Tuesday, June 27, 2017

Is it fair to exclude student loans(education loans) from personal insolvency? Some possible reforms

While reading the Indian Insolvency Code 2016(http://www.indiacode.nic.in/acts-in-pdf/2016/201631.pdf) , I realized that student loan debt is excluded from discharge during insolvency/fresh start process. The definition below states that:
Sectin 79(15) "excluded debt" means—
(a) liability to pay fine imposed by a court or tribunal;
 (b) liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
(c) liability to pay maintenance to any person under any law for the time being in force;
 (d) liability in relation to a student loan; and
 (e) any other debt as may be prescribed

While matters of (a)-(c) are public policy items, it is difficult to fathom why student loans should be singled out for unfavorable treatment. One argument could be that these loans are typically unsecured and single borrower so to avoid the risk of student moral hazard of building their skills and non repayment, these are excluded from personal insolvency. This is the case in USA also, but there, if the college has been fraudulent, de-recognized etc, this debt is forgiven. In my view, this provision should be accompanied by

  1. Allowing bankruptcy protection for only those student loans which were unsecured and not under co-guarantee/co-borrower of parents. Reason being these were secured at time of sanction, and therefore should not get special treatment
  2. Allowing student loan protection to the extent the interest charges were less than the equivalent home loan rates by the same lender. If the lender had charged ~13% under floating, why should they get special treatment here
  3. Not allowing retirement annuities of parents to be attached to repay their children's loans for which they had done guarantees
  4. Allowing case/case student loan waiver where the default is not wilful. Possible indicators could be
    1. Income after graduation<200 emi="" li="" loan="" of="">
    2. Person continued jobless
    3. Institute placement records/academic credentials under question
    4. Evidence of kickbacks between lender and institute 
  5. Fine/Recovery from the concerned education institute where fraud by them is proven(Eg advertise 100% placements or facilities which do not exist)-then the bank should be able to attach and auction the institute. 
  6. Similar to RERA Code, liability on education/admission agents 
In the era prior to this Code, I have seen cases of friends debarred from bank jobs since they fell behind on student loan repayment. This leads to a vicious cycle in this economy and should stop