Student loans and moral outrage
This week I’m fascinated by the issue of where student loans live on the spectrum of moral outrage versus sympathy, which I’ve been discussing with my friend Martha Poon recently. It’s also a very timely issue.
Let’s start on the sympathy side of things. The Corinthian 100 students, who were largely sympathetic figures organized by the group Strike Debt, decided to refuse to pay back student debt they accrued from going to Corinthian College, which was charged with all kinds of false advertising and fraud by, among others, the California Attorney General. I wrote about these protesters back when the group was only 15 large.
Just yesterday Education Secretary Arne Duncan announced that their debt would be forgiven, with certain caveats, that the organizers complained about. Indeed the forgiveness is not automatic, and the paperwork looks to be onerous, or even undoable, for the ex-Corinthian students. Even so, what’s interesting to me is Arne Duncan’s comments to the New York Times:
“You’d have to be made of stone not to feel for these students,” he said. “Some of these schools have brought the ethics of payday lending into higher education.”
On the other side of the spectrum, we have Lee Siegel’s recent New York Times opinion piece, where he explains his decision to default on his student debts. My Slate Money co-host Jordan Weissmann called him an “unrepentant leech” on his Slate response piece, noting that Siegel got a B.A., an M.A., and a masters of philosophy from Columbia University before deciding that his goal of being a writer didn’t jibe with his student debt, so why not just default.
This is a general trend when you talk to most people about student debt: the moral obligation is generally there, you need to pay it back or be considered a bad person, unless the circumstances are extreme, which means you can give evidence that the debt itself is fraudulent.
But there’s a third way of thinking about these things, which I picked up from finance (where, I like to say, you “learn to think like an asshole”). Namely, that there’s no morality attached to debt at all. I saw bankers and hedge funders defaulting and “renegotiating” debt contracts – especially things like long-term rental agreements – when things changed. It wouldn’t even be fair to say that they did it when they “couldn’t” pay the money they owed, because the accounting is so slippery in large companies. It was more like, they knew their lawyers were good, and they knew the other side knew that, and therefore they simply wouldn’t pay more than a certain amount that the other side would get in a dirty lawsuit that everyone wanted to avoid.
In other words, debt contracts, in the context of high finance, have been entirely removed from their moral roots. By contrast, the moral weight that individual consumers attach to what are tiny little contracts in comparison seem kind of random and quaint. Or are they?
It makes me want to conduct a thought experiment. Namely, what would it look like if we consumers thought of our debt in non-moralistic terms, like they do in finance? Would we even be able to do that? A test case is this guy, a failed condo developer profiled by the New York Times. Here are a couple of critical details:
The lender, Bank of America, had tried to foreclose after Mr. Rath stopped paying, but amid the craziness of the mortgage meltdown, it could not prove it was entitled to the property. Despite the bank’s pleas that Mr. Rath was seeking a “windfall,” a judge nullified the debt last year.
Mr. Rath has been renting out the condo for $10,000 a month since moving his family in 2010 to Connecticut, where they have taken up sailing full time. After spending this past winter in the Caribbean, the family is planning to sail to Europe this summer on a 55-foot Hanse 545 racing cruiser, before circumnavigating the globe.
Yeah, so, in other words, I’m not sure we can do it.
Even so, I’m interested in pushing ourselves to take a few steps towards it. I think it would be interesting to consider the effects of a widespread student debt strike, even if a bunch of those who would be involved are less than perfectly sympathetic. As Lee suggested, such a movement could result in more affordable college tuitions, a much more skeptical Department of Education, and a less commodified concept of social mobility.
