Why I Defaulted on My Student Loans
nytimes.com
nytimes.com
I can understand the idea that the government should give free education, or that they should support education with grants instead of loans, or that college tuition should be cheaper. I'm all for people advocating for those causes.
But if you take a loan, you've entered a contract. Breaking that contract isn't something to be proud of. Saying that his options were boring career with debt and soul crushing career without debt is disingenuous. If you took $60k (or whatever) of somebody elses money, be willing to put in the work to pay it off, then you get to do what you want. If you aren't willing to do that, then find a way to subvert the system that doesn't involve you taking large amounts of other peoples money, or at least admit that you made a poor decision.
Entering into the contract might have been a poor decision but compounding that poor decision by not breaking it when breaking it is the better option doesn't seem like a move in a positive direction either.
However, even as I approach his summary and final chapter with an open mind, I remain unconvinced that monetary debt and financial contracts can be divorced so easily from personal morality (or reputation or "face" or whatever).
Certainly there is some nuance to explore here when an entity or group of entities manufactures desires and then provides easy credit for those desires at bad terms and then uses morality as a strong-arm to enforce that debt.
However, to whatever degree you cry foul to that exploitation is also the degree to which you admit your own gullibility or vulnerability to manipulation. You can't have it both ways and righteously walk away from your debts AND maintain the posture of someone who can't easily be duped.
BBC radio ran a short series where David Graeber himself explains his (very insightful) theories about debt.
I think the smart individual plays by two sets of rules. If you borrow from a person, play by the rules that have existed from time immemorial. But if you borrow from a corporation, play by the same rules they play by -- do what's good for you. You have to realize that these are two very different environments. To do otherwise makes you a sucker.
I initially agreed with the parent poster (don't just walk away from your financial commitments) but your comment really takes a different perspective and made me re-think about the whole thing in a completely different way.
My main comment was motivated in part by the fact that trustworthiness is a two-way street, when one agent attaches a lot of value to honouring an obligation and the other does not then the first party is, for lack of a better term, a sucker. That is what a lot people encounter when they take on debt. On the lender's side they are simply a number attached to a contract and if an advantage can be had they will take it, if the debtor sees the agreement and something more than what is there on paper they are signing themselves up for something that the counter-party is not, the relationship is unequal and in some way unfair (I guess, it is complicated, no doubt).
If you are doing a business deal where you are confident the person you struck the deal with is in control of going forward then I think that the obligations and the relationship is very different. If the local bank lends you the money and you have a long-running relationship with the person you signed the papers with there is more of your personal bond attached to it. If you find out a week later that the loan has been sold off to another institution you are receiving the message that the relationship you thought you had with the original lender (and that person you met in that office) is quite different from the one you thought you were going to have. (They have, in your words, suddenly given you an extra job!)
You want people to throw good money after bad, for the sake of their personal pride?
From the individual's end, there's a great amount of morality associated with paying back (or not paying back a loan).
From the lender's end, the probability that you will pay back your loan, and the resulting rate of return a lender would expect, is all something carefully calculated.
From the individual's end, a failure to pay a loan appears to be a moral failing, as if you didn't keep your promise.
From the lender's end, you're part of a larger calculus and thus already predicted and accounted for; morality doesn't even enter into it.
Let's not let morality on the individual's end become part of a financial strategy on the lender's end.
I don't buy the idea of "you signed a contract" so end of story, especially when the risk is so unbalanced between the two parties. Isn't his mother (adult) more responsible for this loan then him (minor). Yes?
You are conflating morals with a financially-based contract. The people the other side do not make that mistake, why would you?
but as someone who paid their student loans, pays their mortgage, and other bills, I sure feel like I'm getting the raw end of the deal for honoring my commitments.
Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children.
In the end, your decision to take a loan commitment (under whatever pretenses or promises) and then default, is fucking the honest American. Thanks!
A mortgage, however is a secured loan with an interest rate tied to the risk of the loan. Especially if you're paying points, PMI or a higher interest rate, the chance of default is already calculated into the house and is part of the risk that the lender's responsibility. They also made a commitment to take it back if you don't pay (and you've paid for that privilege, perhaps dearly.)
Student loans are a bit different because some interest rates are heavily subsidized (some are not). If you're paying a high interest rate, then you are paying for someone to accept the risk of not getting paid back. Default, they get punished, they stop making bad loans, the market corrects.
Instead we've jammed a penny in the circuit breaker and loans must always be available and are near impossible to discharge. Government backs or bails lenders out and nobody gets punished for contributing to the mess (and driving up prices for cash payers too).
edit tldnr -- Loans are not priced based on moral commitment to them. If you get a loan priced as such (interest free from a friend) honor that commitment. If you pay extra for the inherent risk, let the risk taking parties honor their commitment, too.
Marketplace dynamics are weird like that. They often the OPPOSITE behavior of what you'd expect.
One can argue that those who pay off a $250k college loan to a small liberal arts college are creating a moral hazard for loan issuers and college adminstrators who keep jacking up tutition.
The article proposes that if everyone were to default, educational costs would be returned to a more rational level.
Personally, I think that the cost of college education will continue to increase to a significant fraction of the value of the college education, to somewhere around half a million dollars. This is basic economic theory, and will result in fewer students finishing college, and a continuing increase in crushing debt.
