Tuesday, June 14, 2011

Every Graduate A Potential John Dillinger: An Incomplete History Of Student Loan Repayment

Banks seestudent loan defaulters as white collar bandits
Back in 1981, a New York friend of mine went to the bank shortly after payday to find that hir checking account was abso-total-lutely empty.  Zero.  Zed. Nada.  In the course of an inquiry that began with outrage and ended in shame, ze discovered that the federal government had attached hir salary to begin reclaiming a thousand dollars or so of the student loan arrears ze had amassed since graduating three years earlier.

This was back in the day when student loans for an Ivy League education might top out at around $10K for a degree that had cost under $50K in 1970s dollars.  Prior to Ronald Reagan raising the interest rate from 3% to 9% in 1982, and eliminating the deduction for student loans in 1986, my guess is that the payments were a couple hundred dollars a month (go here for Kelly Phillips Erb's excellent history of student loans in a recent issue of Forbes.)

I cannot recall the details of this person's circumstances. However, back in the day, I knew a great many people who didn't pay their students loans, and there were three reasons for it.  The first was that many of us earned very little money. We graduated into a recession job market, we went into artsy, theatrical or literary fields, and people like us could be had for salaries of less than $12K a year.  This translated into a paycheck of around $450 every two weeks, half of which had to be banked for rent.  The second reason people didn't pay was that they could get away with it.  The federal government did a very poor job of monitoring who paid and who didn't pay, and didn't report people to credit agencies for years after they had broken all contact.  This latter action would have had immediate consequences in a city where landlords routinely ran credit reports to screen out potential deadbeat tenants who, under consumer-friendly New York housing laws, were nearly impossible to evict.  Hence, I knew a number of non-payers that -- after missing a couple payments and suffering no consequences -- stopped paying entirely even when they could easily afford to do so.  The third reason people didn't pay was that, because there was no means test for awarding student loans, anyone could walk into the financial aid office and walk out with $5K, minus an exorbitant processing fee of several hundred dollars.  In other words, some people who had taken out student loans had used them to enhance their standard of living.  I am just speculating, but I believe this category of borrowers may have regarded student loans as free money all along.

Back to the empty bank account:  I must say, all of us who met this friend at a bar later and chipped in what we could from our own paychecks to help hir make rent, were seriously impressed by the possibility that an entire bank account could be seized.  By moving against one person, the government made a dramatic impression on a whole friendship network of twenty-something middle-class people.  Several rushed in to various financial institutions on the following day to ask for mercy and make arrangements to pay up.  Although I had no student loans, I made a mental note at the age of 22 that I would never default on a bill.  You might ask, why would you have ever defaulted, Tenured Radical?  The answer is that I was at the beginning of my financial life, had never had a conversation about money with my parents or anyone else, and was just learning to pay bills in the first place. 

One of my Google alerts is "student loans." It will be no surprise to anyone that students -- many of whom are adults -- are taking out more money in educational loans than they ever have, which I believe has a reverberating, depressing effect on the economy as a whole whether the money is repaid or not.  For-profit institutions make borrowing particularly easy in exchange for degrees that may or may not translate into a job at all, much less one with a high enough salary to guarantee repayment.  On-line universities and technical academies can be the worst offenders, siphoning tax dollars in the form of uncapped debt into inflated executive salaries paid out of tuition revenues that are 90% loan driven.  Non-profits have constant institutional discussions about what the caps on student debt ought to be, but despite that, many students graduated this spring from Ivies, state unis and liberal arts colleges that aren't trying to cheat anyone with as much as $50K in loans.  

Students, needless to say, were defaulting on unsustainable education debt at very high rates even before the job market became so tight.   But unlike other debt, as Megan McArdle points out in the June 14 edition of The Atlantic, whether they are government or private, student loans are forever:
There are only two ways to erase the debt: prove you're permanently disabled and will never again earn more than a pittance; or die.  [Note:  I had a friend who chose the latter strategy of dead-beatism.  After hir death, I discovered a shoebox of dunning notices from the federal government -- another branch of which had been paying hir disability and welfare -- that dated from hir diagnosis with a then-fatal disease. But I think there are also some programs in the military that also pay down debt, which has become an incentive to become cannon fodder among people who have no other reason to serve.]

Moreover, student loans are large, which means they're worth suing over. Creditors can correctly assume that most people with a college diploma, or a law degree, are eventually going to have something worth taking: a bank account they can seize, a salary they can garnish. Everything I have ever heard indicates that there is little chance of settling a student loan for less than the principal, and that even that is far from a slam dunk. If the interest has been accruing for a decade or so and is now multiples of the original value of the loan, the lender may waive some of it, but not necessarily all of it. Moreover, most of the amount forgiven counts as taxable income, including a lot of the back interest (any amount in excess of $2500--or all of it if you make more than $75,000 a year.)