Moreover, I think burdening young people with extreme debt is bad for the country, and especially bad for their ability to make good decisions about what to do with their lives. I’m all for a national discussion on this with the debt morality taken out.
mathbabe 
Back around 2010 I actually considered just walking on my house. We were so far underwater (technically still are) that it would be a decade before we were clear. Our house was worth 1/3rd of what we owed on it. My husband and I argued this extensively and in the end we stayed. I made the point that banks and corporations do this stuff all the time – heck, the mortgage bankers association did it until it hit the news, at which point they negotiated a short sale. But both of us were raised to believe that when you take on a debt, you take on a moral obligation and that strategic default would make us horrible people. He couldn’t figure out how he would forgive himself. (What was particularly funny at the time was that the Mortgage Banker Association was simultaneously defaulting and arguing that consumers shouldn’t. It was pretty appalling.)
Student loan debt is similar. Most of us are raised to see this as a nearly sacred obligation, and that not meeting it is somehow a failure of us as a person. This is made WORSE by all the different ways in which student loan debt is different (and far worse) from most other debt; the inability to discharge in bankruptcy and the way it will follow you to your grave. (Of course, if you work for a university you can always just stay in school forever – I’m a fan of that approach instead.
LikeLike
Obviously it’s in the banks’ immense interests for lendees to ascribe more than a monetary calculation (will I have trouble borrowing in the future?) to defaulting on loans.
Am I right in thinking that student debts are special in that they can’t be discharged via bankruptcy? I thought it was weird that neither article got into this.
(BTW jive != jibe, you jive turkey.)
LikeLike
You can’t repossess an education. That’s the cynical explanation, anyway.
LikeLike
I guess you could repossess a transplanted organ, but this seems to be uncommon; nonetheless medical debts are dischargeable (and lead to half of all bankruptcies in the US).
LikeLike
“Jibe” and “jive” have been used interchangeably in the U.S. to indicate the concept “to agree or accord.” While one recent dictionary accepts this usage of “jive,” most sources consider it to be in error.
http://en.wiktionary.org/wiki/jibe
I side with “most sources” cited above. Jive and jibe are both useful words. I hope they retain distinct meanings.
I note that “jibe” is derived from Dutch which may explain mathbabe’s affinity for it.
LikeLike
There is something rather delicious about the idea of removing the idea of debt from its moral roots, given that those roots are so deep that the very word “ought” started out life as the past tense of “owe”.
LikeLike
Yes, student loans are special and cannot normally be discharged in bankruptcy. They can be discharged if you prove undue hardship, but this requires a very high standard of proof.
Moreover, student loans are special in many other respects. There is no statute of limitations (the debt never expires). The lender can garnish wages, social security payments, disability payments, and tax refunds without a court order. The penalties for default are staggeringly high — as much as 25% of the loan balance, which is capitalized into the balance, incurring more interest. If you don’t earn enough money (or if you die), all of the above levers can be applied to your co-signers. Defaulting on student loan debt is second only to defaulting on tax debt; you can technically do it, but it’s probably not worth it.
Since 2010(?) or so, income-based repayment (IBR) has been available. IBR is almost always a better choice than default. IBR protects your co-signers as well. Note that once you default, you are no longer allowed to use IBR.
The only way to beat the system is to work under the table, or do freelance work, to avoid wage and tax refund garnishment. Come to think of it, a freelance writer is the perfect profession from which to default on student loans, which may be why Siegel did it. Still, once he retires, he may be surprised to see a big chunk of his social security get taken for loan payment.
The only really good solution is to flee the country; student loan lenders will not pursue you overseas, mainly because their biggest weapons (namely, wage, tax refund, and social security garnishment) don’t work in other countries, or at least require an expensive court process. Even then, your co-signers are still on the hook. Of course you could do what Cathy mentioned, and screw your co-signers (think like an asshole).
As for the larger issue of morality and debt, I find that lenders build in mechanisms to protect themselves, and default is rarely optimal. Unsecured debt (credit cards) and business defaults (limited liability) are major exceptions, but in general, lenders require adequate collateral or legal protections before they will lend.
LikeLike
Student debt should be dischargeable in bankruptcy. The fact that it isn’t and the amount of student debt outstanding in the US form a totally insane system.
