7 ms·

Why I Defaulted on My Student Loans

33 points by mapleoin 11y ago

leereeves 11y ago
Repost from yesterday: https://news.ycombinator.com/item?id=9674606 https://news.ycombinator.com/item?id=9674606
deedubaya 11y ago
I understand why someone would do this.... but as someone who paid their student loans, pays their mortgage, and other bills, I sure feel like I'm getting the raw end of the deal for honoring my commitments. Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children. In the end, your decision to take a loan commitment (under whatever pretenses or promises) and then default, is fucking the honest American. Thanks!
- djb_hackernews 11y ago
  I know Americans are all about personal responsibility and individualism, etc but we are humans first. I think the decision to stand idly by while your neighbors are getting preyed upon is not being an honest American (no true scotsman, woop)
- LanceH 11y ago
  I agree about student loan being a complete commitment. A mortgage, however is a secured loan with an interest rate tied to the risk of the loan. Especially if you're paying points, PMI or a higher interest rate, the chance of default is already calculated into the house and is part of the risk that the lender's responsibility. They also made a commitment to take it back if you don't pay (and you've paid for that privilege, perhaps dearly.) Student loans are a bit different because some interest rates are heavily subsidized (some are not). If you're paying a high interest rate, then you are paying for someone to accept the risk of not getting paid back. Default, they get punished, they stop making bad loans, the market corrects. Instead we've jammed a penny in the circuit breaker and loans must always be available and are near impossible to discharge. Government backs or bails lenders out and nobody gets punished for contributing to the mess (and driving up prices for cash payers too). edit tldnr -- Loans are not priced based on moral commitment to them. If you get a loan priced as such (interest free from a friend) honor that commitment. If you pay extra for the inherent risk, let the risk taking parties honor their commitment, too.
- solve 11y ago
  Accepting loans no matter what, and paying them no matter what, is actually what will ruin university for our children, and has already been doing so. Marketplace dynamics are weird like that. They often the OPPOSITE behavior of what you'd expect.
- random28345 11y ago
  > Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children. One can argue that those who pay off a $250k college loan to a small liberal arts college are creating a moral hazard for loan issuers and college adminstrators who keep jacking up tutition. The article proposes that if everyone were to default, educational costs would be returned to a more rational level. Personally, I think that the cost of college education will continue to increase to a significant fraction of the value of the college education, to somewhere around half a million dollars. This is basic economic theory, and will result in fewer students finishing college, and a continuing increase in crushing debt.
  - deedubaya 11y ago
    No. Not paying these outrageous rates, going to a cheaper school for a legit degree is what will drive down the costs. Supply and demand. Defaulting on the loans will likely just lead to another government bailout, and sky high tuition will continue.
- bilbo0s 11y ago
  "...Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children..." Sometimes I wonder if taking on debt at all is the actual "recipe for financial ruin". Years and years ago, back in undergrad, I sat through a course on mankind's economic history. It was that course that really made me aware of, and made me think about in an analytical fashion, the ancient admonitions against debt and usury. That class made me pretty sure that there was a certain wisdom in those admonitions.
ben336 11y ago
As somebody who is currently struggling with a huge amount of student debt, this strikes me as quite... self-righteous? I can understand the idea that the government should give free education, or that they should support education with grants instead of loans, or that college tuition should be cheaper. I'm all for people advocating for those causes. But if you take a loan, you've entered a contract. Breaking that contract isn't something to be proud of. Saying that his options were boring career with debt and soul crushing career without debt is disingenuous. If you took $60k (or whatever) of somebody elses money, be willing to put in the work to pay it off, then you get to do what you want. If you aren't willing to do that, then find a way to subvert the system that doesn't involve you taking large amounts of other peoples money, or at least admit that you made a poor decision.
- JamisonM 11y ago
  Sometimes I wonder if the attachment of moral ideas to what are really just business contracts is part of the way modern individuals are being played by modern corporations. In my business experience breaking a contract is something to be proud of if the penalties of breaking it are a better option than the cost of fulfilling it. That was all laid out in the contract, the morality of the thing was laid down in writing at the start when how the contract might not be honoured was considered in the contract itself. Entering into the contract might have been a poor decision but compounding that poor decision by not breaking it when breaking it is the better option doesn't seem like a move in a positive direction either.
  - NoGravitas 11y ago
    Very much so! David Graeber's Debt, the First 5000 Years deals a lot with how the language of debt and morality are intertwined, and what the consequences of that are, especially when different peoples' debts aren't treated the same way. There's a really good summary at Two Friars and a Fool: http://twofriarsandafool.com/2013/09/debt-on-the-experience-of-moral-confusion/ http://twofriarsandafool.com/2013/09/debt-on-the-experience-...
    - 11y ago
nate_meurer 11y ago
This bit is from comment on the NYT site: > "Banks love it when people default on their government backed student loans. At the time of default they are paid in full by the government and then they are able to turn around and sell that debt to collection agencies." Is this true?
- tomsun 11y ago
  I'm assuming the government gets the interest payments in this case. Or else this "loan" is really just a subsidy for the banks.
deleted 11y ago
[deleted]
- golergka 11y ago
  If you enter an agreement voluntarily, and it's not an agreement about something you absolutely need to survive (like air, water, or food), you should honour it.
deleted 11y ago
[deleted]
tomsun 11y ago
