This is an old (2011) article but worth the read:
There’s no question students and graduates face huge student loan debt. Unfortunately, due to federal law passed in 2005, you can not discharge student loan debt in bankruptcy.
So when the law protects financial institutions (at your expense) they will engage in risky practices. If federal law prohibits a student from defaulting on a student loan a bank will give out more student loans! This should sound familiar. If I can sell my home mortgages to the government (or risky hedge funds), I’ll give out more home loans! If I know I am too big to fail, I’ll just keep on making risky loans.
On a practical front, what can students do? Tuition costs are soaring but incomes are not. I humbly admit I don’t have “the answer.” However, I can think of a few suggestions:
1. Try to minimize your borrowing. To do so you may want to read my Cadence of Finance presentation. In there I talk about minimizing high margin exposure.
2. On the lines of minimizing high margin exposure, avoid doing business with the 5 big lenders mentioned in the article above. I have long recommended that people bank with credit unions instead of big banks. Again, see my Cadence of Finance presentation.
3. Not everyone is going to be a nuclear engineer. But the data is clear that higher education is associated with higher income. Choose a major that balances your abilities, interests, and income potential. Payscale.com has a nice page with recent data on earnings by degree (be sure to scroll down). Don’t panic if your interest and abilities land you in the lower income majors. But don’t borrow like you are going to graduate with a Petroleum Engineering degree with Petroleum Engineer income!
4. Pay attention to what politicians are suggesting they will do to address this looming problem. If they currently support bankruptcy protection for other forms of debt but not student loans then you have some information.
5. Whatever your do, don’t rely on the government to bail you out. Alone, you are not “too big too fail.” Do what you can to avoid needing a bail out. Perhaps collectively students with large loans are “too big too fail.” But what will it take to get them “collected” into a uniform position against the system?
Food for thought everyone!