Things You Should Know About Student Loans in Advance

Every person considering student loans should make sure they understand what is in this post from Megan McArdle.  Americans are spoiled, to some extent, by non-recourse home loans (ie, unlike in the rest of the world, they can't come after assets to pay the loan beyond the house itself) and pretty generous terms for escaping credit card debt.  These cause us to forget that most other types of lenders out there are pretty hard-ass about actually, you know, getting paid back.

I never held any student debt, so I was not aware of many of the facts she provides, but my guess is that many people who do have student debts aren't that aware either.  Here is the most important part:

I don't know why Mystal thought I was only talking about federally guaranteed loans, or that I didn't understand that his debt had been sold to a collector, but there you are. If I had thought that he was talking only about federally guaranteed loans, I would simply have said "Mystal is dangerously deluded and needs to issue a correction immediately before someone gets a very harmful idea from his post."  Federal loans don't settle.  Period....

Private lenders have more incentive to settle, but not a great deal more. Most unsecured debt, like credit card balances, personal loans, and medical bills, can and will be settled for pennies on the dollar--as low as ten cents in some cases (though this usually means that they don't have any verification of the debt, so I wouldn't take a settlement this low.) It's not unheard of for a credit card collector to take 25 cents on the dollar on a valid debt, and 50 cents on the dollar is eminently achievable for many people.

But my understanding is that student loans are the great exception to this rule. Why? Student loans are not bankruptable, not even private ones. A collector for normal sorts of unsecured debt is always working with the threat of bankruptcy in the background; if you try to hold out for full repayment, the debtor can always file Chapter 7. In most cases, that means that unsecured creditors get nothing.

But that's not the case with student loans. There are only two ways to erase the debt: prove you're permanently disabled and will never again earn more than a pittance; or die

  • IgotBupkis, President, United Anarchist Society

    >> But that’s not the case with student loans. There are only two ways to erase the debt: prove you’re permanently disabled and will never again earn more than a pittance; or die

    IIRC (can't find the link) the families of members of Congress get their loans forgiven. So that offers a third out -- get one of your family members into Congress.

    "I either want less corruption, or more chances to participate in it."
    - Ashleigh Brilliant -

  • Vitaeus

    Don't forget, if any one cosigns for the debt, if the debtor dies, you get the undischargable debt, IN FULL.

  • GoneWithTheWind

    I worked at a small college and saw many students who "gamed" the system. They willingly took the largest loans they could and spent it on cars, parties, and clothes. When I reminded them that they had to pay these loans some would say that they didn't care or would declare bankruptcy or claim they were going to make a lot of money when they graduated. The paperwork students fill out to get these loans specifically explain that these debts "must" be paid back. But I guess when you are 18 or 19 and mommy isn't watching the temptation to get "free" money is too great.

  • Phil

    Bring back debtors prisons. Failure to repay a loan is theft. Don't care if it is a mortgage, credit card, student loan, or your brother-in-law. Many of these problems will go away if the stakes were high enough. And maybe some who should never have gone to college (or bought a home or new TV) in the first place will think twice.

  • Student loans are a killer and most school counselors (i.e. salespeople) will push students into loans without giving them a complete understanding of how they will adversely impact their lives long-term. I recently graduated with my MBA so my student loan debt is pretty high and I expected it and was aware of how they worked. As the old saying goes though "If I knew now, when I was 18", I'd probably never have attended college. I'd have entered the Air Force, did my 20 and retired at the ripe old age of 38. Or, alternatively entered one of the numerous apprentice programs that pay you while you earn your education. Debt free with a high-paying, constantly in-demand trade career, now that's bang for your buck! Visit my blog (actually a rant)for more un-politically correct thoughts: http://allthingspoliticallyincorrect.blogspot.com/.

  • @IgotBupkis:

    http://www.factcheck.org/2011/01/congress-not-exempt-from-student-loans/

    While they might not get their loans forgiven, they can get a decent portion of them paid down or paid off with the program. I don't see this as being that much different than programs many companies offer with the exception of the size of debt the government will "pay" itself.

  • el coronado

    "bring back debtors prisons"??? you sound like a real fun guy there, phil. the relevant quote you're wanting is "are there no prisons? are there no workhouses?" then, later, when you've grown tired of these slackers clogging up our debtors prison system, you can ask "will no one rid me of these troublesome debtors?"

    ain't it fun being literate and curmudgeonly? not like those damn **debtors**, i'll wager!

  • Fred

    "There are only two ways to erase the debt: prove you’re permanently disabled and will never again earn more than a pittance; or die"

    Or do the old fashioned thingy and pay back the money you borrowed.

    Not very hip or cool, but very, very effective.

  • James H

    I felt relieved to finish paying off my debt last year, even though the payments were pretty small. I was fortunate to go to college when tuition for 4 years would be about $10K, though, at Arizona State as an in-state student (during the early to mid '90s). Now I hear it's $10K per year for in-state students! BUT, at least they can take courses in sustainability now, we didn't have that option as the craze then was "cultural diversity".

  • Mark

    They also try to subsidize worthless degrees. So if you become a sociology major for instance and get a really low paying job, they have programs where you pay low sums and the debt is forgiven after 30 years.

    But other than that the article is essentially correct. It is impossible to get rid of a student loan without paying it back, or getting someone else to pay it back for you.

  • caseyboy

    Phil, lets bring back indentured slavery for dead beats. Why deprive the lender of some form of service in trade.

    The problem is that bad social behavior no longer carries any public stigma. As a matter of fact it could result in a reality TV show. Can you say "slippery slope"?

  • Phil

    Apparently the analogy between theft and loan default is not so absurd: http://www.theatlantic.com/business/archive/2011/06/is-it-okay-to-steal-from-macys/240439/

  • Lee

    I think I read somewhere that if you work for the U. S. Government they will pay off your student loans over time. I can't recall where I saw that, but it was logical given the apparent desire to grow the number of government employees

  • Dr. T

    @Lee: The program is called Public Service Loan Forgiveness and applies only to full-time public service workers who have been making Direct Loan Program* repayments for ten years. Basically, it is a program for government employees who took on a lot of student debt and stretched the loan repayments out for more than ten years (which means huge total interest payments). It's far more sensible to buy a house that is well within your budget, get as big a mortgage as you can, and repay the student loans ASAP. Mortgage interest rates are lower than student loan rates, and mortgage interest is tax deductible.

    * Federal Direct Stafford Loans (Direct Subsidized Loans)
    Federal Direct Unsubsidized Stafford Loans (Direct Unsubsidized Loans)
    Federal Direct PLUS Loans (Direct PLUS Loans)
    Federal Direct Consolidation Loans (Direct Consolidation Loans)

  • Mark

    @Dr T,

    Many states also pay pack loans for teachers. Sometimes every teacher, sometimes the teacher has to teach in an underprivileged district for 3 - 5 years.

    Also the 20 year loan isn't so bad because in eariler days you were allowed to reconsolidate to 20 years and get a fixed interest rate. Usually the rate used to change once a year, in July or August, I don't remember.

    I managed to lock in 3.75% on my student loans in 2003 when interest rates were lowest. After 4 years of good payments it went down to 2.75% and the interest is top of the line deductible (up to 2 grand - but then @ 2.75% it is hard to get 2 grand of interest) making my loan really only 2%. Needless to say, I will pay just about anything else off before I give an extra nickle to my student loan, even though I won't have it paid off until my oldest daughter is through college. (Note last year May - May inflation was 7.3%)