> If it's a bad bet for the bank, it must be far worse of a bet for young adults.
That doesn't follow: you could graduate, get your degree, and declare bankruptcy. You're fine, your loan is gone, and the bank regrets their investment.
The bank doesn't want the bet because "bankruptcy" means very different things to the bank and to the student. To the bank it means they lose all their money. For a just-graduated person with minimal assets it's not that bad -- sure you can't get a mortgage to buy a house for a while, but you probably couldn't have afforded that anyway with student loans. You still have the degree, they can't take that (well, https://www.jefftk.com/p/repossessing-degrees).
I would not underestimate the impact bankruptcy plays in someone's life. You would be getting a bankruptcy on your record in the prime of your life (mid-twenties), making it very very difficult to borrow for the next 10 years. You end up starting building credit in your mid to late thirties, and maybe you are able to participate in the modern economy in your forties. It sucks. I lived it.
However, in a world in which it is common for college students to declare bankruptcy immediately after graduating, financial institutions might take advantage of that information and realize that their creditworthiness is much higher than the bankruptcy would predict. Kind of like how the stock price many companies go up after they cut retirement benefits.
This of course will be to the spiral and collapse of the college loan system.
How high is the creditworthyness of someone who is on a repayment plan to service another debt? It is practically zero. Declaring bankruptcy just limits the duration of the mortgage to 7 years. You still have to pay as much back as you can unless you are literally an unemployed hobo on the street for 7 years.
I'm talking about declaring bankruptcy immediately on graduating, at age 21 (not mid-twenties), and it's off your record seven (not ten) years later, at 28.
> For a just-graduated person with minimal assets it's not that bad
It is in fact bad.
You can’t just declare bankruptcy and get a high paying job a year later and have no student debt....
When I looked into personal bankruptcy I was told by my lawyer that it would only make financial sense if there was no way I could pay back the amount owed in the next 7-10 years.
Making a deal and then breaking it can dissuade employers from putting a person in a high trust position. Most business operates on trust, handshakes, and one's word. Contracts are a backup.
Trust is like glass - easy to break, very hard to put back together.
It still doesn’t follow that the bet is bad for the student if it is bad for the bank. As the student you have some degree of control over the result. If you have reason to think you can make it work it might be a good bet. The bank OTOH only sees that X percent of students fail to pay back.
Right, but there's no feedback. Increasing school prices makes loans harder to pay off, not to discharge in bankruptcy. They can either be discharged or not in bankruptcy.
> That doesn't follow: you could graduate, get your degree, and declare bankruptcy. You're fine, your loan is gone, and the bank regrets their investment.
In my early days in Motorsports (late HS?) we had a anesthesiologist in our group, he was the wise elder who had accrued enough money and flexibility in his practice to play around with the young punks and 'show us how its done.'
One day after a tech day before a track event we working and wrenching in his garage and someone asked him how he got into the trade; turns out he was drafted in Vietnam and chose a medic role out of professional interest but also to ensure not being sent into the suicidal combat zones and come back home alive.
He said that it was incredibly typical to do what you just said in the 60-80s and declare bankruptcy like that when you got your MD, mind you this is at a time when it cost a fraction of what it costs today.
But you could also have your entire medical career subsidized by the State and expedited if you're sent on tour faster than anything offered in the civilian World and choose whatever medical school because of the GI bill and do your residency anywhere you wanted due to your status as a veteran.
And then stiff the Bank for any loans you may have accrued and it was accepted and common practice and save while your credit score was fixed.
He was one of the few boomers who openly spoke about how his generation wasn't anymore responsible then the 'entitled' millennial trope and tried to lecture us about it as that was becoming wide-spread by that time. He actually gave advice about the optics of this route that were being skewed to the detriment of his Industry and profession.
Now seeing the shortage of medical workers during COVID are being perilous overworked all over the World turns out he was, reluctantly, right.
Do you know what bankruptcy does? One does not simply declare bankruptcy unless they're willing to have their lives suddenly become much harder and stay that way for a while.
Let's say I've just graduated from college with a degree. I have minimal assets (clothes, computer) and lots of debt (100k in student loan debt). How does bankruptcy work out poorly for me?
On graduation, unless someone has incredible job prospects, wiping out 100k of debt in exchange for not being able to get a mortgage for 7y is a great deal. At 20k it's not great but still pretty good. I bought a house 7y after graduating from college, and I think this was earlier than most of my cohort.
Additionally, I wouldn't even expect a college bankruptcy to fully preclude getting a home mortgage. With a large down payment the bank isn't actually taking that much risk.
(Except that really I expect that if this law changed loans would require cosigners with good credit)
That doesn't follow: you could graduate, get your degree, and declare bankruptcy. You're fine, your loan is gone, and the bank regrets their investment.