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Friday, June 15, 2012

An Education in Personal Responsibility

Posted by on Fri, Jun 15, 2012 at 11:24 AM

You know, moral hazard and all that:

A few months after he buried his son, Francisco Reynoso began getting notices in the mail. Then the debt collectors came calling.

“They would say, ‘We don’t care what happened with your son, you have to pay us,’” recalled Reynoso, a gardener from Palmdale, Calif.

Reynoso’s son, Freddy, had been the pride of his family and the first to go to college. In 2005, after Freddy was accepted to Boston’s Berklee College of Music, his father co-signed on his hefty private student loans, making him fully liable should Freddy be unwilling or unable to repay them. It was no small decision for a man who made just over $21,000 in 2011, according to his tax returns.

Unlike most other forms of debt, student loans cannot normally be discharged even in bankruptcy. But then, we're not the ones who stupidly took the risk of co-signing a student loan for a son who might possibly die, so why should we let Reynoso off the hook for his mistakes? Individuals need to be held responsible for the financial risks they take, just like Wall Street bankers. That's what makes capitalism work.

(And "Reynoso"? A gardner? In California? Sounds illegal-immigranty. Somebody tip off ICE.)


Comments (32) RSS

Oldest First Unregistered On Registered On Add a comment
Ah, the private-student-loan racket. Add to that the 2005 vibe, when untold numbers of us were so willing to sign so many kinds of dotted lines. Everything was going to just keep going up, remember?
Posted by gloomy gus on June 15, 2012 at 11:32 AM · Report this
Pip Hellion 2
Damn...I guess to protect himself the guy should have taken out a life insurance policy on his son for a few dollars a month, if he could, as an alleged illegal immigrant. A life insurance policy should probably be a stipulation of the promissory note.
Posted by Pip Hellion on June 15, 2012 at 11:33 AM · Report this
Sargon Bighorn 3
I don't see the issue, Where is the issue?
Posted by Sargon Bighorn on June 15, 2012 at 11:33 AM · Report this
rob! 4
“As a father, you’ll do anything for your child,” Reynoso, an American citizen originally from Mexico, said through a translator.
Reading: the lost art.
Posted by rob! on June 15, 2012 at 11:38 AM · Report this
rob! 5
And what is with "2014" being sprinkled in nonsense locations throughout the article? Some sort of FNORD thing?
Posted by rob! on June 15, 2012 at 11:41 AM · Report this
Joe Szilagyi 6
Can someone explain why student loans are handled different than other loans for bankruptcy, and what law encoded this?
Posted by Joe Szilagyi on June 15, 2012 at 11:41 AM · Report this
Theodore Gorath 7
@4: Are you really expecting the Slog writers to check facts instead of making tantilizing assumptions and omissions?

If I didn't know any better, I would think you were new here.
Posted by Theodore Gorath on June 15, 2012 at 11:46 AM · Report this
@Joe Szilagyi

The thought is that if you graduate from college/grad school/etc with tons of debt; and you could get rid of it all by declaring bankruptcy; there would be no reason not to do it. You generally have no assets when you finish school.
Posted by arbeck on June 15, 2012 at 11:48 AM · Report this
Max Solomon 9
he should try what my friend did: flee the country and live overseas.
Posted by Max Solomon on June 15, 2012 at 11:51 AM · Report this
OuterCow 11
Contracts are sacred, dammit! Well, unless they're union contracts, those are perfectly ok to break for some odd reason.

@9 Where'd your friend go, Max?
Posted by OuterCow on June 15, 2012 at 11:55 AM · Report this

Then why dont college graduates act like normal americans...sign up for 20 credit off the student loans and then declare bankruptcy?
Posted by Supreme Ruler Of The Universe http://_ on June 15, 2012 at 11:55 AM · Report this
keshmeshi 13
Is there even such a thing as free-and-clear bankruptcy anymore (for individuals)? I thought the bankruptcy "reform" bill from several years ago shit-canned it.
Posted by keshmeshi on June 15, 2012 at 11:57 AM · Report this

Because if you actually were able to pull this off they can go after you for fraud and bring you up on criminal charges.
Posted by jwlsesq on June 15, 2012 at 12:02 PM · Report this
rob! 15
@7, I'm the eternal optimist.

