Is it Socially Acceptable to Not Pay Your Student Loans?
Tom Gillespie
Why do people loot a store during a revolt? Is it because they are trying to make a statement or that they are trying to get free stuff?
There is a fine line between order and chaos. I know as I was in Los Angeles, one block over from the courthouse, when the Rodney King verdict came out in 1992. For the next week, I was self-imprisoned in my hotel room waiting literally for the smoke to clear.
Our culture is continually changing. Technology, political events, economic events, and social values have all changed the ways we live. If you are between the ages of 18-45, you never had to worry about getting credit before 2009. Now, the entire landscape has changed. The student loan crisis is the next big problem we will have to deal with. It is also impacting the housing recovery.
I believe that in the next two years, after this current election, the real numbers will start to impact many schools and universities throughout the country. Some think that bankruptcy protection should apply to student loans. But then everyone would declare bankruptcy. There is no stigma attached to bankruptcy in America today. Should we just forgive all student loans? How would that work for future generations? We could socialize higher education like other countries, but our university system as we know it and individual freedoms to pursue whatever major we desire would cease to exist.
Occupy Wall Street is one good recent example of how people, especially young people, are starting to revolt. The reason they are revolting is because they were offered credit at a young age and thought that if it was offered to them, they could obviously afford it. They were wrong. The rise in student loan defaults coupled with a weak economy, too many political promises, and a broken system could lead to a debtor revolution: “occupy everything”. We now have over one Trillion dollars in student loan debt. It’s just a number, really. The more important number is the cohort default rate.
First, let me put something to rest. Your recovery rates on student debt have less to do with the economy and more to do with educating your students about their credit. Ultimately, you cannot beat the system. We like to blame everything on a slow economy. Default rates on student loans have always been high in good times and bad. In fact, a 30 percent default rate on student loans in the 1980s was all too common. There was no accountability. The government changed that by putting in tighter regulations over the years but the bar is still way too high.
Today, you can have a cohort default rate of 24 percent and still be considered OK. Using the economy as a reason for high default rates is like blaming your extra 20 pounds on McDonalds.
Let’s use an example; the average charge-off rate for credit card companies is 2 percent. Bank cards are charged off at 180 days past due. The average cohort default rate today on government student loans is 8.8 percent. But that number was manipulated by our government when they reauthorized The Higher Education Opportunity Act (HEOA) in 2008. New changes in the way cohort default rates are calculated (from 2 years past graduation to 3 years) suggest that default rates are going to skyrocket when the data is published for 2012.
Why are default rates so high? The easy answer is the job market but, in fact, default rates on student loans were even higher in the 1980s during an economic boom. In essence, student loans were never looked at in the same way as other types of debt. Prior to 2008 and the financial crisis, creditors discounted student loans on credit reports and people with student loans in default were given a free pass in obtaining credit. Even if they had judgments a mortgage company, auto lender, or credit card company put less weight on student loan debt than others. It was simply not looked at in the same way as other debts.
Now, the credit granting landscape is changing and students have subsequently ruined their credit because they took out these loans at a time when they had no concept of how much debt they were incurring and had no prospects for paying it back. Also, there are several ways of not repaying your loans if you are so inclined. Recent attempts to keep interest rates from changing may be successful in stemming the tide for some student debtors but even with that potential benefit, there is a freight train coming down the track.
When the new cohort default rates are calculated, the default rates are going to soar. With 20-30 percent default rates, will it be more socially acceptable not to pay your student loan? Many colleges and universities will be in danger of losing their loan programs if their default rate exceeds 25 percent and that could lead to a necessary shift in the way students are offered acceptance. In essence, admission criteria could be more heavily weighted towards the student’s financial abilities to repay their debt or the families’ ability to finance the education.
When the new cohort default rates are calculated for 2012, the 8.8 percent default rate is going to be more like 16 percent. Why? Because the law re-aged the accounts. Today there are millions of students who are not in default who have not paid anything on their student loan in two years.
One of the most rhetorically driven pieces on the subject I’ve ever seen. It’s only logic is twisted back on itself. It doesn’t express at all the larger problem. The writer was evidently a man who’s had few real worries in his life.
Let the free market act via refinancing at lower rates and bankruptcy? That would ensure that most people filed bankruptcy on these loans, as it has happened that way in the past…Oh, wait, NO IT HASN’T! The vast majority have always paid their loans. I feel dumber for having read this “article.”
You have to pass the means test to file bankruptcy, genius.
Dear moderator, please do the right thing and post my comments as they are valid points.
By the way, I don’t drink coffee outside of my home. I’m a responsible person and pay what I owe. It would have been nice to get a fresh start a couple of years ago when my wife broke her back and we had to live on one income and eventually lost everything. But, no, the neocons won’t have that. No fresh start for me. I’m just a “loser that doesn’t pay his bills” to them. Oh, and according to them, I’m out every day having a friggin’ latte.
This is the most appalling misrepresentation of the student loan issue I have read in a long time…
In the first place, according to the DoE, the recovery rate on defaulted loans is $1.22 for every $1.00… there is no loss. Loans are Guaranteed by the Feds to be paid at 97% of the CURRENT value, which includes grossly inflated, capitalized, and compounded fees, charges, and interests.
Second, bankruptcy is NOT that easy or frequent. According to Pottow (2009), less than 1% of bankruptcies prior to 1975 included student loans, and today, the number of discharges of student loans in bankruptcy are miniscule.
