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Alan Collinge

August 13th, 2011

Ever wonder what would happen if you removed bankruptcy protections from a lending system in the U.S.?  Well, it happened to the federal student loan system.  While you won't be seeing much about this in any scholarly papers or journals (although it should be of academic interest to economists), the effects of this are now too obvious not to see.

At first blush, you might think that the lender might tend to lend more money than is appropriate for whatever is being purchased...and you'd be right.  Tuition has risen at double, or triple the rate of inflation for decades now, to where we now owe about a trillion dollars in student loans, as a nation (more than credit cards, or any other type of debt besides home mortgages).  

You could see how a lender might start thinking up new ways to jack up the debt as high as possible,...and again you'd be right.  Sallie Mae's "nickel and dime" games, for example,  are legendary.  To see for yourself, just google "sallie Mae", and "screwed me".  Now think of a big, crappy credit card company, and do the same thing.  Divide the number of hits for each by their number of customers (Sallie Mae serves roughly 10 million borrowers).  Huge difference eh?

You might even think that the lender could even want the borrower to default on the loan, so as to really jack up the debt...and one more time, you'd be right.  The big lenders in the market make far more money when federal loans default, and the guarantors would barely be in business were it not for defaults...Many have been caught for defaulting loans without even attempting to collect on the debt.  Even the federal government is making a pretty penny on defaults, despite what you'd like to believe.

Think this could cause the lenders to go so far as to lie to, or even corrupt the federal government and Congress in order to keep this free money coming?  Yet again, you're right.

Suspect that this sort of an arrangement could lead to a high default rate (one of the primary reasons why bankruptcy was removed in the first place)?  Well, your suspicions are correct.

 Think this might ruin a few citizens who were railroaded into this debt without so much as a head's up about bankruptcy being gone?  Well, you're spot on.

Removing Bankruptcy from a Lending System is a Very Stupid Thing to Do.  Congress must return standard bankruptcy protections to student loans AT ONCE!