy to do. The lender would be monitoring the performance of the portfolio and the financial condition of the school. The lender would periodically adjust underwriting criteria to maintain program performance, etc. All of the incentives would be nicely aligned. The students have to make money. The school has skin in the game. The lender is taking reasonable risk, etc...

The whole thing could be so wonderfully structured, it just makes total sense to me. But then the government gets involved. Can't discharge the loans, government guarantees the loans. Wall Street packages them into securities. No one is on the hook for anything other than the student and the taxpayer.

Government involvement doesn't make a bit of sense, does it?

But the growth of the SBA (and other government guaranty programs) and the general deterioration of credit underwriting throughout the '90's and '00's , drove companies like mine from the market.

Like I said, I was making a good living doing this work. Things haven't been quite the same since. It still makes me so mad that I can write a long blog post comment about it. In just a few minutes, no less.
#1 Mike (Link) on 2015-03-12 23:26 (Reply)
Let them discharge the debt, but they have to surrender the diploma/credential. They can still trade on any knowledge they gained, even take a competency test to establish what they know, but the cannot claim, nor can the schools acknowledge having received a diploma or other credential. The schools would acknowledge attendance but no transcripts or graduation.

This would correct a lot of things. First, students would try to gain knowledge since that would be retainable. Competency testing would become a thing. Employers would stop thinking the magic parchment was so magical. People, like Scott Walker, who attended but didn't graduate would be back in the running. It would put a torch to the credential fetish.
#2 JK Brown on 2015-03-12 23:28 (Reply)
Nobody should be able to get more than, let's say, $5000 per year in a loan. When that happens, see the cost of college come down in a hurry.

If we write off this debt, the colleges win. They are allowed to raise prices forever and build ever more impressive dorms that are better than my first apartment, fancy sports arenas equal to some cities and department building after department building...all the while knowing the government will finance everyone's college education and the taxpayer will take on the debt when the loan is forgiven.

What a scam. Cap the loans. Period.
#3 MissT on 2015-03-13 00:39 (Reply)
That's why any plan needs some clawback from the universities as Glenn Reynolds has suggested. After all, by the universities' own words and actions, the poor students are not mature enough to hear words that may upset them, surely they also should have some protection from predatory enrollment?
#3.1 JK Brown on 2015-03-13 11:35 (Reply)
Let me announce my bias: have a couple of family members who acquired student debt and have honourably paid off same. This is Canada. Before our federal government enacted restrictions, certain unscrupulous students would take out student loans, graduate, and then declare bankruptcy. This made their student loans uncollectable, So we taxpayers - university grads and otherwise - were on the hook for their debts. The current system is that it takes ten years before the student loan debt can be absolved by bankruptcy.

My sense is that - if you cannon pay off your student loan by ten years after you have graduated - that you have perpetuated a fraud upon the taxpayers of your jurisdiction by claiming a benefit you could not possibly repay.
#4 Frances on 2015-03-14 23:57 (Reply)

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