October 26, 2011

Being Forgiven

Patrick Laverty

It seems lately one of the topics for discussion is that of the heavy burden from college loans. Some are calling for the loans to be completely forgiven. That means the debt is eliminated.

The money was borrowed from a lending institution, where that might be a private bank or the US government, papers were signed agreeing to pay it back, the student received the education, and now they don't want to pay it back. It's too much money. The banks knew they were lending these people more than they could afford to pay back. "Predatory lending."
Interestingly, an NYU professor is actually advocating for students en masse to simply stop paying their college loans

New York University professor Andrew Ross led a discussion about the burden of student loan debt — now estimated to be between $550 billion and $829 billion — and proposed a radical solution: “A Pledge of Refusal.” The idea is that protesters would sign a pledge to stop making payments on their student loans as soon as 1 million had joined in making the pledge.
The article goes on to ask about the professor biting the hand that feeds him.
Ross acknowledged the irony of protesting against one of the main sources of his salary but added, “I feel very bad that my salary has actually been financed (by these debts). … To me it is just heartbreaking to see my students carry so much debt. It’s just immoral.”
However, the repayment of the loans isn't a source of his salary. He already has his money. He won't be out anything and neither would NYU. It is the banks and the US government who would be out their investment.

Also, the money that is repaid by graduates for their loans goes directly back to current students to pay their college costs. So if Professor Ross is successful, what will happen is the low-income students today won't be able to go to college because the money won't be available. Is that what they want to be responsible for? Some hard-working, low-income student not being able to go to college?

Where is the personal responsibility in this? Where was the plan here? Where was the forethought in signing for five- or six-figure loans for an education that may not have jobs available to pay the bill?

Some people today believe that higher education is a basic human right. I would disagree. People have a right to an education through high school and then the rest becomes a privilege. Especially when today, a college education is not a requirement to get a good paying job in many fields. Yes, there are fields where a college or graduate education is required, but for many other fields, it is not. I would love to have a 6,000 square foot house on a cliff overlooking the ocean with a garage full of fast cars. I can't afford that. College is no different. People need to learn to live within their means. If that means going to CCRI for a couple years to get the general education requirements in first and then transferring to get the bachelor's degree to save money, then that's what they should do. If it means getting a low-level job at a company and using a tuition reimbursement benefit to get a degree, then do that. If it means working your way up in your chosen field and getting experience instead of the education, then do that.

The bottom line for these people is they took on the debt, there's no way to give anything back like you can when your house or car is foreclosed on, so the debt has to be collected on. That's why it is guaranteed. This is explained to people when they sign the note and agree to put themselves in debt. Forgiveness? No. Please pay what you owe so the next person in line can make their decision about whether they want to borrow the money to go to college too.

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Student loans are one of the few debts which cannot be discharged in bankruptcy. Since all Bankruptcy Laws are an "Act of Congress", it might be interesting to read some of the legislative history.

This is a fairly recent enactment, so you might not have to dig to deep. It is probably in newspaper archives.

Posted by: Warrington Faust at October 26, 2011 11:19 PM

"People have a right to an education through high school and then the rest becomes a privilege."

How much of this is just status quo bias? It seems like an arbitrary line in the sand. You don't need a high school education to be able to function in our society or know how to read, write, or do basic math. From where does this "right" to other people's money and labor stem? It's certainly not in the Constitution or any holy book with which I am familiar.

Posted by: Dan at October 26, 2011 11:22 PM

I just hit Drudge and see that Obama is pushing a "stimulus" for student loans. Basically, it is a cap on the amount of payments, regardless of the size of the loan.

Nothing new here, student loans have always been political. Back in their early days, loans could be forgiven if you taught in a "depressed area". North Attleboro, MA was such a "depressed area". I never noticed that driving through. But, my friends with student loans found that out pretty fast.

Nondischargability and government guarantees have long resulted in economists warning of a "student loan bubble".

Posted by: Warrington Faust at October 26, 2011 11:36 PM

Partick, you probably already know my response here:

1) I took out loans with the assumption that my extremely in-demand graduate degree would increase my earning potential.

2) After I graduated, not only did we enter a recession, lowering the total number of jobs available, but I was diagnosed with Crohn's Disease, which prevents me from working a full 40-hour week.

3) Regardless of my unemployment OR temporary disability status, my loans have continued to accrue interest at a rate set by the same government I send my payments to.

I want an answer please Patrick... what exactly have I done to not live up to the responsibilities I accepted when I took the loan? What part of this was my fault? If I'm missing something, I'd like to know so I don't walk around telling this story like an idiot.

