Should Students Voluntarily Default On $1.3 Trillion In Debt?

One week ago, we highlighted a NY Times op-ed by Lee Siegel, a writer who holds not one, not two, but three degrees from Columbia, including two graduate degrees. Long story short, Siegel accumulated quite a bit of student debt on the way to obtaining three degrees from one of the nation’s top schools, but apparently no one told him that writers (or at least the type of writer he planned on being) don’t generally make a lot of money, and so when Siegel found himself falling behind, he simply decided he would not be repaying his student loans.

(Lee Siegel)

You see for Siegel, student debt is part of a system that’s “legal but not moral.” It’s “absurd that one [can] amass crippling debt as a result, not of drug addiction or reckless borrowing and spending, but of going to college.”

Of course, one might easily argue that taking out three large loans to fund three degrees from Columbia, none of which promise high-paying jobs, is the very definition of “reckless borrowing and spending.”

Siegel also says it’s ridiculous that the education system “open[s] a new life beyond [people’s] modest origins [only to] call in its chits and prevent [these people] from pursuing that new life, simply because [they] had the misfortune of coming from modest origins.”

But is it then immoral for auto lenders to expect to get their money back from low-income borrowers who take out car loans? After all, car loans also “open a new life” for people of “modest origins.” Before the loan they had to walk or take public transportation. After the loan they are able to go wherever they want, whenever they want in an expedient fashion. Is it then wrong for auto lenders to “call in their chits” by expecting borrowers to make their monthly payments? Obviously not. The argument is nonsensical.

Siegel sums up the difficult decision he faced as follows:

“Years later, I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.”

So according to Siegel, because the free market doesn’t value (in monetary terms) writers as much as it does say, petroleum engineers, that means writers shouldn’t have to repay their loans.

But there’s no inherent injustice in the fact that writers are not, on average, paid as much as petroleum engineers. It is Siegel’s right to choose what he wants to study and thereby what vocation he wants to dedicate his life to. If that’s writing, so be it. That’s great.

It is however, society’s right to determine how much Siegel’s writing is worth. If that determination leaves Siegel unable to service his debt, he does not have the right to punish society for how they valued his work by forcing taxpayers to take a loss on his student loans.

We can of course argue over what it says about our society when writers and intellectuals can’t make enough to live a comfortable existence while white collar criminals on Wall Street rake in hundreds of millions every year, but that’s an entirely separate argument and probably shouldn’t have been included in Siegel’s op-ed because frankly, it has nothing to do with whether or not borrowers should be held accountable for their obligations to creditors.

The better argument may be that the student debt bubble is just one more example of easy credit and moral hazard conspiring to create a massive social inefficiency wherein it's impossible to compete for a job without having a $35,000 college degree, but depending on the major, these degrees don't often prepare graduates for the job market. What's left is a nation of waiters and bartenders laboring under tens, if not hundreds of thousands in student loans in an economy that still (BLS and BEA "adjustments" notwithstanding) hasn't recovered from a crisis caused by the very same type of easy credit and moral hazard that has now spawned the student debt bubble.

In other words, it's not that Siegel is wrong to criticize the student debt bubble, it's just that the issue isn't whether or not student borrowers somehow deserve to be treated differently by creditors simply because their debt went towards an education while someone else's debt went towards a Honda Civic. 

 

Moving on, you'll recall that Siegel also has some concrete recommendations for graduates struggling under a mountain of student debt. As a reminder, here they are:

You might want to follow these steps: Get as many credit cards as you can before your credit is ruined. Find a stable housing situation. Pay your rent on time so that you have a good record in that area when you do have to move. Live with or marry someone with good credit (preferably someone who shares your desperate nihilism).

The NY Times has more on why some of these suggestions might turn out to be bad ideas:

Over the last couple of decades, we have been engaged in an enormous national experiment, taking impressionable and often ignorant teenagers and young adults and seeing just how much student loan debt they can handle.

 

Colleges and graduate schools flaunt their fancy amenities while making the case for their brand of degrees, loan papers in hand. Parents stand idly by and often co-sign for the debt. As a result, more than $1 trillion in student loans are outstanding, and people of all ages are struggling to repay them.

 

Whatever you may think of these results and the costs that produced them, there is also a practical question at hand for people who feel as if they are in over their heads: Is it ever a good idea to try to beat the system by openly defying it and refusing to repay the debt that you willingly took on?

 

The ramifications of defaulting and remaining in debt deliberately are usually real and lasting. After all, the federal government spends over $1 billion annually on collection agencies to get its money back on behalf of the taxpayers who pay for the loan programs.

 

Mr. Siegel suggested that others might want to consider his example and listed three steps that could help them cope..

 

First, he tells people to get as many credit cards as they can before they stop repaying their student loans. This way, presumably, you will have plenty of credit available once your credit report is ruined and you can’t get new cards. But card issuers are constantly checking the credit of existing cardholders to look for distress signals. If they see any, they may lower your limits or close your accounts.

 

You could use debit cards instead, as long as you don’t bounce checks or regularly overdraw. Once your credit is a mess, however, it becomes that much easier to justify all sorts of bad financial behavior. After all, your student loan default has already rendered you off limits for lending, so what’s a few more late payments or stiffed creditors?

 

The second piece of advice Mr. Siegel has for aspiring defaulters is to establish a good history of paying rent. This can work, as long as you rent from a landlord who never checks your credit or a new one who relies on your old landlord’s good word.

 

But many landlords do check and won’t be sympathetic, especially in tight markets. Besides, plenty of people don’t want to be tenants forever, given how hard it can be to find rentals in some good school districts. Others want to plant roots and build home equity.

 

Will those defaulters be able to qualify for a mortgage? A judgment resulting from a default may stay on your credit report for up to 10 years. But we’re talking about the credit reporting agencies here. Mistakes happen, black marks may linger, and they aren’t always easy to fix quickly when your home purchase hangs in the balance..

 

Which brings us to Mr. Siegel’s third piece of advice: Marry well, or at least have a creditworthy partner. Then, that person can be the sole mortgage applicant. Mr. Siegel’s wife bought the home where they live, according to public records.

 

There are a number of problems with this approach. Some lenders may not allow it, since certain low down-payment loans in community property states require both spouses to apply, according to Wells Fargo. Of course, you’ll need to talk someone into coupling up with you in the first place, after explaining that you’re not so big on financial obligations but that you really, truly intend to honor marital ones.

In the final analysis, the entire debate may well end up being irrelevant because the larger the student debt bubble grows, the louder the "forgive all student debt" calls become and because, in Bill Ackman's words, "there's no way students are going to pay it back," it may not be long before the Lee Siegels of the world have their debt cancelled before they have a chance to make a publicity stunt out of their defaults.

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