Are Conscientious Student-Loan Defaulters a Threat?

Some think defaulting on student loans might be the new draft-card burning, and could force the government to address rising tuition and $1.2 trillion in student debt.

National Journal
J. Weston Phippen
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J. Weston Phippen
June 23, 2015, 11:58 a.m.

A group of stu­dents called the Cor­inthi­an 100 pur­pose­fully de­faul­ted on their stu­dent loans. It was a play to protest Cor­inthi­an Col­leges, a private, for-profit school chain that has been called pred­at­ory and has been ac­cused of mis­lead­ing low-in­come stu­dents in­to con­sid­er­able debt for de­grees that some have called worth­less. The protest worked. On June 8, the gov­ern­ment an­nounced that it would for­give the stu­dents’ loans.

Each year, tu­ition rises at private and pub­lic col­leges, as does the amount of debt stu­dents carry with them after gradu­ation. So while the Cor­inthi­an stu­dents had some­what unique cir­cum­stances (for-profit de­grees have re­cently come un­der at­tack), their de­fi­ance raises the ques­tion: What if hun­dreds of thou­sands or even mil­lions of stu­dents de­faul­ted on their loans as a form of protest—a massive move­ment to “burn” the promis­sory note?

An­drew Ross, a pro­fess­or at New York Uni­versity, wants people to do just this.

“It’s a wide­spread con­sensus that this is a huge crisis for fu­ture gen­er­a­tions,” Ross says.

Ross was an early mem­ber of the Oc­cupy Wall Street move­ment. He is the au­thor of a book called Cred­ito­cracy: And the Case for Debt Re­fus­al. He also con­trib­uted to the Debt Res­isters’ Op­er­a­tions Manu­al, pub­lished by Strike Debt, an off­shoot of the Oc­cupy move­ment.

The Oc­cupy move­ment has fo­cused a lot on debt, hav­ing cre­ated or­gan­iz­a­tions like Rolling Ju­bilee, which buys health care and stu­dent debt (about $32 mil­lion so far, ac­cord­ing to its web­site), and the Debt Col­lect­ive, which helped or­gan­ize the Cor­inthi­an stu­dent-loan protests.

The reas­on for the debt fo­cus, Ross says, is be­cause an edu­ca­tion is the best way to im­prove a per­son’s stand­ing in life, yet the U.S. edu­ca­tion­al sys­tem is widen­ing gaps of in­equal­ity. “It’s been turned in­to the cruelest of debt trap,” Ross says, “where stu­dents from only the most well-heeled fam­il­ies can es­cape.”

Stu­dent Debt Crisis is an­oth­er or­gan­iz­a­tion that fo­cuses on stu­dent debt. And while it sup­por­ted the Cor­inthi­an 100, Ex­ec­ut­ive Dir­ect­or Nat­alia Ab­rams doesn’t ask people to de­fault. What the group has done is pro­pose two fed­er­al bills in 2012 and 2013 that would have re­pur­posed money from cor­por­ate wel­fare to help pay off stu­dent debt, a move the group be­lieves would have stim­u­lated the eco­nomy from the bot­tom up.

More than 1.2 mil­lion people signed a pe­ti­tion in sup­port, but both bills fell short in Con­gress. Ab­rams ad­vises against vol­un­tary de­fault be­cause “it’s just so det­ri­ment­al, I can’t in good faith ask people to do that.”

Stu­dent loans are dif­fer­ent than al­most any oth­er type of debt. Adam Min­sky, a law­yer who spe­cial­izes in stu­dent loans, says the gov­ern­ment doesn’t even have to take a debt­or to court. Without a court or­der, the gov­ern­ment can gar­nish wages (typ­ic­ally around 15 per­cent of in­come), and with­hold any fed­er­al stream of money, like tax re­funds and So­cial Se­cur­ity.

“They can lit­er­ally pur­sue you un­til you die,” Min­sky says.

In nearly two dozen states, de­fault­ers can have their pro­fes­sion­al li­censes re­voked. In a few, they can even lose their driver’s li­censes. With all this, plus back in­terest, stu­dents who de­fault will likely end up pay­ing much more than they ori­gin­ally bor­rowed. In ad­di­tion, de­fault­ing can ru­in someone’s cred­it.

“Cred­it com­pan­ies don’t care if you didn’t pay the loan be­cause you were dead­beat or mak­ing a protest,” says Dav­id Wessel, dir­ect­or of the Hutchins Cen­ter on Fisc­al and Mon­et­ary Policy at the Brook­ings In­sti­tute.

What hasn’t been talked about much, however, is the po­ten­tial im­pact on the eco­nomy if such a move­ment were to ac­tu­ally gain pop­ular­ity.

The av­er­age col­lege seni­or who gradu­ated from a pub­lic or private non­profit col­lege in 2013 owed $28,400, ac­cord­ing to a re­port by The In­sti­tute for Col­lege Ac­cess & Suc­cess.

Some simple math would lead one to con­clude that if 1 mil­lion people were to de­fault, this would mean a $28 bil­lion bar­gain­ing chip for “con­scien­tious stu­dent-loan de­fault­ers.”

“You really have to break that up in two dif­fer­ent parts,” says Douglas Webber, an as­so­ci­ate pro­fess­or of eco­nom­ics at Temple Uni­versity. “There are gov­ern­ment-backed stu­dent loans and private stu­dent loans, and it’s very easy to pre­dict what will hap­pen in the private mar­ket.”

In the private mar­ket, Webber says, that massive de­fault would in­crease ex­ist­ing stu­dent-loan in­terest rates. Lenders would re­duce the amount of money they loaned to stu­dents, and pos­sibly, stop lend­ing al­to­geth­er.

“It’s a little more dif­fi­cult to talk about what will hap­pen on the gov­ern­ment end,” Webber says. The gov­ern­ment would re­coup it some­where, either from taxes or cuts to ser­vices, or it could just lump it in­to the na­tion­al debt ($18.2 tril­lion and count­ing), he says.

The fed­er­al gov­ern­ment can sue uni­versit­ies for that money. But this is un­likely to hap­pen un­less, as in the Cor­inthi­an case, there are leg­al grounds to be­lieve the school preyed upon its stu­dents. Most likely the gov­ern­ment will re­claim it from the debt­or.

The idea of a wide-scale con­scien­tious stu­dent-loan de­fault­er move­ment has even less of an im­pact giv­en that about 650,000 people de­faul­ted on their loans last year, and there was no ir­re­vers­ible ef­fect set in mo­tion on the part of banks or the gov­ern­ment.

Ul­ti­mately, both Webber and Wessel say, any im­pact to the eco­nomy would be min­im­al.

What a col­lect­ive de­fault could do, though, they say, is fo­cus polit­ic­al aware­ness around rising costs of tu­ition, and an edu­ca­tion­al sys­tem that is in­creas­ingly strat­i­fied and un­equal.

What Ross and the Debt Col­lect­ive hope to ac­com­plish is to em­phas­ize that an edu­ca­tion is a so­cial right, and that the U.S. should join the grow­ing list of coun­tries that provide a free col­lege edu­ca­tion. With a col­lect­ive de­fault, Ross says, someone’s bound to pay at­ten­tion.

“It’s not just about money, it’s about demo­cracy,” Ross says. “If you look back at the civil-rights move­ment, one of the most right­eous de­mands was to open the col­legi­al doors to a pop­u­la­tion who had been denied the right to an edu­ca­tion. And now the right to edu­ca­tion has been re­placed by the right to ac­cess edu­ca­tion­al loans.”

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