Not long ago I answered a reader question and suggested they consider stopping payment on their cosigned private student loan in the face of no other better solution. You can see that reader Q&A here.
In response to that post I received some feedback which is not unusual from people who don't understand the complexity of the student loan crisis in America.
Here are a few of the comments I received in response to my advice.
What about the Education they received for $150k. They should just get that for free??? I hope the loan companies use the full force of the law to go after these people that purposely let their loans default. I have no empathy for these people that had to go to the fancy schools for their fancy degrees in meaningless fields. What kind of society are we building that people think its ok to purposely not fulfill their SIGNED contracts. They wanted an education and these loan companies provided the funds so they can receive one. Now you are telling people its ok not to pay them.
It's a bit shocking that you're advising people to basically be irresponsible. How about INSTEAD, we advise people not to take on debt they cant afford. Period.
I'm paying for my loans so why can't they! The guy who writes this garbage should be charged with paying back all these loans that people have stopped paying because of his bad advice! Not paying your loans affects everyone, not just the person who defaulted. If you don't want to pay them, then you shouldn't have taken them out. Honestly who takes out $150k in loans and is unable to pay them? Most people who do have loans that high are in the medical field, which many places have programs where they pay the loans in exchange for the person working for them for so many years.
The comments typify the type of knee-jerk reaction so many people have without understanding the complexity of the issues surrounding private student loan debt or the reality of education in the United States. Defaulting on your private student loan debt is typically the best of your worst options when all other options have been explored. But it is no more crazy than the many people who did the math and strategically defaulted on their mortgages during the economic meltdown.
The real question everyone needs to ask is at what point do you sacrifice a safer financial future to attempt to remedy an unfortunate past financial situation?
To understand the role and/or strategy of this approach you have to apply math and reality rather than just emotion and assumptions. Which do you think your banker is using?
And while it is not a goal of defaulting on your student loan debt, who knows, maybe defaulting will open the eyes of some private student loan lenders to make lending and risk decisions before just asking the student or the parent to go on the hook for the loans. Maybe for-profit schools and public universities will take steps to drive down the cost of tuition instead of raising it to fill available money and leading more and more people to depend on private student loans. I guess anything is possible.
But defaulting on student loans is not a tool to walk away without repaying but to open new doors to new repayment options or legal protections.
The reality is nearly everyone who is involved in the decision to take out private student loans shares part of the blame for the reality of the mess created. However, it is not uncommon for people to simply say this is all a problem that rests squarely on the shoulders of the 20-year-old student who was the least informed in this process.
And for the people that think $150,000 is for a fancy school school. Well you could not be more wrong. It's not uncommon in my inbox for people to contact me with that much debt who went to a for-profit trade school, tried to graduate but couldn't for some reason, or got a degree in a low paying field even though the school made them believe they'd make more.
Let's look at one example. A student graduated with $183,639 in student loans after attending The Art Institute and University of the Arts. She graduated with a degree in Bachelor of Fine Arts. The student has been employed as an artist and makes $41,000 a year and will most likely continue to earn that salary in her field. It will never enough to ever repay the loans. After defaulting, her lenders either discharged her debt in bankruptcy or reorganized it so she could make some payments. Her balance was reduced to $131,140 with payments of $359 a month for 300 months. See this article for more details.
So let's look at who played a role in the eventual debt we want a young consumer to suck up and pay off. This list is in no particular order.
- Society assumes school debt is good debt and you have to go to college. You actually don't. Not everyone should go to college.
- People headed to college were told by teachers and counselors that going to college was a good thing and would pay off.
- Parents blindly encouraged their kids to go to school, often without any consideration of the field of study versus the cost of the education.
- Financial aid offices who worked hard to find financing for school by using both federal and private student loans without consideration of the capacity to repay or likelihood of graduating.
- Lenders passed out more and more loans which led to the inflating costs of a higher education and funded easy access to for-profit schools.
- Then there is the explosion in for-profit schools who charged much more and performed far less than public universities or community colleges.
- How about the schools, universities, colleges, technical schools, and trade schools all marketing heavily to the public about how wonderful they are without openly disclosing the results experienced by students.
- What about the well intended friends and family who willingly cosigned for loans to allow the young person to go deeper in debt. They thought they were doing a good thing.
The young person who takes out the private loans is told by everyone along the way the loans are a smart decision and an investment in themselves. What they are not told is about 75% of people who have student loans never graduate. They have the debt but never the brass ring of the degree.
