Posts tagged ‘student loan default’

June 23, 2015

Should you default on your student loans?

by Grace

Lee Siegel, New York writer and recipient of three Ivy League degrees, was roundly castigated after he proudly explained  “Why I Defaulted on My Student Loans”.

Years later, I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.

I chose life. That is to say, I defaulted on my student loans.

As difficult as it has been, I’ve never looked back. The millions of young people today, who collectively owe over $1 trillion in loans, may want to consider my example.

Besides generating revulsion at Siegel’s oozing sense of entitlement, his column stirred criticism of the New York Times for “dispatching criminally negligent financial advice”.

Ron Leiber pointed out the flaws in Seigel’s explanation of how to circumvent the negative repercussions from a student loan default.

First, he tells people to get as many credit cards as they can before they stop repaying their student loans. This way, presumably, you will have plenty of credit available once your credit report is ruined and you can’t get new cards. But card issuers are constantly checking the credit of existing cardholders to look for distress signals. If they see any, they may lower your limits or close your accounts….

The second piece of advice Mr. Siegel has for aspiring defaulters is to establish a good history of paying rent. This can work, as long as you rent from a landlord who never checks your credit or a new one who relies on your old landlord’s good word.

But many landlords do check and won’t be sympathetic, especially in tight markets. Besides, plenty of people don’t want to be tenants forever, given how hard it can be to find rentals in some good school districts. Others want to plant roots and build home equity.

Will those defaulters be able to qualify for a mortgage? A judgment resulting from a default may stay on your credit report for up to 10 years….

Bank of America, one of the biggest home lenders, did not comment on whether people with defaults on their credit record would be able to get mortgages, and a Wells Fargo spokeswoman declined to categorically rule out the possibility that someone could qualify for a loan within the tarnished-credit window.

But Richard M. Bettencourt Jr., the secretary of the National Association of Mortgage Brokers and a lender himself with a company called Mortgage Network in Danvers, Mass., said he had never seen people with student loan defaults on their credit records get a mortgage….

Which brings us to Mr. Siegel’s third piece of advice: Marry well, or at least have a creditworthy partner. Then, that person can be the sole mortgage applicant. Mr. Siegel’s wife bought the home where they live, according to public records.

There are a number of problems with this approach. Some lenders may not allow it, since certain low down-payment loans in community property states require both spouses to apply, according to Wells Fargo. Of course, you’ll need to talk someone into coupling up with you in the first place, after explaining that you’re not so big on financial obligations but that you really, truly intend to honor marital ones.

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Lee Siegel, “Why I Defaulted on My Student Loans”, New York Times, June 6, 2015.

Ron Lieber, “Taking On Student Debt, and Refusing to Pay”, New York Times, June 15, 2015.

February 26, 2015

Student loan defaults are the only type that continue to rise

by Grace

Americans are having more trouble paying off their student loans than their mortgages or any other type of debt.

As student debt balances continue to grow . . .

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. . .  student loan defaults have overtaken those for all other types of debt.

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America’s total student loan debt is now nearly $1.2 trillion. One reason the burden is difficult to pay off, Fed researchers wrote: “Student debt is not dischargeable in bankruptcy like other types of debt … Delinquent or defaulted student loans can stagnate on borrowers’ credit reports.”

The number of student borrowers almost doubled over ten years.

The surge is fueled by more people borrowing — and borrowing larger amounts. The number of borrowers rose 92 percent between 2004 and 2014, according to the Fed researchers. The average student loan balance grew 74 percent.

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Danielle Paquette, “Americans are having more trouble paying off their student debt than their houses”, Washington Post, February 19, 2015.

February 23, 2015

Student loan defaults are most common among those with lowest balances

by Grace

It’s borrowers with the smallest balances that are most likely to default on their student loans.

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College dropouts are more likely to default.

… One likely explanation, offered by the New York Fed researchers, is that many Americans with small loan balances are dropouts. They may have attended school for a semester or two without getting a degree. They often don’t end up with the decent-paying job that a college education is supposed to bring, and thus lack the income to repay their debt.

Another possibility is that low-balance borrowers attained credentials such as certificates that don’t lead to the kind of jobs and salaries that a bachelor’s degree does.

A larger loan balance usually indicates a graduate degree, a credential that generally correlates with a higher salary.

By contrast, many borrowers with large loan balances are people who graduated from master’s programs and professional schools—doctors, lawyers—who typically end up with generous salaries. (We said typical, not always. There are plenty of struggling lawyers.)

High earners disproportionately take advantage of income-based repayment programs that shift part of their loan burden to taxpayers.

So while they have the biggest debts, they’re getting the actual returns on their investment and thus are in position to repay their loans. They also may be the most likely to enroll in income-based repayment programs, which many academics say disproportionately benefit high earners.

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Josh Mitchell, “Who’s Most Likely to Default on Student Loans?”, Wall Street Journal, Feb 19, 2015.

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