@11, China's a good guess.
Posted by rob! on June 15, 2012 at 12:05 PM · Report this
Knat 16
That debt collectors are apparently free to say and do anything to strong-arm you into paying only makes it that much more... American, I guess?
Posted by Knat on June 15, 2012 at 12:24 PM · Report this
You_Gotta_Be_Kidding_Me 17
“Hefty” student loans for music school… Probably not the best investment (alive or dead).
Posted by You_Gotta_Be_Kidding_Me on June 15, 2012 at 12:42 PM · Report this
Vince 18
More proof the rich are killing the American dream.
Posted by Vince on June 15, 2012 at 12:48 PM · Report this
@6 The bankruptcy discharge provision for federal loan (the Stafford Loan)was part of the Reauthorization of the Higher Education Act. I believe it was the 1998 reauthorization. There was a modification to the Bankruptcy Act in 2005 that extended the exclusion to non-federal loans.

Under current law, @2's suggestion is the best one. If you're co-signing a loan for a student, take out insurance, either on their life or on the repayment of the loan in the case of their death or incapacitation. I'm actually rather surprised there isn't some form of co-signer insurance more widely available.

On the bright side, the HEA is up for reauthorization next year, so probably no one will have to worry about new federal loans after that. If Congress keeps going as they have, they won't reauthorize, and there will be no more federal student loans.
Posted by usagi on June 15, 2012 at 1:01 PM · Report this
Conservatives might actually have a point here: easy student loan availability has led to soaring prices at colleges who know they can charge almost anything and still have students enroll. This also means a disincentive for schools to implement programs that used to make school affordable like part time or evening classes.

Meanwhile, restrictions are put into place requiring degrees to be finished within a certain amount of time. So what would happen if it was much harder to get a student loan? Would schools finally start offering programs people could afford?
Posted by PoliGeek on June 15, 2012 at 1:05 PM · Report this
Teslick 21
16: It is amazing what debt collectors still try to pull off these days. I was recently harassed by a collector out of New York looking to get money from my neighbor, which is a blatant violation of federal law. I finally had to report them for them to stop, so the tactics described sound typical.

Although this gentleman should say fine, try to get your blood out of this turnip.
Posted by Teslick on June 15, 2012 at 1:22 PM · Report this
delirian 22
@20: The recent rises in tuition seem to be due to austerity and damage to investments. The States no longer want to pay for the schools and the current retirement programs don't have enough cash to sustain themselves so the schools bump up tuition fees. I don't really see any evidence of schools getting rich or packing away cash. It seems to be the opposite.

Of course, like austerity in general, this will only hurt the State in the long run. A State with well educated workers is a state with more valuable workers. Education is an investment that pays for itself. It makes good economic sense for the government to try to support it and help those who are deserving.