And of course getting a principal-only settlement requires you to amass a sum equal to the original principal of your student loan--without the creditor finding and seizing it.
So if you are a college graduate who thinks ze needs another degree to even imagine getting an interesting job, someone who wants to complete a degree, a mother considering a return to the workforce, or someone who simply wants to change directions, you need to have a plan for paying that money back before taking the loan out.  Smart colleges and universities will begin helping students learn to plan this kind of strategy, as well as working ethics courses into the curriculum so that students won't feel so free to step away from an obligation they have contracted when the full impact of that contract becomes clear.


Walt Lessun said...

Nostalgia: I took out my student loans in the mid-seventies, landed a decent job, got pay raises during the hyper-inflation of the "whip inflation now" years and ended up paying the loans off with the pocket change accumulated on my dresser. Rule: borrow real money; pay it back with inflated money.

Farah Mendlesohn said...

Between the US medical system and student loans I firmly believe that the USA has reinstated debt peonage. That it is "voluntary" is questionable.

Anonymous said...

Thank you for posting this - reading it was a good wake up call for me to take a serious look at my student loan situation. I have been, and will continue to be, postponing payments with grad school, but this post reminded me that's no real reason to be ignorant of what's happening to them while I'm there.

Z said...

There are all these horror stories on this now. One person said "student loan debt is the most toxic kind of debt" and I am contemplating this.

Anonymous said...

...P.S. I agree wholeheartedly with Farah's comment.

Anonymous said...

I took out student loans from 1975 to 1982 while I was in graduate school, made little money afterwards but paid back every penny. And it felt great.

Anonymous said...

Well, in addition to working ethics courses into the curriculum to discourage 'deadbeatism,' we might also use those ethics courses to critique the staggering injustices of the payment "systems" -- I use the term very loosely here -- and the lifelong stresses and inequalities it encourages.

(Not suggesting you would disagree, TR, but I do think the structural injustices in the financing of higher education in the U.S. are of much greater ethical significance than the 'deadbeatism' of individual students. As you note in the post, it is much, much harder to get away with that now than it might have been in the past, which also adds to the notion that it is the need for such enormous amounts of debt that is the crying ethical concern).

FrauTech said...

Great post. I know two engineers right now who are debating dropping out of the workforce to go back to school for MBAs. Both have planned to take on extensive debt to do this. I'm not sure a good way to politely make sure these individuals have thought this level of debt through.

I know another engineer who dropped out of corporate america and took a job that would specifically forgive their student loans.

I went to a public school and worked full time the whole time. That option is not available for many people, but it probably is available for most of the people who put themselves into debt. At the same time, I'm not sure I like encouraging the idea that some level of employment be a requirement to attend college.

I think 50% of it must be students choosing more affordable colleges and recognizing that name-brand is not always needed for a solid career as well as taking breaks and working to reduce/eliminate debt early on. On the other hand, there's a lot institutional problems with the student loan industry that contribute to tuition inflation and a debtor society that benefits banks rather than individuals.

Farah Mendlesohn said...

Frau tech: lots of research has been done into both issues, and it's clear that overall, the results for students who work full time are poorer than for those who work part time (for support) which are poorer than those who work part time (for luxuries) etc.etc.

Also: jobs do follow "good" schools. Only a few UK PMs haven't gone through Oxbridge, and Oxbridge dominates journalism and the BBC as well as law in the UK. A look at most of the senior law makers in the US reveals "Good" schools. Networking and Name count.

Tenured Radical said...

Daniel: I have never understood why making higher ed affordable wasn't a national priority -- except, of course, that creating a cheaper, dumbed-down work force that is in thrall to debt does seem to match other conservative priorities in the US.

FrauTech: there are some schools (Warren Wilson is one) that explicitly make work part of the education, and I suspect that the vast majority of students in state systems work part-time, and often extend the time to the BA as a result. One odd remnant of the time that higher ed was cheap is the notion that college years represent an extended adolescence. In other words, anxiety about the cost of higher ed and what it takes to gain access to it coexists with the determination of many students to party 'til they drop, invest their time in sports, sororities and frats, etc.

And Farah: Agreed - the names do matter, although those networks are less absolute in the US. I liked Tony Judt's essays in the NYRB about how the fact that higher ed was nearly free in Britain actually made a huge difference for the decades when Oxbridge shifted its priorities to educating Brits of all classes and races.

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