The author of this piece is self-rightous. But the bigger problem isn't his inability or his relent to honor the student loan debt. The bigger problem is the detachment of the value of education, and prospective students' understanding of which. When students enter university, they understand that it is a place that will challenge their intellects, but what they don't understand is the amount of financial value it will provide after they graduate. Unless they go into a lucrative field, the return on investment in liberal arts (not picking on this specific major) is not worth it. Unless you're going into a top program in a top university (Engineering at Ivy League, CS at Stanford, MIT, CalTech, etc), it's better to enroll into an STEM program at a reputable in-state college. Otherwise it's almost not worth it.
acomjean 11y ago
Student Loans are not like loans for tangible things (homes and cars). When you default on your student loan they don't take your diploma back. You keep your degree, the increased earning potential. You keep your experiences and education. Student loans are a complex web of federal guarantees, but if basic capitalism works, by defaulting you are going to make it more expensive for the next students, who have to pay more to cover the defaulters. Some students won't be able to afford it with the added interest rates. Seems his education helped him be successful. So why should he pay for it? "Lee Siegel is the author of five books who is writing a memoir about money."
- fnordfnordfnord 11y ago
  >Student loans are a complex web of federal guarantees, but if basic capitalism works, by defaulting you are going to make it more expensive for the next students, who have to pay more to cover the defaulters. Not defaulting also seems to have the effect of driving costs up for the next students.
- grecy 11y ago
  > Student Loans are not like loans for tangible things (homes and cars). When they take your home or car back, they don't take back your experiences and memories you gained while enjoying those items.
  - acomjean 11y ago
    They can resell homes and cars and get monetary value from them. Diplomas not so much.
ryandrake 11y ago
Default is an option specifically written into any loan contract, the terms of which (and the actions that happen upon default) presumably agreed to by all parties. There is no reason to artificially bring morality into a debtor's decision to default. The loan-writing industry, of course, loves that we attach shame to the option that most hurts their business. Saying it's immoral to default on a loan is like saying it's immoral to exercise a put option that happens to bankrupt the option writer.
JonFish85 11y ago
Well this is excellent. I look forward to the day when the responsible members of society (people who pay their bills on time, who save for retirement, who don't over-buy) are pushed even further to take care of the people who were immature and planned incredibly poorly. Our society works fine when it's assumed that a small portion of its members are irresponsible. But when it's systemic, there isn't enough money to go around. That's what happened with the housing bubble. Blaming banks is easy, and certainly they did a lot of shady stuff. But nobody forced people to take on mortgages they couldn't hope to pay. Nobody forced kids to take out $100k in loans to go to a dream school instead of a state school. The student loan debt burden is enormous. And I suspect that the people who make out the worst in it will be the ones who actually PAY on time. And I'm terrified of what will happen when it's time to start cashing out my 401k. After years of saving, a person who has faithfully saved $5M should have a nice retirement ahead of them. But I suspect that so many more people will have nothing, and those people will still be voting, and cut themselves a hefty slice of the pie from those who actually planned ahead. And because of the way 401k's are set up, it's a multi-trillion dollar pot of money that can be re-assigned from the "$5m retirement rich" people to those who didn't bother to think ahead and save. One person defaults on an irresponsible debt, no big deal. But the more people do it and the more acceptable that becomes, the worse it is for everyone (especially the responsible people that a society relies upon to keep the money flowing).
- curiouscats 11y ago
  Student debt becoming unreliable will likely impact rates on student debt. Though it is confused by government subsidies. Those who would lose out are those forced to pay higher rates on student debt. If the government bails out those financial institution then everyone paying taxes suffers. If we continue to subsidies debt and have to do so at higher subsidy levels to make up for risk of defaults then taxpayers again suffer. Indirectly, if it became a significant macroeconomic factor those schools would suffer if students refuse to take out high amounts of hight cost debt. Frankly, this would be a good outcome as they would stop adding on huge admin costs and ego boosting expensive buildings. Student debt is tricky because credit histories likely haven't been built up. For other debt largely those with good histories will get good rates. Those with bad histories will get bad rates (for cars, houses, etc.). Startup small business loans are pretty much always bad rates (if you can get them at all). Given our track record the last few decades don't worry about the 1% ($5 million puts you way into the 1%). Congress has done nothing but bend over backwards to give every possible favor to the 1%. The middle class (say those with $100,000 to $400,000 in their retirement accounts) may suffer but the 1% is very unlikely to suffer until we drastically change who we elect.
malka 11y ago
>I am sharply aware of the strongest objection to my lapse into default. If everyone acted as I did, chaos would result. The entire structure of American higher education would change. This is not an objection. This is an argument in favor.
t0mbstone 11y ago
The trick to getting around student loans is simple: 1. Open lots of credit cards 2. Take out cash advances on the cards 3. Use the cash to pay off your student loans (or just pay for college directly, using the cash) 4. Pay on credit cards until the interest has ballooned out of control and you can't pay them anymore 5. Declare bankruptcy and default on all your debt If someone should be able to buy a house and cars and toys and shoes and designer clothes and then just declare bankruptcy and walk away from their debt totally free, why shouldn't you be able to do the same for other types of debt? Why do we treat educational debt as the one type of debt that is able to enslave you for the rest of your life, while it's ok to default and walk away from debt caused by crazy consumer spending?
- kak9 11y ago
  No statement on whether this should be true or not. But the reason it was started was because students didn't have the credit history to get loans at all--especially since the thought was they had no credit to lose so they would be incentivized to just default immediately after graduating. Which is why student loans were made non-defaultable, to make a market for student loans possible.
  - t0mbstone 11y ago
    True, but I don't think there is anything stopping someone from using this technique later to cleanly default on their student loans later on in their life, once they have built up credit history.

