Sonoma County Bankruptcy Lawyer Blog

The federal consumer regulator says it's high time for private student lenders to provide transparency into their practices, Reuters reports.

"It has been operating in the shadows for too long," Raj Date, the Treasury Department adviser who is running the Consumer Financial Protection Bureau, said in a release. "Shedding light on this industry will benefit students, lenders, and the market as a whole."

The problem with student loans, from our perspective, is that they are not dischargeable in bankruptcy, and that schools are motivated to sign up students - even very marginal students - since the taxpayers are on the hook when the students default.

But since the debt can't be discharged, students find their financial lives ruined at a very early age, while the schools and the lenders are making out. Call in the Student Loan Bubble.

No idea what changes the agency will recommend or how hard the banks will fight, but any scrutiny is welcomed. But one thing that would make a huge difference is to make student debt dischargeable.

So this page is going around Facebook: "A rising tide does, in fact, lift all boats - forgiving student loan debt, rather than tax cuts for corporations, millionaires and billionaires, has a MUCH greater chance of helping to rise that tide in a MUCH shorter time-frame. ..."

It goes on to state that there's a bill in Congress - H. Res 365, introduced by Rep. Hansen Clarke (D-MI), seeking student loan forgiveness as a means of economic stimulus.

In fact, this bill is something less than it appears.

It's a resolution "expressing the sense of the House of Representatives that Congress should cut the United States' true debt burden by reducing home mortgage balances, forgiving student loans, and bringing down overall personal debt."

No doubt, the existing student loan system is an abusive system, designed for the taxpayers to underwrite private schools' predatory practices, but signing a Facebook petition to support a resolution won't change a thing.

There's a fascinating article on Avvo's Naked Law site, titled 8 Reasons College Tuition is the Next Bubble to Burst.

It's of particular interest to me not only because I have a son about to enter 11th grade but also because the article implicates the 2005 "reform" of bankruptcy law in the Tuition Bubble.

Here's the theory in a nutshell: Private colleges have been riding the same debt bubble that real estate and derivatives were riding - spiking profits based on consumers getting easy credit. And since student loans are nondischargable in bankruptcy, the lenders take no risks that students will default. In other words, we have a system that encourages private schools to hike tuition rates, since students can always get those giant loans, and encourages banks to lend the money, since they know they will not be left holding the BK bag.

Continue reading "Is college tuition a bubble that's about to burst?" »