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Comment by chimeracoder | Hacker News Reader

> I think not being able to default on your student loans is the main factor in rising costs. There is no reason not to give out a student loan of any amount if it is guaranteed money.

Just because the loans can't be discharged during bankruptcy proceedings doesn't mean the lender gets their money back. Default rates are high (and rising). The lender may get some money, but that doesn't mean they get their principal back, let alone a sufficient interest to justify giving out the loan in the first place.

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The mechanism by which you default on a loan is bankruptcy. If you can't discharge a loan in bankruptcy, you can't default on it.

Some people never make enough money to pay it off, after which the government will pay the loan off after a few years. The lender gets payed anyway. These are risk free loans for lenders.

> The mechanism by which you default on a loan is bankruptcy. If you can't discharge a loan in bankruptcy, you can't default on it.

This is absolutely, completely, 100% wrong. Defaulting on a loan means that the borrower has failed to repay according to the agreed-upon terms.

> Some people never make enough money to pay it off, after which the government will pay the loan off after a few years. The lender gets payed anyway.

This isn't really true either. The lender is not guaranteed to be paid their principal back.

> These are risk free loans for lenders.

If these were truly risk-free, then the interest rate on private student loans would be roughly equal to the current actual risk-free rate of investment (because any new lender could always capture additional loans by undercutting their competitors and still make a profit).

Except, that's not true at all. The interest rate on private loans is quite high. In fact, it's significantly higher than the interest rate on mortgages, which are loans backed by collateral that can actually be seized.

The spread between them is very low, much lower than another kind of unsecured loan would be to young adults with no credit.

>The lender is not guaranteed to be paid their principal back.

This may apply for personal loans, where real money is given up; but, it's not really correct to call a bank, the originators of most private student loans, as far as I know, a 'lender'; as, banks don't lend their own money, but create new money through promissory notes.

> This may apply for personal loans, where real money is given up; but, it's not really correct to call a bank, the originators of most private student loans, as far as I know, a 'lender';

It is 100% correct to refer to a bank as a lender. This is standard use of terminology.

Do you have an official reference? I would believe that persons in the industry may use slang terms, but technically it would be incorrect to refer to a bank as a lender in most 'loans' they perform.

If you check the Promissory Notes, I'd guess they probably don't say "lender", except as possibly an alias for a definition that is not equivalent to the standard definition -- wherein, one forgoes actual physical property (cash, for example) for another's use; with the expectation that the property will be returned at some point (possibly with some form of payment to compensate for the real loss of property).

Edit: Do you think Wells Fargo has myriad $100k bundles just sitting around waiting for students to take? I don't think so. They use their power to create new money, rather than loan out the entire principal from their reserves.

> The mechanism by which you default on a loan is bankruptcy. If you can't discharge a loan in bankruptcy, you can't default on it.

I think you may be confusing the terms 'default' and 'discharge', and have the ordering wrong.

You may be in default, which may lead to bankruptcy, which may lead to the debt being discharged.

Discharging the debt does not lead to defaulting on it.

This helpful Wikipedia paragraph should clear things up for you:

https://en.wikipedia.org/wiki/Default_(finance)#Distinction_...

Note that 'default' is simply 'a debtor has passed the payment deadline on a debt they were due to pay'. 'Bankrupt' is 'a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default'.

See how 'bankrupt' is done to someone who is already either insolvent or in 'default'?

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