33 points by mapleoin 11y ago

Repost from yesterday: https://news.ycombinator.com/item?id=9674606 https://news.ycombinator.com/item?id=9674606

I understand why someone would do this.... but as someone who paid their student loans, pays their mortgage, and other bills, I sure feel like I'm getting the raw end of the deal for honoring my commitments. Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children. In the end, your decision to take a loan commitment (under whatever pretenses or promises) and then default, is fucking the honest American. Thanks!

djb_hackernews 11y ago
I know Americans are all about personal responsibility and individualism, etc but we are humans first. I think the decision to stand idly by while your neighbors are getting preyed upon is not being an honest American (no true scotsman, woop)
LanceH 11y ago
I agree about student loan being a complete commitment. A mortgage, however is a secured loan with an interest rate tied to the risk of the loan. Especially if you're paying points, PMI or a higher interest rate, the chance of default is already calculated into the house and is part of the risk that the lender's responsibility. They also made a commitment to take it back if you don't pay (and you've paid for that privilege, perhaps dearly.) Student loans are a bit different because some interest rates are heavily subsidized (some are not). If you're paying a high interest rate, then you are paying for someone to accept the risk of not getting paid back. Default, they get punished, they stop making bad loans, the market corrects. Instead we've jammed a penny in the circuit breaker and loans must always be available and are near impossible to discharge. Government backs or bails lenders out and nobody gets punished for contributing to the mess (and driving up prices for cash payers too). edit tldnr -- Loans are not priced based on moral commitment to them. If you get a loan priced as such (interest free from a friend) honor that commitment. If you pay extra for the inherent risk, let the risk taking parties honor their commitment, too.
solve 11y ago
Accepting loans no matter what, and paying them no matter what, is actually what will ruin university for our children, and has already been doing so. Marketplace dynamics are weird like that. They often the OPPOSITE behavior of what you'd expect.
random28345 11y ago
> Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children. One can argue that those who pay off a $250k college loan to a small liberal arts college are creating a moral hazard for loan issuers and college adminstrators who keep jacking up tutition. The article proposes that if everyone were to default, educational costs would be returned to a more rational level. Personally, I think that the cost of college education will continue to increase to a significant fraction of the value of the college education, to somewhere around half a million dollars. This is basic economic theory, and will result in fewer students finishing college, and a continuing increase in crushing debt.
- deedubaya 11y ago
  No. Not paying these outrageous rates, going to a cheaper school for a legit degree is what will drive down the costs. Supply and demand. Defaulting on the loans will likely just lead to another government bailout, and sky high tuition will continue.
bilbo0s 11y ago
"...Making it acceptable to default on or get bailed out of debt (whatever the source) is a recipe for financial ruin for us AND our children..." Sometimes I wonder if taking on debt at all is the actual "recipe for financial ruin". Years and years ago, back in undergrad, I sat through a course on mankind's economic history. It was that course that really made me aware of, and made me think about in an analytical fashion, the ancient admonitions against debt and usury. That class made me pretty sure that there was a certain wisdom in those admonitions.

