The Student Loans Crisis: Default or Pay?

Rebekah Frank

 

In a June 6th article for the New York Times, Lee Siegel told the story of how he “signed away his young life” by taking out his first student loan. This is an experience many of us can relate to. For those who were not fortunate enough to have parents both willing and able to pay for schooling, or be hard-working and/or physically gifted enough to be deserving of a merit or athletic scholarship, taking out a loan is the only means to higher learning. And higher learning, we are inaccurately told from a young age, is the most surefire way to achieve success. It is this uniquely American narrative, coupled with the ever-increasing price of education, that has resulted in our current situation.

 

According to CNN, 40 million Americans now hold at least one outstanding student loan, up from 29 million in 2008, at the start of the recession. Borrowers, on average, carry four student loans each, up from three in 2008, with an average debt increase of $6,000. Debtors now hold $29,000 in student loans up from $23,000 merely 7 years ago. The result? The nationwide student loan debt now amounts to a whopping $1.2 trillion, an 84% increase since the beginning of the recession.

 

One of the unique aspects of student loans is that those taking out the loans are oftentimes in their late teens and lack the necessary financial track records to indicate to lenders their ability, or willingness, to repay when the time comes. They also often lack the financial literacy to make informed decisions for themselves. For those who land jobs following college, timely repayment of loans can have a very positive impact on future financial standings and credit scores, thereby opening the doors for future lower interest loans for large purchases, such as a car or a home.

 

But for those who struggle to find work, the results can be extremely damaging. Imagine coming out of school and finding, as so many people do, a job market lacking in opportunities while you carry a ballooning financial burden that was billed as a path to financial security. This is an uncertainty shared by many. According to Caroline Hoxby, the Scott and Donya Bommer Professor of Economics at Stanford University, attending college has increased during every financial recession since the 1960s. The most recent recession was no different. The reason, according to Hoxby, is that “the opportunity cost of going to college – the job opportunities a person forgoes while in college – drops very dramatically during recessions.” In other words, during a recession, it becomes harder to find a job, keep a job, and secure a promotion.

 

So even though families might find it more painful to spend money on an education when they have less, or perhaps less reliable, incomes, the idea that a higher education opens more doors is an appealing one. It seems logical, then, to get a degree and improve your odds of being hired while the job market is light in hopes that when you receive your diploma, opportunities will be more available. But what if you finish school and those opportunities are still not available? What if you find yourself among those who collectively owe $1.2 trillion in oftentimes high-interest loans?

 

Lee Siegel makes an argument for default. In his piece he paints a grim picture. By the end of his sophomore year at a small liberal arts college, he writes, his mother and he “had taken out a second loan, (his) father had declared bankruptcy and (his) parents had divorced.” His mother could no longer afford the high payments, and Siegel was forced to transfer to a state school in New Jersey, closer to his childhood neighborhood in the Bronx. (What he neglects to mention is that he dropped out in short order and transferred to Columbia University, a private school.)

 

Student loans, as Siegel describes them, effectively tore his family apart. And yet, even with all the discord at home, Siegel trudged on to earn three degrees from Columbia University. And then came the choice. Siegel could “give up what had become (his) vocation and take a job that he didn’t want in order to repay the huge debt (he) had accumulated in college and graduate school. Or he could take what he had been led to believe was both the morally and legally reprehensible step of defaulting on his student loans.” Defaulting on his loans, he argues, was the only way he could secure a job that would not waste what he considers his “particular usefulness to society.” So he defaulted. And in a piece read by people the world over, he argued that the millions of young people today who hold the $1.2 trillion in loans should consider following his lead.

 

In ways, he makes a good argument. Going back to school is the responsible choice. It qualifies as investing in one’s future and, at least theoretically, makes a person of more use to herself and to society at large. It’s not as if the $1.2 trillion in debt was amassed through drug use or maxing out credit cards. He even offers up alternative realities to the choice he eventually made. He could have continued working at The Wild Pair, where he had held a stable job between dropping out of a state college because he “thought he deserved better” and enrolling at Columbia University. Or he could have gone into finance and lived a life of “self-disgust and unhappiness.”  He sets up what amounts to a zero-sum game. Either you sell your soul to repay your student loans, or you default and live a life of happiness and professional fulfillment.

