Defaulting on federal student loans is stupid, not brave

Olufunke Michaels (R) and her classmates celebrate after receiving their degrees from the John F. Kennedy School of Government during the 364th Commencement Exercises at Harvard University in Cambridge, Massachusetts May 28, 2015.    REUTERS/Brian Snyder

Today’s college graduates need to get the message that defaulting on federal student loans is not just stupid, it is unnecessary.

That message easily could get lost in the controversy following a recent New York Times opinion piece, “Why I Defaulted on My Student Loans,” in which writer Lee Siegel not only defended his decision to ignore his education debt, but urged others to join him as a way of changing the economics of paying for college.

“If people groaning under the weight of student loans simply said, ‘Enough,’ then all the pieties about debt that have become absorbed into all the pieties about higher education might be brought into alignment with reality,” Siegel wrote. “Instead of guaranteeing loans, the government would have to guarantee a college education.”


We now have some indication that debt strikes may work: The U.S. Department of Education expanded its forgiveness program after some former students of the Corinthian Colleges chain – which shut down all its remaining campuses in late April – publicly refused to pay their debt, saying they’d been defrauded.

Before the chain collapsed, it had been fined by the Education Department for falsifying job placement claims and was the target of numerous other investigations for predatory lending and deceptive recruitment.

But the Education Department’s willingness to reconsider likely was less a response to the debt strike than to the intervention of state attorneys general and consumer advocates who encouraged the feds to be more generous with Corinthian victims.

In any case, Siegel’s piece downplays the personal and lifelong financial devastation that default can inflict, while ignoring the fact that there are now plenty of options for dealing with most student loan debt.

If debt collectors are sometimes likened to junkyard dogs, the Department of Education would be the one who is not chained or fenced. There is no statute of limitations on federal student loans, which means its collectors can chase you to your grave.

Along the way, they can snatch your tax refunds and garnish your wages without having to go to court. They can even take a bite out of your Social Security checks, something other creditors cannot do.

Borrowers pursued by other collectors can escape into bankruptcy court. Student loan borrowers are unlikely to find relief this way, since few can meet the stringent “undue hardship” clause courts require to erase this debt.

These powerful tools are among the reasons why the federal government expects its collection efforts to recover enough money in principal, interest and penalty fees to offset any defaults in its student loan programs.

Even before collection actions start, though, the failure to pay will take a heavy toll on a borrower’s credit – and thus impair the person’s ability to get credit cards, apartments and jobs.

Bad credit can inflate the cost of insurance and the size of deposits required for utilities and wireless phone service.

All this pain is increasingly unnecessary, since improvements in federal payment plans mean the vast majority of today’s student borrowers can find ways to avoid default.

The latest iteration of the Education Department’s Pay As You Earn program, for example, caps payments at 10 percent of discretionary income – defined as the amount over 150 percent of the federal poverty level for the borrower’s household size and state of residence. For some low-income borrowers, that can translate into monthly payments of zero dollars.

Forgiveness of remaining balances is possible after 10 years for those with public service jobs and after 20 years otherwise.

There are certainly some who will still struggle. Among them, for example, are higher-income borrowers who have crushing levels of other debt, who may have trouble staying current even under Pay As You Earn.

People with older student loans are not eligible for the new arrangement and may have to pay up to 15 percent of their discretionary income with the other available income-based repayment plan.

Parents who took out federal PLUS loans also are not eligible for the more generous repayment options, although they may qualify for an income-contingent plan that caps payments at 20 percent of discretionary income.

Meanwhile, private student loans, which make up roughly 15 percent of the $1 trillion or so currently owed in education debt, offer far fewer repayment options and consumer protections than federal student loan debt. That is why Congress should seriously consider the Consumer Financial Protection Bureau’s suggestion that these loans – which involve no taxpayer funds or government guarantees – be easier to discharge in bankruptcy court.

Other reforms, such as expanding grant aid, simplifying financial aid forms and expanding Pay As You Earn to other borrowers, should be considered as well. What is not worth discussing is default as political protest. Today’s graduates have much better options than to make human sacrifices of themselves.


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