ben336 11y ago

As somebody who is currently struggling with a huge amount of student debt, this strikes me as quite... self-righteous? I can understand the idea that the government should give free education, or that they should support education with grants instead of loans, or that college tuition should be cheaper. I'm all for people advocating for those causes. But if you take a loan, you've entered a contract. Breaking that contract isn't something to be proud of. Saying that his options were boring career with debt and soul crushing career without debt is disingenuous. If you took $60k (or whatever) of somebody elses money, be willing to put in the work to pay it off, then you get to do what you want. If you aren't willing to do that, then find a way to subvert the system that doesn't involve you taking large amounts of other peoples money, or at least admit that you made a poor decision.

JamisonM 11y ago
Sometimes I wonder if the attachment of moral ideas to what are really just business contracts is part of the way modern individuals are being played by modern corporations. In my business experience breaking a contract is something to be proud of if the penalties of breaking it are a better option than the cost of fulfilling it. That was all laid out in the contract, the morality of the thing was laid down in writing at the start when how the contract might not be honoured was considered in the contract itself. Entering into the contract might have been a poor decision but compounding that poor decision by not breaking it when breaking it is the better option doesn't seem like a move in a positive direction either.
- NoGravitas 11y ago
  Very much so! David Graeber's Debt, the First 5000 Years deals a lot with how the language of debt and morality are intertwined, and what the consequences of that are, especially when different peoples' debts aren't treated the same way. There's a really good summary at Two Friars and a Fool: http://twofriarsandafool.com/2013/09/debt-on-the-experience-of-moral-confusion/ http://twofriarsandafool.com/2013/09/debt-on-the-experience-...
  - 11y ago

nate_meurer 11y ago

This bit is from comment on the NYT site: > "Banks love it when people default on their government backed student loans. At the time of default they are paid in full by the government and then they are able to turn around and sell that debt to collection agencies." Is this true?

tomsun 11y ago
I'm assuming the government gets the interest payments in this case. Or else this "loan" is really just a subsidy for the banks.

deleted 11y ago

[deleted]

golergka 11y ago
If you enter an agreement voluntarily, and it's not an agreement about something you absolutely need to survive (like air, water, or food), you should honour it.

deleted 11y ago

[deleted]

tomsun 11y ago

The author of this piece is self-rightous. But the bigger problem isn't his inability or his relent to honor the student loan debt. The bigger problem is the detachment of the value of education, and prospective students' understanding of which. When students enter university, they understand that it is a place that will challenge their intellects, but what they don't understand is the amount of financial value it will provide after they graduate. Unless they go into a lucrative field, the return on investment in liberal arts (not picking on this specific major) is not worth it. Unless you're going into a top program in a top university (Engineering at Ivy League, CS at Stanford, MIT, CalTech, etc), it's better to enroll into an STEM program at a reputable in-state college. Otherwise it's almost not worth it.

acomjean 11y ago

Student Loans are not like loans for tangible things (homes and cars). When you default on your student loan they don't take your diploma back. You keep your degree, the increased earning potential. You keep your experiences and education. Student loans are a complex web of federal guarantees, but if basic capitalism works, by defaulting you are going to make it more expensive for the next students, who have to pay more to cover the defaulters. Some students won't be able to afford it with the added interest rates. Seems his education helped him be successful. So why should he pay for it? "Lee Siegel is the author of five books who is writing a memoir about money."

