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.