Third, part of the loan “fees” that are included are “D&D insurance” – death and default… every student loan includes that – and every financial aid officer will tell you ‘it’s so if anything happens to you, it’s covered’… which is of course unless CONGRESS changed that along with all the other changes…. CONGRESS at the behest of ‘lobbyists’ removed the statute of limitations on the collections of old loans that HAD PASSED THE SoL back to 1972, and a whole bunch of Vietnam era vets suddenly found themselves with HUGE defaulted “loans” that had been zombie-resuscitated complete with accrued interest, penalties, and fees, and sold to collection agencies.
With the removal of bankruptcy protections, and ALL OTHER CONSUMER PROTECTIONS, Congress, in their infinite quest for ‘donations’, managed to consign MILLIONS of borrowers to lifetime debt indenture.
There are over 36 MILLION outstanding student loans in this country todate, and according to Moody’s Analytics, 66% are in default, deferment or forbearance – OVER 20 MILLION !!!!
While 60% of all loans are held by people under 40, FORTY PERCENT are held by tax-payers over 40, and 6% are held by elders over 65.
More than 50% of all recent graduates are unemployed, and few are working either full-time or in their fields… they DO have to eat sometime between their multiple part-time jobs, and sometimes that latte IS their meal and pick-me-up… that is a gratuitous and ignoble jab at grads who have largely moved back in with their parents to make ends meet.
THOSE numbers are NOT “lazy, irresponsible college kids” – the problem IS the STRUCTURE OF THE LOANS THEMSELVES, and it is SYSTEMIC. Insultingly offering a “pizza party” to “educate” current college students and ‘offering success strategies and goal-setting’ is absurd – EVERYBODY and his dog have been touting that stuff for decades, and HERE we are.
College presidents and financial aid officers need to max out Pell grants FIRST. They need to use loans as absolute last resorts and TELL students BLUNTLY that student loans are NOT dischargeable, and are LIFETIME DEBTS – period.
If you want to talk about what is ‘socially acceptable’, let’s talk about the social acceptibility of usury, predatory lending, reneging on /re-legislating contracts and debtors’ prisons and SWAT teams… really?
And let’s be VERY CLEAR here… the ‘customer’ so nobly being served is NOT STUDENTS.
Well since hate speech is prohibited, let’s just go with all of the above. I see 3 commenters and see no need to state the obvious at this point. I will add that I am embarressed for the writer. My dad is somewhat guilty of the same logic. Explanations such as the ones above (from commenters) fall on a deaf ear. Because all young people “don’t understand debt”. I have accrued some debt in my lifetime. All loans made with clarity of what was owed and when it was due. Even some that required refinancing which added interets and fees. But it was written (typed) clearly and the terms were excepted. I had a baby 20 years ago with no insurance. Doctor and hospital paid in full on monthly payments. Repaying what is owed is not so difficult when the rules don’t change at the will by Congress. Or….just when the original agreement is what you end up paying. And one last bit of info concerning college grads and bankruptcy……….we generally take pride in our education and our standing in the community. I dare say that in our late30′s, 40′s or older bankruptcy seems attractive. It’s survival. But no worries there because it’s not an option:-) :-) :-)
I am truly grateful to everyone for posting the comments above. I have done much soul searching over the last few days and came to realize that I did a very poor job on this article. I want to extend a sincere apology to InsideARM readers. I realize now that I took my discussion to the max without compassion for so many that are desperately trying daily to do the right things. We all get side-swiped by circumstances at times. The system is broken in so many different ways and we all are all continually at the mercy of game changing circumstances in every direction. My article did more than just provoke thought, it provoked anger and I am deeply sorry that I offended you. Lastly, In my “OPINION” I truly do believe that teaching students about personal finance and credit as well as goal and success principles can make a difference in life from the start. The credit game has changed since 2008 and since I can’t change the game, I need to understand how to play it. I hope that message isn’t lost in the end. My sincerest apologies. Tom Gillespie
Mr. Gillespie, thank you and I for one appreciate your thoughtful reply. I too agree that everyone, not just students, need better education in finance and credit starting in high school at the latest. However, none of these educational programs actually address the exceptional circumstances of student loans, and since ‘truth in lending’ laws don’t always apply to student loans, the best advice is ‘caveat emptor’ and ‘RUN, Forrest, RUN’…
The actual practice of finance and credit is based on a clear, honest, and upfront provision of necessary information. Unfortunately, that is NOT the case, by legislation, with student loans, and the ramifications are life-altering. THIS ‘credit game’ changed drastically in 1998 with the repeal of Glass-Steagall, the privatization of SLM and others, and the repeal of all consumer protections from student loans. Since Congress can change the terms of the ‘contract’ retroactively at ANY time, there is in fact no way for borrowers, past or future, to actually depend that ‘a contract is a contract is a contract’ or to plan accordingly, which pretty much virtually negates all the financial education we both advocate.
Again, thanks for your reply and good luck ;-)
Thank you for the apology. This lending system is predatory and fixed. Here’s how it works: Congress approves more money available for students to borrow. Schools see this and almost immediately raise tuition (tuition is rising at 2 to 3 times the rate of inflation). Lending institutions realize that if you don’t pay, they own you for the rest of your life because there are no protections on loans. If anything drastic happens, you are screwed. Once tuition rises a few more semsters, Congress raises the amount a person can borrow, schools raise tution, lenders lend more…you get the idea. Students are borrowing far more than they can hope to pay back.
“semesters”