Forcing folks to pay interest on loans that the government owns, when they are unemployed due to a recession the government itself helped create isn't just bad policy, it's outright unconscionable.

Posted by: jparis at October 27, 2011 3:30 AM

-Government subsidizes loans to some students. Prices go up to carve out consumer surplus.
-Government subsidizes loans to more students to offset rise in prices. Prices go up more to carve out additional consumer surplus.
-Government subsidizes loans to basically everyone. Prices go up three fold in 20 years.
-Government switches over to lending directly. Everyone begins borrowing from government.
-Government prevents the loans from ever being discharged.
-Students can't pay off their loans.
-Government forgives your loans if you work for government.

You don't have to be a conspiracy theorist to see a pattern here, Mr. Magoo could connect these dots. The best thing that can be said is that it isn't 100% intentional.

Posted by: Dan at October 27, 2011 7:53 AM

"I want an answer please Patrick... what exactly have I done to not live up to the responsibilities I accepted when I took the loan? What part of this was my fault? "

No idea. You'd know better than I would. I'm sorry to hear about your condition, but that's not the case we're talking about here. No different than someone who got paralyzed by a drunk driver the day after graduating from college. What'd that person do wrong?

Do you believe in creating policy based on one case? We can go back and forth all day with "one-off" cases on both sides. So instead, take a macro view and then what policy makes the most sense.

Posted by: Patrick at October 27, 2011 8:51 AM

RE: Dischargeability in Bankruptcy of student loans.

Must have been a brain fart, but when I posted above I forgot that I knew the reason they were exempted from Bankruptcy. That was, as I recall, in the early 90's. The newspapers were full of stories of high earning student loan recipients who were filing bankruptcy to discharge the loan. In those days tuitions were much lower, so in order to owe 100K, you probably went to medical school. There were a lot of news stories of doctors filing bankruptcy to rid themselves of the loans. So, "something had to be done". Congress, "in order to protect the taxpayers" who funded these loans, made them nondischargeable. But, tuitions continued to escalate, so now a 100K student loan is far more plausible.

Posted by: Warrington Faust at October 27, 2011 9:07 AM

Jparis - I think you and the conservatives and libertarians on this blog are speaking past each other on this issue. Progressives tend to believe that the role of government is to insulate people from risks or misfortunes. Libertarians and conservatives tend to believe that risks and misfortunes are an immutable part of life and any long-term functioning economy. We see the role of government as to protect people from malicious acts from others, not from ourselves or the slings and arrows of fate. It is not a question of fault for us because we accept as a premise that life is not equal and never can be.

In one sense, taking out a loan is a bet on your future. When you bet incorrectly, even if through no fault of your own, it is a necessary component of the risk-rewards system that you be made to pay the cost. Anything else and the moral hazard corruption will eventually contribute to it coming crashing down (e.g., bank bailouts). You don't "deserve" to pay the costs of a medical ailment, but neither does anyone else deserve to pay your cost for the same reason. We accept this in other areas of life - nobody should be forced to fix my car when it breaks down. One can argue that health is fundamentally different, but then one would not be thinking like an economist.

A serious question - if I invest in a booming stock market and the market crashes for reasons beyond my control, do I deserve to lose my money? I think the proper answer is that blame is not relevant in what we are talking about with these bets on futures. If you don't want risk, you can work in fast food for the rest of your life. You'll always have a job, although not a very good one. Not everyone can be a highly paid professional, so if you bet on becoming one there is an implicit risk that you might not be. If that risk is unacceptable, there are safer alternatives available.

Posted by: Dan at October 27, 2011 9:13 AM

@Patrick: Of course you're right that policy should never seek to serve the individual case over the collective whole. But in general, would you be for having the government not forgive, but instead at least suspend interest accrual on people with student loans who are unemployed during a recession or who are on temporary disability? That's certainly a lot of people right there who are getting screwed over as they try to restart their lives. Sorry for making it so personal btw.

@Dan: I try to never do that, but let's see what we can do to remedy it.

So you've got it boiled-down pretty well in terms of viewpoints, except that while I feel government's role in part is to protect the vulnerable (children, the sick, the elderly) from circumstances largely out of their control, I also believe that as an adult, there's no such thing as a free lunch.

So while I understand the car/health analogy for what it is, I still put forward that the government in this case isn't just acting in a more libertarian style, making sure people pay their debts off (credit cards would be the same) regardless of circumstance -- but instead, they are actually making a profit off the fact that I can't pay my loans due in part to a recession they helped create. So I could ask the same question of you that I asked of Patrick in regards to loan interest, rather than forgiving loans. Middle ground is something we seem to have forgotten about as a whole in this nation.

