Bond's don't change rate when the company get's into trouble the cost of new bonds goes up.
Student loans are normally fixed interest rate loans and they only charge penalty's when your late in paying them.
The problem with increasing rates when people get into trouble is it tends to force more people over the cliff. Let's say you owe 20k at 10% and make 50k/year. You get hospitalized for 5k and your old and new rate becomes 33%. You have gone from a 2k /year to 5k/year when you need to borrow 5k more. If the company lending you 5k wants to charge you 33% interest that's fine you can focus on paying them back first and get free of debt but when everyone starts raising your rates while your in trouble it's almost impossible to get out of the hole.
PS: Not to mention demonstrating a lack of good credit is an ill defined concept. Loss of a job reduces credit worthiness even if you make all your payments.
> Bond's don't change rate when the company get's into trouble the cost of new bonds goes up.
That's not true.
Many commercial bond and loans include covenants that cause changes (loan gets called, interest rate changes, etc) when certain things (sales revenue, money in bank, etc) happen.
Some even tie their interest rate to external factors, like LIBOR.
And, biz credit lines do get pulled.
> Loss of a job reduces credit worthiness even if you make all your payments.
It's unclear if you find that wrong or not. Job loss may well affect future ability to repay even if you're current now.
Concede the point on bonds held to maturity; you're right.
Private student loans are variable interest rate loans, many at the whim of the providing company. (I'd agree that private student loans are much closer to evil than revolving credit, and that more education is due on both topics to consumers of both types of debt. But I'm still not in favor of restricting the availability of a financial product that might not be in any given consumer's best interest, so long as it is in the best interest of some consumer.) Govt-backed student loans are as you describe.
As to the over the edge "problem", that's a problem of the consumer's making+, and a creditor acting in their own best interest probably OUGHT to tighten credit for borrowers that it identifies, even on an acturial basis using information unrelated to the direct consumer<->creditor interaction, as being a higher risk.
+ - Debtors who are not in over their head generally don't face these problems.
My point is I am not in debt over my head in part because I am considered a low risk. My car loan is at 4.9% and my CC debt is at 9%. If my interest rate where to grow to 12+ on the car and 33% on my credit card I would have far less slack.
Edit: Ok, running the numbers it would not be that bad but I would become far more focused on having zero debt.
Edit for clarity: My CC debt is at 9% which is a little more than investing in the stock market on average, but I am trying to build up better credit so it seems like a good idea to keep money in the market and take a little hit vs. paying off my CC debt.
Not that the last 3 months suggests the idea is without risk but it's not enough money that I really care. However, if I had less in the way of assets an my rate where to spike I would quickly start caring.
Student loans are normally fixed interest rate loans and they only charge penalty's when your late in paying them.
The problem with increasing rates when people get into trouble is it tends to force more people over the cliff. Let's say you owe 20k at 10% and make 50k/year. You get hospitalized for 5k and your old and new rate becomes 33%. You have gone from a 2k /year to 5k/year when you need to borrow 5k more. If the company lending you 5k wants to charge you 33% interest that's fine you can focus on paying them back first and get free of debt but when everyone starts raising your rates while your in trouble it's almost impossible to get out of the hole.
PS: Not to mention demonstrating a lack of good credit is an ill defined concept. Loss of a job reduces credit worthiness even if you make all your payments.