Going for broke won't pay

Students who are using a legal loophole to clear their loans by declaring themselves bankrupt should beware, says Joel Budd. It may be a quick fix, but it could ruin their lives
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The Independent Online

Students have caught forbidden fruit syndrome - as when a group of people are told they cannot, must not, do something, and want to go straight out and do it. In early January, the Government's insolvency service quietly added student loans to its list of bankruptcy debts. This means that, at least in principle, students can wipe out their obligations by declaring themselves bankrupt – a tempting prospect for people who may be more than £12,000 in the red.

Students have caught forbidden fruit syndrome - as when a group of people are told they cannot, must not, do something, and want to go straight out and do it. In early January, the Government's insolvency service quietly added student loans to its list of bankruptcy debts. This means that, at least in principle, students can wipe out their obligations by declaring themselves bankrupt – a tempting prospect for people who may be more than £12,000 in the red.

It was several weeks before anybody noticed the change. Then, earlier this month, financial consultants began to pop up on television. They announced that a loophole had appeared in the bankruptcy code, but strongly advised students against taking advantage of it. The Department for Education and Skills quickly released a statement, saying that students should not be allowed to clear their debts in this manner, and that the loophole would be closed as soon as possible.

Phones have been ringing ever since. The National Union of Students, which sounded an early warning about the dangers of bankruptcy, has fielded many inquiries from students who are seriously considering it.

"They're a bright bunch, and they want to look at all the options open to them," says NUS president Mandy Telford. "Students are carrying a very considerable amount of debt, and when they hear about this, they think: 'well, that might be an option'."

Telford blames the Government, not so much for letting the bankruptcy loophole open, but for putting students in a position where they are tempted to take advantage of it. She argues that debt of all kinds has increased in the past few years. The NUS has heard from many students who owe large sums to banks and credit card lenders as well as the Student Loans Company.

Another person with a warm phone is Nick Hood, senior London partner at the insolvency experts Begbies Traynor. Following his appearance on BBC2's Working Lunch, where he advised students not to file for bankruptcy, Hood began to receive requests for more information. They are still coming in.

"For many students doing business degrees, Working Lunch is required watching," explains Hood. "So when I appeared on the programme, saying: 'there's this loophole, but don't do it,' word was bound to get out into the student community."

Hood worries that bankruptcy will come to be seen as a quick and easy fix. He is particularly concerned about a forthcoming law that will allow people with debts of less than £20,000 to discharge themselves from bankruptcy in a single year. This may make it seem more appealing.

But bankruptcy carries long-term consequences that many people are not aware of. "Getting credit cards will be difficult for five, maybe 10 years," says Hood. "Getting a mortgage will also be difficult, and a discharged bankrupt will have to pay a premium rate for it. Then there are employment costs. The stigma of bankruptcy might well influence an employer's decision not to give someone a job."

Yet it's hard not to feel sympathy for students who – however foolishly – try to take advantage of the loophole while it remains open. Hood explains that, until recently, student loans were very unusual in that they couldn't be erased through bankruptcy. The only other payments protected in this way were court-ordered fines and alimony.

So why should impoverished students be treated like criminals and deadbeat divorcees, while people who notch up tens of thousands of pounds in, say, gambling debts can get them written off?

One answer is that student debt is government money, and governments tend to protect their own investments. Even in America, where bankruptcy is relatively painless and very common (a staggering 1.5 million applications were filed last year), students cannot normally write off their loans by declaring themselves broke.

But there's another reason why the government is so keen to protect student loans. Most students are young, and, as Warwick economist Andrew Oswald explains, they don't have much to lose. "It's especially easy to declare bankruptcy early in your life because you have few assets. That's partly why the government has to be particularly concerned about this," he says.

From a public relations point of view, the timing of all this is unfortunate. For the last six months, ministers have been trying to solve a seemingly impossible problem: how to obtain more money for the universities without upsetting voters. Last month, they finally revealed how they would do it. The higher education White Paper was a triumph, shifting the financial burden further onto students while preserving the principle of open access. But the carefully crafted formulas for deciding who would pay for university, and how much, seem rather beside the point if graduates can simply opt out through bankruptcy.

The loophole will not remain open for long. It won't survive the change to the funding regime outlined in the White Paper, and it is likely to be closed before then.

But students will continue to go bankrupt. Mature students, who often carry large debts into their courses, have long done so. And the dishonest and desperate will find other ways around the law. Debt can be shifted sideways, in what one bankruptcy counsellor calls "the great British pastime." Loans can be used to pay off student loans, and then declared as bankruptcy debts. It's a criminal offence, but not a rare one.

education@independent.co.uk

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