Student Debt: Written Off Debt Doesn’t Mean It’s Gone…
Reuters recently reported that banks wrote off $3 Billion in student loans for the first two months of 2013, an increase of fully 36% higher than the same period last year. While some will salivate, thinking that the bank is giving up on the loan and there's an opportunity to escape the stifling debtload, it's important to recognize one salient fact: Debt that's been written off doesn't mean that it's gone or dead...it's just being reassigned.
Many have now learned that student debt is different from other debt in that it cannot be discharged in bankruptcy; there is no clearing of the slate with the requisite hit to your credit history. That's the crucial difference when you hear that a bank is writing off a student's debt versus any other person's debt. The ultimate effect of a written off loan is that it's treated by the bank as an expense; it's considered as a cost of doing business and the net loss - face value of the loan less any recoverable amount - is deducted from revenue to determine the profit for the year. So the banks are saying that they've had enough on some loans and will write them off. But the non-dischargeable nature of the loan doesn't change and whoever buys that loan - a so-called vulture - will accept the risk of non-payment for the possibly greater return on the debt. And the fact that this can haunt someone forever means that the vulture has considerable upside to the transaction since there's no alternative for bankruptcy. So for the bank, it's an accounting transaction only and no relief for the student who's in arrears or default.
One of the lessons that I try to teach the kids is that things don't just happen, but there's frequently a reason for why, when and how they happen. In this case, Bloomberg reported last week that Obama was cutting the collection agency commissions for student loans in default from 16% to 11%. Prior to this announcement, a debt collector could receive up to 16% of the debt as commission if payments of a sufficient size were realized and it's this largesse that led to some of the well-documented abuses noted over the past year. With the President's action, the commission will decrease to 11% regardless of what's received, so the effect is to diminish the pressure tactics and abuses. The second part of the why-when-how aspect is that some of the largest student collection agencies - such as NCO and Pioneer Credit Recovery - are subsidiaries of JPM Chase and Sallie Mae (SLM) respectively. While I'm not conversant with the arcane details of corporate accounting, I suspect that the write-off involves a shifting of the debt to the subsidiary where it can be recovered at the still pertinent rate of 16% instead of the 11%. The net effect is that the student debt write-off has been simply front-loaded and shifted as the parent corporations still profit and the students are still pursued.
So what's the takeaway from this?
- These bank write-offs are irrelevant for the debtor as they're still responsible for the debt;
- This is just another piece of anecdotal evidence that the financial industry has an advanced view of what's going on within the present administration;
- While the news of larger write-offs adds to pressure for further action to effectively address the entire issue of student debt, it's still incumbent upon the parents to help the kids figure out how to obtain the best education possible with the minimum amount of debt, if there has to be debt at all.
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