Saturday, September 5, 2015

Why Not Default on Student Loans?

By Professor Doom

     Roughly twice as many people have student loans as there are college students. It’s tough to list all the reasons for this, but I’ll hit the highlights:

     First, higher education is, in many cases, wildly overpriced. Second, most jobs you can get with “generic” degrees can’t pay off the loans. Third, most loans are for four years, while degrees take six years—it’s easy to spend years in college and exit with nothing to show for it but debt and no degree to help pay it off. Fourth, loans go to anyone who can click a box saying he wants a degree, so lots of folks are being loaned money for no good reason. Fifth, college administrators, eager for growth, have annihilated standards so that it’s easy to get into a college, so more people are taking loans. Sixth, accreditation, which is supposed to restrict loans just to schools which are interested in education, has been subverted by college administrators so that there’s nothing stopping a bogus school from raking in billions in loan money. Those are just off the top of my head, but then there’s the big reason:

     No matter how desperate your financial situation, the only way to be rid of your student loans is to pay them off. There’s no bankruptcy protection against student loans. Pay them off, or keep paying what you can until the day you die. These loans are forever, for many people lured into this system.

     That said, there are a plethora of loan deferment programs that let you put off when you need to start paying, or to pay less now for bigger payments later, or whatever. However, many people see their minimum wage (or less) paychecks, look at the expected monthly payment on the student loan for the education that is only worth minimum wage, and say “this is ridiculous, I’m just not going to pay.”

Years later, I found myself confronted with a choice that too many people have had to and will have to face…
I chose life. That is to say, I defaulted on my student loans.

     Now, I’m not necessarily recommending this. “This’ll ruin your credit,” is the most common threat against defaulting, but I’m not so sure this is much of a penalty. If you have a massive debt hanging over your head, your credit isn’t that good anyway. At least, in theory.

      There’s a moral issue to not repaying loans, but student loans are a very different matter than other consumer loans. Much like cigarette addiction, these loans are generally inflicted on the young, who simply don’t realize what they’re signing up for. Just as tobacco company executives are viewed with disdain for targeting children for their product, so too can a case be made that college administration’s efforts to trap people into these inescapable debts is also immoral. In many cases the infliction of these loans has been unconscionable, so defaulting on these loans is no more immoral than being addicted to smoking.

     The person who’s decided to default, by the way, is no kid, and has made the decision to give up on paying off the loans after careful deliberation:

Forty years after I took out my first student loan, and 30 years after getting my last, the Department of Education is still pursuing the unpaid balance. My mother, who co-signed some of the loans, is dead. The banks that made them have all gone under. I doubt that anyone can even find the promissory notes. The accrued interest, combined with the collection agencies’ opulent fees, is now several times the principal.

     Imagine, 40 years of trying to pay off debts for an education that very clearly hasn’t paid off. Please, gentle reader, remember this author’s story the next time another administrator smugly assures that “education is worth” the price he’s charging for it. 40 years of paying, and this guy is deeper in debt than when he started.

     And now here comes advice for defaulting on student loans:

You might want to follow these steps: Get as many credit cards as you can before your credit is ruined. Find a stable housing situation. Pay your rent on time so that you have a good record in that area when you do have to move. Live with or marry someone with good credit…

    It is, indeed, easy to get credit cards when your credit is good, and hard to lose credit cards (as long as you keep making payments) even if your credit is bad. Sponging off someone else’s good credit is not exactly good advice—yeah, it works, but finding that someone can be problematic, and I think you’d be better off finding someone who makes you happy than someone with a good credit rating.

     For what it’s worth, credit card debt can be cleared via bankruptcy. If you wish to ruin your credit in a different way, and your student loan debt isn’t too hideous, you could max out your credit card payments in cash advances, and use that money to pay off the debt…then go bankrupt. This would be immoral, of course, essentially robbing a legitimate Peter (the credit card company, and it’s only legitimate compared to higher education) to pay an illegitimate Paul (whatever school suckered you into debt), so a bad idea all around. I don’t recommend this at all, but mention just to discuss how queer student debt is different than other debt…money is money, right? Apparently not.

     Anyway, the author’s advice is good. If you intend to not pay the monsters that got you into student loan debt, make sure the human beings that you intend to deal with have some reason to think you can be trusted.

The reported consequences of having no credit are scare talk, to some extent. The reliably predatory nature of American life guarantees that there will always be somebody to help you, from credit card companies charging stratospheric interest rates to subprime loans for houses and cars. Our economic system ensures that so long as you are willing to sink deeper and deeper into debt, you will keep being enthusiastically invited to play the economic game.

     Again, this is an excellent point: subprime lending for the big purchases of life (house and car) is so common now that it’s not that big a deal if you just walk away from the student subprime lending. You’ll still have a decent chance for the big purchases, if you really want more debt.

     Imagine if everyone defaulted on student loans, would it be so bad? Yes, the banks would lose 1.2 trillion dollars…but the banks have already been bailed out for many multiples of that, our own Federal government throws away that much money every few months now, and this time around the money would be spent on its own citizens for a change. With 40 million loan defaulters, I suspect an entire industry of lenders would spring up specializing in “we loan money to people that were screwed over by unscrupulous higher education administrators.”

      I just don’t see this as being a big deal, not compared to the wide variety of other credit defaults that go on every day in our deeply economically disturbed world. Heck, maybe some of the loan money would be “claw backed” from the administrators who stole it…but I reckon that’s just crazy talk.

     The author agrees:

The collection agencies retained by the Department of Education would be exposed as the greedy vultures that they are. The government would get out of the loan-making and the loan-enforcement business. Congress might even explore a special, universal education tax that would make higher education affordable.
There would be a national shaming of colleges and universities for charging soaring tuition rates that are reaching lunatic levels. 

     I suspect that higher education would be more affordable if government weren’t involved at all (higher education was more affordable before government got involved, after all). I don’t know if there’d be a national shaming of higher education…but there should be.


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