No-Fault Debt



Last week, the Wall Street Journal reported that “43 percent of the roughly 22 million Americans with federal student loans weren’t making payment as of Jan. 1.”  The data come from the U. S. Department of Education, which now sets student loan debt well above auto loan debt, credit card debt, and evolving home-equity loan debt.  To get an idea of how bad this is, remember that in 2008 the percentage of people with those risky subprime mortgages who were delinquent in their payments was only 18 percent for refinancings and 28 percent for purchase mortgages. That was enough to cause a national panic.  Now, in the student loan sector, one in six borrowers have gone at least a year without making a payment.  Others are only a few months behind, while another portion is made up of people who have secured permission to defer payments because of financial straits such as unemployment.

There is another way besides amount to compare auto loans and home loans to student loans.  People who bought a house or car too expensive for their income at least have something to show for their indebtedness: the house and the car.  But what do student loan borrowers have?  One thing: enrollment in college.  They are able to take classes—that’s all.  The value of what they’ve bought rests wholly on its potential to deliver a nice paycheck a few years later.  (I presume that few of those borrowers believe that the non-career related knowledge they acquire in, say, ancient history and political theory are worth the amount of the loan.)  Houses and cars are tangible objects with a more or less set market value.  The “thing” that forms when a 20-year-old completes eight semesters of college is intangible and hard to measure.  The connection between the service the loan paid for and the means of paying it off is tenuous and postponed.  It is no wonder that we have such a high default rate.

But wait, the Journal says.  That 43 percent figure is actually an improvement from last year when the rate was 46 percent.  Unfortunately, though, the rate dropped for the wrong reason.  It was not that the three percent gain came from borrowers who caught up on their payments.  It’s because they entered a federal program that allowed them to “slash monthly bills by tying them to a small percentage of a borrower’s income.”

When you read these horror stories of student debt, which seem to come out every week, it’s hard to keep from shaking your head at the insanity of the system.  The government keeps telling everyone to go to college and encourages banks to hand them money to do so.  Banks are happy to do so because taxpayers assume the risk, a risk that appears riskier every month.  And colleges keep admitting, educating, and graduating youths who can’t find a job sufficient to pay the piper.

And there is another party to the farce.  A while back, while speaking at a two-year college in the South, an administrator revealed a dismaying fact after I asked about graduation and retention rates.  The school has found that a significant number of students disappear each year on a particular day.  That’s the day that loans go through.  Kids enroll, collect the money, and move on.

There is some evidence that many of those recipients have no plans to pay any of it back.  One loan provider mentioned in the Journal story supplied two bits of experience to back up that suspicion.  It does try to work out payment plans that tie monthly bills to income, and it claims that it typically contacts debtors more than 200 times by phone, mail, and email in the year leading up to a default.  But “Ninety percent of those borrowers . . . never respond and more than half never make a single payment before they default.”

The news stories usually profile a debtor or two.  In not one instance have they fallen down without making an obtuse or stubborn decision along the way.  The Journal describes a 38-year-old who isn’t making payments on an $11,900 federal student loan.  He has a job as an analyst at an auto company that pays $46,000 a year, which sounds good.  But everything else mentioned in the story runs against financial health.  He has three children; he isn’t married (he is engaged to the mother of those kids, but one has to wonder why they’ve waited); and he has credit card payments and a car loan to handle.

Reason Number Four is the most exasperating.  His student loan mess originated just a few years ago.  During the recession, he enrolled in a for-profit college in Michigan and earned a certificate in media arts.  He wanted to get a job in radio, and the loan provided the means, he thought.  But the job never came through.  Yes, a 35-year-old guy with a few media courses from a low-profile school wasn’t hired by any radio stations.

He feels cheated.  The deferment he has obtained will expire, but he may not honor the agreement.  “They promised me everything,” he says.  I believe him—sort of.  I’m sure the school’s promotional materials praise the quality of instruction to the skies, and they showcase happy alums who declare, “None of this would have happened without University of X!”  That doesn’t quite amount to a guarantee, but if the materials don’t include any information on the number of graduates who didn’t find employment soon after, too, it comes close.

Still, our deadbeat wasn’t a green 17-year-old at the time.  He was in his early-30s with lots of work experience and a family to support.  When he concludes, “And I honestly have nothing to show for it except a piece of paper that doesn’t really do me any good,” we’re tempted to reply, “Were you really so stupid and naïve that you didn’t see this as a likely outcome?”

Here’s another defaulter who deserves no sympathy. She’s a 44-year-old lawyer with three daughters and $186,000 in student loan debt.  Here’s how it happened.  She went to college and her father, a physician, covered the costs in freshman year.  After that, she found a job at a Manhattan law firm, which provided “more than enough funds to finance the rest of her undergraduate studies.”

So far, so good.  But that wasn’t enough.  She had a “dream” of becoming a lawyer, so she enrolled at University of Miami law school.  Her plan was to get a job after the first year ended and pay her own way after that.  But, she admits, she did so poorly that first year that she realized she wouldn’t be able to cut it if she worked a job at the same time.  So she went to the federal trough for $26,000 annual loans, plus a $20,000 private loan for support while she studied for the bar exam.

Question: Given your struggles in law school and your slim chances of getting a high-paying job at a top firm—she ended up working as a public defender for the state of Florida at less than $50,000 per year—was it wise to run up the debt like this?

Things aren’t so bad at the moment, though.  The income-based federal program has accepted her and that $186,000 debt costs her only $74 per month.

And how about Virginia Murphy and Bonnie Kurowski-Alicea?  They appear in another Wall Street Journal story from last August.  Murphy has a balance of $256,000 built up when she pursued her “dream of becoming a public defender” and went to Tulane law school.  Why take on so much debt when your career-goal isn’t high-paying (she now earns $56,000 as a public defender in West Palm Beach)?  Because, she divulges, she knew about a federal loan forgiveness plan that would free her from having to pay most of it back.  The taxpayers would cover it.

Ms. Kurowski-Alicea took a different route.  She got a loan for undergraduate schooling, then went back to school for a master’s degree and then a doctorate.  Her motivation?  To postpone paying the undergraduate loans.  You don’t have to repay student loans while you’re still in school.  But then, she got more loans to cover her graduate work, bringing her total to $209,000.  By the way, her unemployed husband has $75,000 in student loan debt.

This kind of idiocy and manipulation is inevitable when dreams go uncurbed by reality.  It will happen when we give people easy escapes from responsibility.  And it will only aggravate the sour morale of people who didn’t make such mistakes when they see the fruits of bad behavior shuffled onto their shoulders.

Instead of telling youths about student loans, we should hand them a book by Alex Chediak, Beating the College Debt Trap.   It’s a handy primer on how to get in and out of college without sinking into crushing debt.  Every high school counselor should have a copy in hand to pass along to starry-eyed students who think that a loan of $25,000 at age 19 will just, well, go away in the regular course of life.

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