Wednesday, May 13, 2009

Bankruptcy and studen loans

I read an interesting article this morning about bankruptcy and student loans. It's odd to me that we allow people to file bankruptcy to discharge debt for flat screen TVs and other toys, yet not for things that matter like student loans. Why is this? What is inherently different about student loans that make them less forgivable in bankruptcy? Shouldn't we be more willing to forgive such debt over stupid consumer spending? After all a student loan can provide education that can be used for productive purposes. Not so with a flat screen TV.
However, I can also see the point that easy discharge through bankruptcy increases the risk to student loan providers and thereby increasing the costs and requirements to get a student loan. We should be motivated to keep the costs and risks low so people can pursue their education. After all thanks to cheap and easy student loans I made it law school and can now bring home the bacon. However, prior to the current economic crisis, even credit for flat screen TVs was relatively cheap and easy. I used to receive letters and solicitations for cheap and easy credit all the time, and anticipate more when we pull ourselves out of this slump.
So why then are student loans unforgivable when flat screen TVs are?
I can only guess that we dislike the following scenario. Let's say a lawyer (or doctor or other professional) in a down market is laid off and he goes through bankruptcy. His student loans are forgiven. As the market picks up, he gets a fabulous job and goes about earning the big bucks but does not have to repay his loans. It seems patently unfair for him to reap the benefits of his loans when he did have to pay for them. However, he is working. It's not like he is getting a free ride. He has put in his 8-10 hours a day to get his paycheck. With a flat screen TV, after bankruptcy you can sit on your rear end and reap the benefits of the TV without having to pay for the TV. All the while you are not being a productive member of society.
Frankly it all seems so silly to me that we make such distinctions. The take away point is to buy that nice TV before you go bankrupt, but do it on credit.

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