What a Student Loan 'Bubble' Bursting Might Look Like

Infinitely scary.

> The fact that people can't ever discharge their loans

They can, it just has a higher bar of unaffordability before it can be discharged even in bankruptcy. OTOH, the higher the ratio of student loan debt to income becomes for typical borrowers, the more likely it is that there would be a wave of discharges.

Even without discharges, though, you can have an escalating problem of loans becoming worthless to those with the right to collect them; that the loan isn't legally discharged doesn't mean that the borrower isn't practically judgement-proof.

> The whole notion of bursting is people collectively realizing their folly and everyone scrambling as quickly as possible to make out with whatever they've got left - like a run on a bank.

No, not like a run on a bank, more like a panic sale of a marketable asset class, in this case student loan assets (or student loan asset backed securities, just like the mortgage-backed securities that went through the same thing around 2008.)

OTOH, this is really only likely to be a big issue with private, non-government-backed student loans, which exist and have high per-borrower balances, but are a minority of student loan debt.

On the federal side, increasing defaults mostly reduce the difference between loans and grants and probably push public policy away from generally-offered loans to more targeted (by some mix of need, individual merit, and social desirability of course of study) grants. (These also are marketed and privately collectable after the government originates them, but the government guarantee limits the risk of value crash.)

My mom discharged her student loan debt by passing away. They didn’t even go after her estate for some reason.

The bar is higher, but not impossibly high.

Aggregate student loan repayment should be capped as a percentage of yearly income. This should have been included as part of the same legislation that made student loans non-dischargable by bankruptcy. If you make 100k / year, and the rate is set at 10% (random number), 10k is the maximum amount you pay on your loans, regardless of the total amount you loans you have accrued.

Currently, there is no downward pressure on either universities or banking institutions for tuition rates or amount of money lent in student aid, because the government guarantees repayment. As a result, tuition rises every year far faster than inflation, and banks are happy to join in the reaping of the profits. Capping repayment rates would correct both of those issues, as the ROI goes down significantly over a certain total amount lent, if indeed the sum total can be repaid within a lifetime.

This would additionally ensure that while student loans are available to all students, all parties involved (student, bank, university) have an interest in ensuring the student will be able to pay back the loans, as opposed to now, where two parties have an interest in loaning as much as possible, and one child has conflicting interests.

This would additionally force some accountability on universities for their programs. For-Profit institutions, which currently largely exist to gather tuition money while providing no real educational value would suddenly become unprofitable, and collapse. Simply put: if your graduating students make little money after graduation, their rate of repayment will be significantly smaller than an institution that provides actionable skills.

Similarly, this would incentivize universities to ensure that all of their students are pursuing reasonable / coherent career paths. Currently, universities have the dual incentives to ensure that their students that go on to significant success and high paying industries do so (alumni donations), but also to collect as much tuition/room/board etc as possible from their existing students. This change would negate impact of the this second option.

This would allow students who go to expensive schools to go into lower paying professions. This would allow students with the best and most expensive education to pursue all types of jobs (for example, teaching), not just the jobs best fit to pay down their debt.

This would cap how punitive the accrued debt can be to the graduating student, and resolve the original issue mentioned in the article: student debt is now so overwhelming, it is preventing a generation from entering financial adulthood.

And lastly, this is just a guess and could be wrong, but I would paradoxically expect that in addition to all of the above changes, capping repayment rates would also result in lower amounts of student debt willingly taken on by students. This is for the simple reason that it is easy to rationalize "I'll be able to pay back {Insert_Any_Abstract_Dollar_Figure_Here} once I graduate and get my dream job", but everyone intrinsically would understand: "If I take out this loan, I'll be paying 10% of my income for the next 30 years"

I'm not an expert (or OP), but this is probably the information you're looking for: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell...

My (possibly inaccurate) summary is that they can be discharged if it would be impossible to live with a minimal standard of living while still paying off the loan.