Federal reports show students pushed to schools relying on private student loans have been shifted into private student loans before their federal loan programs were exhausted. As the Consumer Financial Protection Bureau (CFPB) said, "Many private student loan borrowers did not exhaust their federal Stafford Loan limits before turning to the private loan product. Some borrowers reported that they did not know they had fewer options when repaying their private student loans than they did with their federal student loans." Who is to blame for that if you want to assign fault? Is it the schools who professionally knew better or the uninformed kid?
Here is the warning from the U.S. Government about private student loans: "These loans do not offer the flexible repayment terms or borrower protections featured by federal student loans. Private student loans are not funded or subsidized by the federal government; instead, they are funded by banks, credit unions, or other types of lenders.
The bank or lender -- not the federal government -- sets interest rates, loan limits, terms and conditions of private student loans. Your ability to qualify for and borrow a private student loan may be based on numerous factors that can include your credit history, whether or not you choose to have a co-signer, your co-signer's credit history, your choice of school, and your course of study.
The private student loan was designed to mimic a Stafford loan during school, but it has key differences which create risks for consumers if the future path of interest rates, the economy, and the labor market vary beyond initial expectations. If a significant number of consumers still confuse the two, that confusion may cause long-lasting and substantial consumer harm.
- Source
But these loans don't just suck in the uneducated student. They also drag in friends and families as cosigners. According to the CFPB, "In 2011, over 90% of private student loans were co-signed." There is a fine line between helping you love to get a private student loan and enabling them to go so far in debt they can't dig themselves out. But the CFPB also found that despite marketing and contract language saying cosigners could be released from private student loan responsibilities, about 90% of requests are denied by lenders.
But here is one of the most disturbing charts I've seen in the past few years.
Prior to 2009, private lenders were passing out loans without much regard to credit scores and the ability to repay. In fact in 2006-2008 the lowest credit scores have the highest percentage of private student loans.
Potential student loan debtors don't get a window sticker like when buying a car. They are not well informed what the graduation rate is for the school they have selected.
Let's take a look at just one school.
Martin University in Indianapolis is a college that offers a number of programs. The school actively tries to get students to enroll. Martin University is eligible to help students apply and receive federal student loans. The school promotes the value of education with messages like "Learning for Life, "Your Future Starts Here," and "higher education must be made available to all who can benefit." That sounds wonderful and many people are encouraged to attend.
But let's look at the performance of the school as reported by the U.S. Department of Education.
According to the College Score Card, student who received federal funding had an 11% graduation rate, only 15% of students are able to pay down their debt, the typical federal student loan debt is $42,247 with a payment of $469 a month. The average salary after ten years after entering the college is $22,300. - Source
So is it fair to crucify students who elected to attend Martin University as slackers when the average student has no likely ability to repay their student loan debt?
This example is for federal student loan debt but coming up with private student loan performance data is impossible since it is not required to be made public.
By the way, if you want to look at another source of federal student loan school performance, see Debt by Degrees by ProPublica.
If you want to look into why many students probably have an argument they were misled into taking out unaffordable student loans, read this.
Hell yes.
But with no requirement that private student loan lenders make any affordable repayment programs available to loan holders the end result is college students of all ages are now suckered into crappy loans and shackled by debt the schools and lenders benefited from. And people want to be critical and say the student bears all of the responsibility for the bad choices of believing the marketing, parental advice, and help the recruiters and financial aid offices cheerfully offered.
That's right, private student loan lenders have no obligation to make any reasonable repayment plan available. They also don't have to forgive debt when someone becomes disabled, as federal loans do. And any temporary repayment plan only explodes the otherwise unaffordable balance due. Forbearance or deferment might be a payment holiday but it puts the amount owed on a bodybuilder steroid plan.
So the reality today is students buried in private student loan debt, when faced with no other better option, should actually consider defaulting on their private student loan debt to open doors for other options.
Prior to defaulting, students should also look closely at the legal options available to them from filing bankruptcy. There are reasons why some private student loan debt can be discharged in bankruptcy, almost instantly.
And speaking of bankruptcy, it is always a good option to clear the decks of other debt which is standing in the way of making the student loan payment. But in my experience, it is the private student loans that are the biggest debt and often others debts are much smaller and would not make a major difference if discharged.
And to the critics that scream about personal responsibility, do you forget that just because a debt is discharged in bankruptcy, that does not mean that the debtor can't repay it as they can afford to after their bankruptcy. In fact, the Federal Reserve Bank of New York says "Those That File Bankruptcy Do Better Than Those That Don't."
It's time to get educated on the impossible corner so many private student loan holders find themselves in before painting those that face no real options to repay with a dirty brush.
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.