LikeLike
I’ll be honest. The story you provide doesn’t make me any more inclined to a moral view of debt. Sure, the guy who defaulted on his debt is likely a jerk. But the bank system was so screwed up that they couldn’t even proved that they owned the debt. The decision by the bank to use shady financial instruments to hide what they were doing from investors turned out to make it impossible to collect on the debt? Guess that is what you get for using shady instruments that are meant to obscure. In order for there to be a moral dimension, I feel like their has to be someone who is doing the right thing but losing out. It isn’t enough to point to the fact that the borrower is an amoral a-hole, especially when the bank is behaving with the same lack of morality. See, also, the example of rtbarber above, where banks guilt people about the morality of default while engaging in the same behavior. The people scolding you (or scolding the yachting guy) don’t actually believe in the moral code they are enforcing. They just think the rest of us are rubes. And, for the most part, they are right.
LikeLike
The problem is that people conflate several kinds of “debt”.
Reneging on some debt (the store owner lets me take home a product and I promise to pay next week; more seriously family and friends collect money to pay my bond) is immoral, in the sense that these kind of transactions are based on social goodwill, and reneging on them hurts the fabric of society, so that we all agree to feel offended when that happens (that’s what “immoral” means). People doing favours for each others is good for society, and we naturally police each other to behave when others do us favours so that favours continue to be given and society as a whole is a nicer place. Moreover, we encourage such loans to be given with (depending on the circumstances) less careful consideration of risks and rewards and more consideration of social ties. Of course, if circumstances change you may not be able to pay the money back, but then society accepts the situation. We still expect those who draw on their social capital by asking their social network for money to make serious efforts to pay this money back.
Freely contracted debt like bank loans or getting the money from a bonds agent are not favours. The are carefully considered and priced transactions and reneging on them when circumstances change is not immoral. Since the lender should have done its due diligence and priced the risk of default into the interest rate (or asked for more securities, or declined to lend in the first place), the lender is not doing anyone a favour and if Mr. Siegel’s loans were simply private transactions with his bank, I’d have no problem with him defaulting. In that case I believe the loans would also be dischargeable in bankruptcy.
It’s true that commercial lenders like their debtors feel that bank loans are like the favours you get from your social network, but these are really different kinds of social constructs. If Mr. Siegel really only took a bank loan, then he wasn’t mooching off the bank. If his degrees were not worth the investment (say, he wasn’t a good enough high-school student to merit taking a large loan to got to Columbia when he could instead have gone to Rutgers), then the bank should have figured that out and refused the loan. Of course, taking a loan with the intent to default is wrong — but that should be thought of as concealing information from the lender leading them to misprice the loan. I don’t think Mr. Siegel is thought to have made any misrepresentations to the bank at the time.
If Mr. Siegel’s loans were government-backed, however, the situation is a bit different. Now the taxpayers feel that this is the first kind of loan: society did Mr. Siegel a favour by giving him a lower interest rate, deferrals, and other terms that he could not get on his own. The loan program was sold to the voters by politicians as a kind of social goodwill scheme where we all pitch in together to help those in need. In that situation the public is reasonably offended, especially since Mr. Siegel used the loans to attend a very expensive school, possibly showing that he didn’t make good use of the money society invested in him.
I don’t know where Mr. Siegel’s case falls, though his op-ed seems to suggest he just got a bank loan cosigned by his parents, so I tend to be fine with his actions.
Of course, taxpayers do have some recourse against strategic default of publicly-backed loans. First and foremost they can have Congress end the program, but they can also have the government set interest rates to more accurately represent the credit risk and capital costs given the payment terms. Congress can require government-backed loans not be used at too expensive colleges, or that the investment be independently evaluated (i.e. that someone who isn’t beholden to the university or to the student decide whether it makes sense to lend to this particular student to go to that particular university). The government can monitor the default rates of graduates from different universities and limit the loans offered to students at these universities based on that number. Various other things can be done.
The first order of business, however, should be to clearly decide whether government loans are a straight-up investment in human capital, in which case the program should be run as such (and then you need a good case that government officials using other people’s money really can accurately price such investments better than banks risking their own, even ignoring all the attached political pressures) or whether they are a social assistance program, in which case we should expect those who take the loans to accept that society is assisting them and then morality (in the sense of social policing of anti-social behaviour) is definitely applicable.
