The problem is, so many of them are living with their parents. I suspect a fair number of these ex-students and their co-signing parents would be happy to declare bankruptcy if it meant an end to a significant portion of their debt. I'm sorry that's what our country has come to, but I believe it has. Remember the days when people didn't used to default on their mortgages? A fair amount of the stigma has been erased. I don't see student loan based bankruptcies much differently.
A large number of bankruptcies in the student loan area will force another bailout of the banks and we the taxpayers will be left holding the bag.
Because it is sensible, I doubt that what I've suggested herein will become law. But if it did, I don't think it would require any wide-scale bailouts of any lenders.
From what I've read, there's roughly a trillion dollars of outstanding student debt. But roughly half this money is being paid back, on time, in full. A big chunk of the remaining half-trillion comprises deferred interest and various fees for late payment, default fees, etc. I recently read of a case of someone who borrowed $70K, and through penalties, interest, fees, had $280K in debt. Much or all of that sort of thing would be rolled back in bankruptcy court. If banks were counting those fees and interest on non-performing loans as performing assets, they not only deserve to go broke, but deserve to go to jail.
My own guess is that most everyone with $50K or less will in debt will be able to repay the principal, with modest interest, in full. I'm guessing that the total losses, both private and public, will amount to a couple or three hundred billion or so. Spread out over a number of years. The federally-guaranteed part of the losses will be a rounding error in the federal budget. The private losses will be significant, but spread out over a period of years, will hardly be unbearable.
The crucial part of this is to to stop the bleeding. I read that roughly $100 billion in debt is being added to the tab each year. Thus, it's necessary to make changes to bankruptcy law as soon as possible, and to end federal loans as soon as possible.
However, because a train wreck is not yet quite imminent, it is unlikely that anyone will do anything positive. Then, when the train starts derailing in a spectacular way, folks will panic and do all sorts of counterproductive things to “fix” the problem. Which will likely mean an across-the-board write-off of a significant amount of the principal, bailouts for the lenders, and even more money for student loans. Argh.
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