fnordfnordfnord 11y ago
>Student loans are a complex web of federal guarantees, but if basic capitalism works, by defaulting you are going to make it more expensive for the next students, who have to pay more to cover the defaulters. Not defaulting also seems to have the effect of driving costs up for the next students.
grecy 11y ago
> Student Loans are not like loans for tangible things (homes and cars). When they take your home or car back, they don't take back your experiences and memories you gained while enjoying those items.
- acomjean 11y ago
  They can resell homes and cars and get monetary value from them. Diplomas not so much.

ryandrake 11y ago

Default is an option specifically written into any loan contract, the terms of which (and the actions that happen upon default) presumably agreed to by all parties. There is no reason to artificially bring morality into a debtor's decision to default. The loan-writing industry, of course, loves that we attach shame to the option that most hurts their business. Saying it's immoral to default on a loan is like saying it's immoral to exercise a put option that happens to bankrupt the option writer.

JonFish85 11y ago

Well this is excellent. I look forward to the day when the responsible members of society (people who pay their bills on time, who save for retirement, who don't over-buy) are pushed even further to take care of the people who were immature and planned incredibly poorly. Our society works fine when it's assumed that a small portion of its members are irresponsible. But when it's systemic, there isn't enough money to go around. That's what happened with the housing bubble. Blaming banks is easy, and certainly they did a lot of shady stuff. But nobody forced people to take on mortgages they couldn't hope to pay. Nobody forced kids to take out $100k in loans to go to a dream school instead of a state school. The student loan debt burden is enormous. And I suspect that the people who make out the worst in it will be the ones who actually PAY on time. And I'm terrified of what will happen when it's time to start cashing out my 401k. After years of saving, a person who has faithfully saved $5M should have a nice retirement ahead of them. But I suspect that so many more people will have nothing, and those people will still be voting, and cut themselves a hefty slice of the pie from those who actually planned ahead. And because of the way 401k's are set up, it's a multi-trillion dollar pot of money that can be re-assigned from the "$5m retirement rich" people to those who didn't bother to think ahead and save. One person defaults on an irresponsible debt, no big deal. But the more people do it and the more acceptable that becomes, the worse it is for everyone (especially the responsible people that a society relies upon to keep the money flowing).

curiouscats 11y ago
Student debt becoming unreliable will likely impact rates on student debt. Though it is confused by government subsidies. Those who would lose out are those forced to pay higher rates on student debt. If the government bails out those financial institution then everyone paying taxes suffers. If we continue to subsidies debt and have to do so at higher subsidy levels to make up for risk of defaults then taxpayers again suffer. Indirectly, if it became a significant macroeconomic factor those schools would suffer if students refuse to take out high amounts of hight cost debt. Frankly, this would be a good outcome as they would stop adding on huge admin costs and ego boosting expensive buildings. Student debt is tricky because credit histories likely haven't been built up. For other debt largely those with good histories will get good rates. Those with bad histories will get bad rates (for cars, houses, etc.). Startup small business loans are pretty much always bad rates (if you can get them at all). Given our track record the last few decades don't worry about the 1% ($5 million puts you way into the 1%). Congress has done nothing but bend over backwards to give every possible favor to the 1%. The middle class (say those with $100,000 to $400,000 in their retirement accounts) may suffer but the 1% is very unlikely to suffer until we drastically change who we elect.

malka 11y ago

>I am sharply aware of the strongest objection to my lapse into default. If everyone acted as I did, chaos would result. The entire structure of American higher education would change. This is not an objection. This is an argument in favor.

t0mbstone 11y ago

The trick to getting around student loans is simple: 1. Open lots of credit cards 2. Take out cash advances on the cards 3. Use the cash to pay off your student loans (or just pay for college directly, using the cash) 4. Pay on credit cards until the interest has ballooned out of control and you can't pay them anymore 5. Declare bankruptcy and default on all your debt If someone should be able to buy a house and cars and toys and shoes and designer clothes and then just declare bankruptcy and walk away from their debt totally free, why shouldn't you be able to do the same for other types of debt? Why do we treat educational debt as the one type of debt that is able to enslave you for the rest of your life, while it's ok to default and walk away from debt caused by crazy consumer spending?

kak9 11y ago
No statement on whether this should be true or not. But the reason it was started was because students didn't have the credit history to get loans at all--especially since the thought was they had no credit to lose so they would be incentivized to just default immediately after graduating. Which is why student loans were made non-defaultable, to make a market for student loans possible.
- t0mbstone 11y ago
  True, but I don't think there is anything stopping someone from using this technique later to cleanly default on their student loans later on in their life, once they have built up credit history.