LikeLike
Mr. Siegel’s article consistently uses the phrase “student loan” throughout, including in the headline. A student loan is a very special type of loan. It is very different from a bank loan. See my earlier comment for a partial list of the ways in which student loans are special.
In Mr. Siegel’s subsequent TV appearance on CNBC, he specifically cited the differences between student loans and bank loans in defending his choice to default: http://www.huffingtonpost.com/2015/06/08/cnbc-student-loan-boycott_n_7537432.html
The mere fact that his parents co-signed the loan is not directly relevant. Student loans can have co-signers, just like any other kind of loan.
Based on Mr. Siegel’s article and his TV appearance, I would say that his loan was very definitely a student loan, as opposed to a bank loan co-signed by his parents. If it was not a student loan, then he is being highly deceptive in his public statements.
LikeLike
If we all think like, and behave like, assholes/bankers, society will fall apart. We need to restore a sense of morality to the financial profession, not emulate them.
So, not having read the whole op-ed or Jordan’s reply, I’m inclined more inclined to side with Jordan.
On the other hand, the Corinthian students are not debtors, they are victims. They were should have no obligation of any kind. I am delighted to see they were successful in getting the loans discharged.
LikeLike
I’m not so sure, Josh. I think the double standard where banks and corporations get to renegotiate their debt but individuals can’t is a real source of inequality. One way to deal with this is for banks to start caring more about morality of debt, but another way is for people to stop. Or at least, to start thinking beyond the simplistic and common line, “you borrowed this so it must have been what you wanted and it must have been worth it to you so now you are obligated under any circumstances to pay it back.”
LikeLike
I agree there should not be a double standard.
But, I think operating as if everyone will screw you if it is to their benefit is very stressful and time-consuming. I’ve been on Wall Street and that is the operating assumption (and to some extent, people even brag about it) but even there it isn’t really true and I do think the system would fall apart if it were.
A long topic I cannot do justice to here (if I am capable at all).
LikeLike
If student debts were dischargeable in bankruptcy, that wouldn’t mean that all students would screw the system. Bankruptcy isn’t exactly the greatest way to go. The point isn’t to remove consequences of defaulting, but instead make them less severe. Currently they are far too strict.
LikeLike
I think there is another angle on this that comes from watching governments at the state, local, federal and international level. Defaulting on commitments to bankers and bond holders is viewed almost uniformly as worse than defaulting on commitments to citizens. Hey, when the troika forces Greece to cut pensions or Republicrats talk about cutting Social Security, it isn’t even framed as a default. Pensions/social security are particularly important here, since the eventually beneficiaries paid money in under an agreement that promised money out. But no one seems to really object to cutting. Rumor out of Illinois is that the state supreme court there objecting to a cut of public employee pensions is just going to result in a constitutional amendment explicitly allowing cuts in public employee pensions.
So it isn’t just the evil bankers who view their commitments as fungible. And which commitments are fungible has a lot to do with the power dynamics between the entity owing money and the one expecting to receive it. As far as I’m concerned, a student debt strike is probably a good way to start trying to shift those power dynamics. And I’m not sure that the asshole with the sailboat is really relevant to that shift.
LikeLike
Yeah, but almost no college grads have ‘extreme debt.’ According to the NYT only 2/3rds of grads have any debt, and those that do average only $27k, over 10 years at low rates, that’s under $300/mo hardly enough to put one in debtor’s prison.
Also according to the NYT and other sources, only 6% of graduates have > $100k in debt – and those are usually the ones with 2-3 degrees, and it’s normally the MBA/JD/MDs who can pay it back over time.
So, I have little sympathy for the extreme examples of the philosophy grads, or the law grads that did poorly in school and can’t get a $100k a year job anymore.
LikeLike
Agreed. Great article. Thanks!
LikeLike