As to your question: Obviously playing the stock market has serious risks that are made well-aware to you, should you decide to try to make money that way.

But to be a fully analogous situation, I have to ask: Would you be upset if you bought Google or Apple stock today, and tomorrow, the government told you that you instead owned some nice stock in well... the government, instead?

Same thing has happened with student loans. When I got my loans in 2004, they were from a private lending company that facilitated Federal Stafford Loans. Now here's private enterprise at work: they looked at my credit score, my 15 years of work history, my paid-off car, etc. and gave me a very low rate that I could later consolidate if I wanted.

Then I got a letter from the Department of Education telling me that thanks to the utter failure of the banking industry, they had just bought all my loans, and the Government now owns them directly.

While the private company would let me consolidate my rates if the interest market changed, the Feds will not. While the private company had me at about 3.5% interest, the Government has me at 7%.

So... you own AT&T -- the Government takes over AT&T and you lose your shirt in the process. Are you mad at the Government? I am.

So yes, this little liberal (I dunno if I even want to call myself a "liberal" anymore after just being censored on RIF) believes in private industry and informed decision-making. Having zero choices thrust upon you after you make an informed investment isn't the same thing, I don't think.

Posted by: jparis at October 27, 2011 11:51 AM

I see your point and it's a fair one. My robotic libertarian response is that many of these public policy ethical quandaries could be avoided if government simply stayed out of things in the first place, and particularly with student loans their compounding solutions have proven to be far worse than some of the original problems themselves. But I can't argue that where government is already involved in our private lives, people should be treated fairly and in a common sense manner.

Posted by: Dan at October 27, 2011 12:14 PM

One more point about the difference between student loans and other debt?

I have about $5k in credit card debt right now. Am I upset they are changing me interest while we're in a recession and I'm sick? NOT AT ALL.

Why? They disclosed their policies and interest rates to me when I got the card and made the purchases. I was an informed consumer.

How is the Gov't different? They didn't tell me they would buy up all my loans. They didn't tell me that once they set an interest rate they would never change it again under any circumstances. They also let me go on "deferment" but then only months later reminded me that even under deferment, I still owe them more interest.

Better analogy (I hope).

Posted by: jparis at October 27, 2011 12:15 PM

Middle ground? Ok. I see the middle ground as if you have a documented disability, I'm ok with putting the account into forbearance, with no accrual of interest. However, the account is still collectable, regardless of your eventual outcome. Even in death, the debt is collectable from whatever you have left, if anything.

Unemployment? That's one that can be more of a choice. Not saying that your unemployment is your choice or that's the case for some others, but there are people who certainly could go work and choose not to. Or they can live off of others. So in that case, I'm ok with forbearance but not the interest stop.

That seems to be middle ground to me.

Congrats on joining the RIF banned crowd.

Posted by: Patrick at October 27, 2011 12:15 PM

@Dan & Patrick: We seem to agree here. Debts need to be repaid... I'm not one of those kids who thinks that now that he's out of school, that "magic money" he got should be covered by someone else.

So yeah, give me my interest forbearance, and man, I'd be frankly just applying away up here in Oregon, and as soon as I got a job, I'd be back to paying them off. Again, my ability to get a job is slightly complicated by being sick, but that can be worked through.

And (not that it matters), I'm apparently not banned yet, probably because whoever deleted my post doesn't have the authority over Brian... who, when I left RI, was kind enough to attend my going-away party on Smith Hill.

There's still some good and open-minded progressives... just seemingly fewer and fewer.

Posted by: jparis at October 27, 2011 12:22 PM

I sympathize with JParis, but see my post on the "Contracts Clause" above. When you accept a student loan, you enter into a contract which is not conditional. It is simply "pay, or die". There is no provision that you obtain the employment desired, or any employment at all. The obligation to repay is not conditional, it is absolute.

I see that Obama wishes to alter the arrangement. This is essentially "forgiveness". Since the government may "forgive" a portion owed, and that government guarantees the loan, it is simply a transfer of the debt from the borrower to the taxpayers. The debt does not simply "disappear". This assumes that the government will make good on its guarantee to the lender.

This is not a situation that "progressive" politics can alter.

If you take a loan to buy a car and that car is a "lemon", you have no recourse against the lender. The manufacturer may have to make a refund under a "lemon law", but the debt abides. I note that some law schools are being sued for false representations about employability.

Posted by: Warrington Faust at October 27, 2011 3:13 PM
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