While many students may be naive on the details of student loans, their government used to be looking out for them. The government used to try to make school cheap enough that middle class families could afford it with moderate amounts of loans. In the short term, the government needs to either allow student loans to be discharged in bankruptcy or to support those universities again. Otherwise the result will be only rich kids and foreigners going to US schools. The educated workforce, its value, and its tax revenues will wither.
Posted by delirian on June 15, 2012 at 1:35 PM · Report this
thatsnotright 23
There are actually very stringent harrassment laws regarding what debt collectors can say and how they contact debtors in many states. It is always a good idea to record calls from collection agency workers as well as kep a contact log, especially if they show up at your house. An attorney friend of mine recorded a debt collector for AmEx calling him a scum-bag and a coward on his answering machine and had the debt dropped when he wrote a letter threatening legal action.
Posted by thatsnotright on June 15, 2012 at 2:14 PM · Report this
Daddy Love 24
What, you want the guys who know all about how to assess risk and who subsequently lent the money to people who are terrible risks to eat the bad loans they underwrote? You have a lot to learn about the good ol' USA, buddy.
Posted by Daddy Love on June 15, 2012 at 2:26 PM · Report this
Max Solomon 25
@11: cyprus
Posted by Max Solomon on June 15, 2012 at 2:27 PM · Report this
i will not cry a single tear if they never get a penny from this dude. what a waste of a life - to be a banker i mean.
Posted by peskypoop on June 15, 2012 at 3:23 PM · Report this
biffp 27
Romney's tax cuts for millionaires would be $100k for them in year 1 and $949k over a 10 year period. That should fix the nation's problems. Guy has less answers than Herman Cain.
Posted by biffp on June 15, 2012 at 3:44 PM · Report this
@6: The reason student loans are not dischargable in bankruptcy is that nearly all students are technically insolvent when they graduate. They have a pile of debt and no (tangible) assets and no income. Essentially every student would qualify for bankruptcy protection and could completely discharge his loans. Since creditors would also be aware of this option, they would not offer uncollateralized student loans in the first place. (The bankruptcy would be on your credit report for seven years, which is some disincentive, but who buys a house within seven years of graduating from college?)
Posted by David Wright on June 15, 2012 at 3:54 PM · Report this
Pridge Wessea 29
@28 - So were there no private loans before this regulation?
Posted by Pridge Wessea on June 15, 2012 at 5:28 PM · Report this
I'm confused. If the debt collectors are apparently unable to demonstrate that they really are owed money, then doesn't Reynoso just refuse to pay? I didn't sign an agreement with you; you can't demonstrate adequately that the rights and obligations associated with this loan were properly transferred from the original lender to you; therefore I do not owe you. End of story. Surely?
Posted by Phil H on June 15, 2012 at 10:49 PM · Report this
@29: The rule dates back to 1976, and before that the only way to get a "college loan" was to get someone with assets and income (typically parents) comeasurate with the loan amount to co-sign. I'm not sure why this should be difficult to believe: Have you ever applied for any other loan in which the lender didn't want proof of assets and income comeasurate with the loan amount at the time of the loan? If you were a bank, would you lend to someone who could make his debt to you disappear with almost no negative consequences to himself?
Posted by David Wright on June 15, 2012 at 11:04 PM · Report this
@6, Joe Szilagyi, please ignore the other rather tentative, and watered down comments, regardless of how well intentioned they may have been.

While some were correct, it was the 2005 bankruptcy bill that did it, it is due to the securitized nature of student loans (along with all the other securitized loan structures out there (predominantly those residential mortgages, but also commercial mortgages, credit card receivables, auto loans, etc., etc.).

An amendment was attached to that 2005 bankruptcy bill which was cited in the Financial Crisis Inquiry Commission (FCIC) report, which explained that under the amendment the derivatives dealers would receive the highest priority as creditors to any and all of those loans.

In other words, those who were behind the highly profitable, and highly questionable, structruing of those loans, would receive the first payouts and they couldn't be discharged.

Clearly, the structuring of those mortgages, which if they were FHA loans, would automatically almost fully be compensated by the government to the banks upon foreclosure, then the banks could re-securitize and re-sell those houses --- their super-profit cycle:

original mortgage payment and spinoff as securitized CDOs, etc. and

almost fully compensated when house foreclosed upon if FHA, and

able to re-securitize and re-sell house, either individually or as auction to corporate buyers.

This profit cycle devised and brought to you from the good people at


(Yes, unlike your daddy, sgt_doom does know best!)
Posted by sgt_doom on June 16, 2012 at 11:12 AM · Report this
I think we should all take this opportunity to acknowledge that Senators Murray and Cantwell voted for the Bankruptcy Reform Act of 2005 and against the establishment of a federal usury rate in 2009.
Posted by PCM on June 17, 2012 at 10:19 AM · Report this

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