 

 

Who, when presented with these alternatives, wouldn’t choose the latter? But when you press on a little further, the outcomes of this decision seem slightly less appealing. Siegel does not deny that defaulting on loans will negatively impact a person’s credit and opportunities, and he offers three easy steps: 1) get as many credit cards as you possibly can before you ruin your credit; 2) find a stable housing situation and pay your rent on time; and 3), live with or marry someone with good credit. Someone, it would follow, who repayed his or her student loans. And then, he says, do not be afraid because “the reliably predatory nature of American life guarantees that there will always be somebody to help you, from credit card companies charging stratospheric rates to subprime loans for houses and cars. Our economic system,” he continues, “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.” So, he argues, the same predatory lending that got you into debt in the first place is exactly the structure that will allow you to continue to survive, if not thrive, economically once you default. For many people, this sort of irresponsibility and uncertainty can be a little much to swallow. But worry not. As long as enough people default, Siegel says, the government will have to respond by guaranteeing an education rather than by guaranteeing student loans.

 

Jordan Weissman, of Slate, offers a response. He places Siegel’s piece in context. In the months preceding the publication of Siegel’s article, almost 200 students from Corinthian Colleges launched a debt strike during which they refused to repay the money they borrowed while attending the for-profit education chain. Corinthian Colleges, Inc. was a specific case, however. Corinthian was investigated, and eventually shuttered, for defrauding its students by providing misinformation regarding its job placement and graduation rates, and the federal loans held by students who attended the schools were forgiven.

 

Siegel, on the other hand, did not fall victim to a predatory lending scheme. Instead, he took out loans and accepted scholarships that led him to eventually earn a B.A., an M.A., and a master’s of philosophy from Columbia University. He graduated before our current student loan crisis really began and most certainly owes more than the average $29,000 to the government, even without taking into consideration the interest that has likely tripled or quadrupled his debt load. And all this because he (erroneously) believed that he required three degrees from one of the most expensive universities in the country in order to pursue his dream to be a professional writer.

 

 

Siegel’s biggest offense here, according to Weissman, is that throughout his column Siegel doles out “criminally negligent financial advice.” The reality of defaulting, Weissman argues, is much worse than Siegel lets on. The fact of the matter is that since student loans are federally owned, if a person defaults on those loans the government can garnish up to 15 percent of the borrower’s disposable wages directly from their paycheck until the loan is repayed. Alternatively, the newest income-based repayment plan offered by the government requires a borrower to repay only 10 percent of wages.

 

It is certainly true that higher education in the United States is prohibitively expensive, and that $1.2 trillion in student loans is a scarily high number. There are a lot of people struggling under the burden of high loans with high interest rates, people who are working jobs that they don’t love in order to repay those loans, families that are placed under high levels of stress by that loan bill that keeps coming month after month. But how about all the people who have taken advantage of income-based repayment in order to simultaneously repay their loans and pursue careers that they love, careers that don’t pay as well as the lucrative ones that can, according to Siegel, lead to “self-disgust and lifelong unhappiness.” There is no great answer here. The repayment of loans, especially once you factor in graduate and doctoral programs, can seem an insurmountable obstacle. The interest rates assure that repayment happens slowly. But the alternative – ruined credit, reliance on loved ones for housing and transportation, garnishing of wages – seems worse.

 

Shuttering schools that are predatory lenders, institutions that take advantage of young people and army veterans, is a good first step. But imagine what would happen if we all followed Siegel’s advice and defaulted. Imagine if $1.2 trillion just went unpaid, just disappeared. Where would we be then? There needs to be a complete overhaul in the way we value and finance traditional education, but a mass default is most certainly not the answer. That wouldn’t end well for any of us, not even for Lee Siegel.

 

Author Bio:

Rebekah Frank is a contributing writer at Highbrow Magazine.

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