Dispatches from a Small Business
It strikes me that there's a tipping point / preference cascade. When you see 10 or 20% of all student loans are delinquent, if you owe, perhaps the rational move is to stop paying. Things are heading towards a "crisis" (an air quotes "crisis" is like a regular crisis, except it involves more politicians and MSM).
What are the chances team Pepsi will try to buy votes by forgiving all student loans sometime in the next few years? My guess: 20%.
Yes. But I would observe this is not new news. Even the graph bears that out. There has not been a dip in student loan defaults for several years.
Unless the Pepsi or Coke party does something the kids are stuck. It is almost impossible to discharge student loans without dying. You can also become permanently disabled.
The worst thing you can do is stop payment. You need to always call them and get into the next student deferment program to keep looking current. If you do this after 20 years the loans are forgiven, if you don't it is a noose on you for the rest
The problem with student loan forgiveness as a vote-buying strategy, is that a lot of those loans have been securitized by Sallie Mae and sold to investors (just like mortgages-backed securities).
If the government forgives the borrowers, then the lenders (security holders) have to write down the value of their assets. If the securities are held by pension funds, the pension plan would become (increasingly) underfunded. If the securities are held by banks, the banks would become (increasingly) insolvent.
This is largely because the government pushed all private lenders out of the student loan business. In general, debts owed to the government can not be discharged by bankruptcy. This includes tax debt as well as student loans.
No - that is also the case with my student loan. But my loan, even though it was privately sourced is Federally guaranteed, so falls under the same you are stuck with it rules.
But yes, I agree with your point about federal intrusion. The feds, don't do any checking to see if your career choice is viable. Go to Stanford for 5 years and get an MS in Sociology - it will be hard to pay back the 120K in loans with your Day care supervisor job.
Private banks would at least try to determine if your career choice is viable, and the likelihood of your completing the program and paying them back before loaning the money.
Sallie mae doesn't securitize new loans. I think these defaults are for more recent students and are mostly under the federal funded loan program (as opposed to federally guaranteed) I don't know, maybe the government contracts with Sallie to collect the loans, but I don't think Sallie has any new ownership any more.
One could always consolidate those into a non-student loan (HELOC, say, or CC), and THEN declare bankruptcy...
But that would take a bit more forward thinking than I would expect from some of the mega-loan folks I've seen interviewed...
There's a problem that student loans do not have any collateral on them except the individual's future earnings.
If you bankrupt on your mortgage, the bank can take the house. If you could bankrupt on your student loan, right after finishing college, then the bank would usually got screwed. You don't have any assets yet to take.
You are quite right. No one willing to rack up 6 figures in debt for a degree with zero marginal income potential would be smart enough to try re-paying their student loans with another debt instrument that would be discharged in bankruptcy. However, even if they did think of trying that, where the heck is someone with 6 figures worth of student load debt and no job prospects that don't include the phrase "do you want fries with that?" going to find a bank willing to give them that large of a line of credit.
There is also the issue that a large chunk of the increases in college costs over the last few decades have been driven in part by increased demand that is driven by federally guaranteed student loans.
Yup, and same thing happened when the Feds started mucking with homes. Yeah you can get a 30 year loan with 3% down, but because it is so much easier to get a Fanny loan, the housing prices went soaring. Even today take fannie out of the picture and home prices would drop 1/3
Much of the complaining I've heard has even been from people who can get jobs, but still radically overpaid for a BA - these folks often can buy a condo or the like, or can at least get credit cards.
One of the first things I did when I got myself together after finishing college was repackage my (small, ~15k) student loans into the rest of my generalized debt consolidation (via HELOC). This had the advantage of keeping me from thinking that it was in any way different from any other debt, and is happily quite paid off now.
I consolidated with Sallie Mae in the 20 year payback program which is OK because I am locked in at a 2.75% rate - which is partially tax deductible. Figure it is the last loan I want to pay off - considering many years I pay less than inflation for the interest, and have lots of options to not pay if I lose a job.
Ironic that yesterday I saw an article saying that investors were getting more and more fond of student loan debt.
Perhaps it's because that debt is not dischargeable in bankruptcy.