Defaulting on the loans will likely just lead to another government bailout, and sky high tuition will continue.
Sometimes I wonder if taking on debt at all is the actual "recipe for financial ruin". Years and years ago, back in undergrad, I sat through a course on mankind's economic history. It was that course that really made me aware of, and made me think about in an analytical fashion, the ancient admonitions against debt and usury. That class made me pretty sure that there was a certain wisdom in those admonitions.
Saying it's immoral to default on a loan is like saying it's immoral to exercise a put option that happens to bankrupt the option writer.
> "Banks love it when people default on their government backed student loans. At the time of default they are paid in full by the government and then they are able to turn around and sell that debt to collection agencies."
Is this true?
When students enter university, they understand that it is a place that will challenge their intellects, but what they don't understand is the amount of financial value it will provide after they graduate. Unless they go into a lucrative field, the return on investment in liberal arts (not picking on this specific major) is not worth it.
Unless you're going into a top program in a top university (Engineering at Ivy League, CS at Stanford, MIT, CalTech, etc), it's better to enroll into an STEM program at a reputable in-state college. Otherwise it's almost not worth it.
1. Open lots of credit cards
2. Take out cash advances on the cards
3. Use the cash to pay off your student loans (or just pay for college directly, using the cash)
4. Pay on credit cards until the interest has ballooned out of control and you can't pay them anymore
5. Declare bankruptcy and default on all your debt
If someone should be able to buy a house and cars and toys and shoes and designer clothes and then just declare bankruptcy and walk away from their debt totally free, why shouldn't you be able to do the same for other types of debt?
Why do we treat educational debt as the one type of debt that is able to enslave you for the rest of your life, while it's ok to default and walk away from debt caused by crazy consumer spending?
But the reason it was started was because students didn't have the credit history to get loans at all--especially since the thought was they had no credit to lose so they would be incentivized to just default immediately after graduating.
Which is why student loans were made non-defaultable, to make a market for student loans possible.
Student loans are a complex web of federal guarantees, but if basic capitalism works, by defaulting you are going to make it more expensive for the next students, who have to pay more to cover the defaulters. Some students won't be able to afford it with the added interest rates.
Seems his education helped him be successful. So why should he pay for it?
"Lee Siegel is the author of five books who is writing a memoir about money."
Not defaulting also seems to have the effect of driving costs up for the next students.
When they take your home or car back, they don't take back your experiences and memories you gained while enjoying those items.
This is not an objection. This is an argument in favor.
That's what happened with the housing bubble. Blaming banks is easy, and certainly they did a lot of shady stuff. But nobody forced people to take on mortgages they couldn't hope to pay. Nobody forced kids to take out $100k in loans to go to a dream school instead of a state school.
The student loan debt burden is enormous. And I suspect that the people who make out the worst in it will be the ones who actually PAY on time. And I'm terrified of what will happen when it's time to start cashing out my 401k. After years of saving, a person who has faithfully saved $5M should have a nice retirement ahead of them. But I suspect that so many more people will have nothing, and those people will still be voting, and cut themselves a hefty slice of the pie from those who actually planned ahead. And because of the way 401k's are set up, it's a multi-trillion dollar pot of money that can be re-assigned from the "$5m retirement rich" people to those who didn't bother to think ahead and save.
One person defaults on an irresponsible debt, no big deal. But the more people do it and the more acceptable that becomes, the worse it is for everyone (especially the responsible people that a society relies upon to keep the money flowing).
Those who would lose out are those forced to pay higher rates on student debt.
If the government bails out those financial institution then everyone paying taxes suffers. If we continue to subsidies debt and have to do so at higher subsidy levels to make up for risk of defaults then taxpayers again suffer.
Indirectly, if it became a significant macroeconomic factor those schools would suffer if students refuse to take out high amounts of hight cost debt. Frankly, this would be a good outcome as they would stop adding on huge admin costs and ego boosting expensive buildings.
Student debt is tricky because credit histories likely haven't been built up. For other debt largely those with good histories will get good rates. Those with bad histories will get bad rates (for cars, houses, etc.). Startup small business loans are pretty much always bad rates (if you can get them at all).
Given our track record the last few decades don't worry about the 1% ($5 million puts you way into the 1%). Congress has done nothing but bend over backwards to give every possible favor to the 1%. The middle class (say those with $100,000 to $400,000 in their retirement accounts) may suffer but the 1% is very unlikely to suffer until we drastically change who we elect.
Really?
We're told, almost from day one, that the best path to success in America is through a college education.
We're also told that the American dream is to buy your own house.
Furthermore, we're told to follow our dreams, chase our passions, that nothing can stop us, and that we shouldn't let anything or anyone get in our way. We can be anything we want to be so long as we put in hard work.
How much financial literacy training did you get in high school? I went to private Catholic high school, and I didn't get any. Most people will say that's Mom and Dad's job. Wait, they're too busy working trying to pay for healthcare, make sure there's food in the pantry, and gas in the car.
The claims of personal responsibility and caveat emptor can only go so far. When the culture you live in is literally teaching you the opposite, it's not enough to blame the buyers. Everyone is to blame.