By J. DeVoy
Earlier this week, 60 Minutes tackled the hard issue of strategic mortgage default. In these situations, people capable of paying their mortgages despite being badly upside-down on their homes – owing far more than they’re worth – simply walk away from them. While government loan modification programs are available to those who have lost jobs and suffered other economic hardship, creditors are refusing to offer interest or principal reductions to people who are capable of paying their mortgages. So far, this latter group has been unable to cause any change in public or private policy on loan modifications, despite the group growing by the day.
In the 2005 Bankruptcy Code revisions, student loans were made non-dischargable in bankruptcy. Now, as noted in a recent Frontline episode, the government administers all Federal student loans, which were previously available through private banks and lenders. The episode further explains that Federal loans can be attached to wages and tax returns if not paid, and will follow the borrower everywhere… except into the grave. Federal loans are discharged upon death.
For graduates returning home to live with their parents, jobless and adrift, one consequence may be depression and long-term psychological effects. Given the above-average cognitive abilities and self-awareness of college graduates, it seems more likely than not that they would suffer these effects more than the average person. In one particularly sad story last year, one attorney committed suicide upon learning of his layoff.
Suicide is a serious matter that shatters families, ruining the lives of those left behind, and thus it is not invoked lightly. With graduates from the classes of 2009 and 2010 now entering the worst job market anyone can remember, and competing with people a generation older for entry-level positions, the future clearly is bleak for them. Coupled with a black swan environmental disaster that has profound implications for the long-term cost of oil and the growing sovereign debt default crisis, the makings of a double-dip recession are moving rapidly into place.
Even with the benefit of programs like Income-Based Repayment, the interest and principal of student loans will continue to grow for recent graduates. Despite the program’s vaunted 10-year forgiveness feature for government and public interest employment, such jobs are extremely selective or nonexistent as state governments slash and burn various departments with layoffs, furloughs and forced attrition. The social and egoistic cachet conferred by a college degree may also preclude graduates from seeking work in blue-collar or service fields; some may cite the desire to preserve themselves for a “career-track” position, while others’ pride may come in the way of taking a job that doesn’t make use of their credentials. Even for those with the humility to seek whatever employment they can, employers may well reject these applicants for being flight risks destined to bolt for the first superior opportunity, or for lacking the requisite skills for the job.
If enough college graduates are pushed to the breaking point and decide life isn’t worth living, will anyone notice? A governmental response assumes its knowledge, which is difficult if surviving family members refuse to talk about what happened and what they know. For some families, this devastation may have already visited home for exactly the reason of crushing, inescapable student loan debt and crushed dreams. But, like a tree falling in the woods, nobody can know a problem exists if it remains a hushed secret — however painful it is to keep.
Hopefully the state of education lending will never come to needing reform because of ended lives. There are signs that this is already happening across the country, though, and the trend may only accelerate as economic malaise deepens, parental resources diminish, and opportunities for even the smartest among us become increasingly scarce. Despite the emphasis to attend college from every angle, those who do and have done so are increasingly finding that the credentials they acquired at great expense aren’t as valuable as they were lead to believe. This is the ultimate betrayal: People who are lionized for their accomplishment and knowledge are left to drop out of society in the most irreversible way possible. More immediately, the discharge of these loans upon death affects the CDO-like securities stacked upon them; discharges above those actuarially anticipated when creating the instrument would lead to its unwinding, as well as the derivatives and options resting upon it.
As for what these reforms would be, making student loan debt dischargable in bankruptcy wouldn’t solve the whole problem. It would, however, bring about several other realizations. First, the cost of education in America has gotten out of control. Second, the values of a generic college degree are oversold. Additionally, not all institutions or degrees are created equally, and it is absurd that students from elite schools pay the same interest rate – to the extent undergraduates at elite schools have to take loans – as students from less rigorous institutions. The same is true of major selection, as the value provided by a degree in biology or chemistry and the opportunities it provides is markedly different from one in communications, psychology or criminal justice. These would be painful realizations, but ones that do not seem to be arising naturally.
However large or insignificant the problem of loan-induced helplessness is, it can’t be ascertained or addressed without ensuring it can be discussed. Despite the shame and stigma people feel for not meeting their financial obligations, or the hurt a family may feel for the senseless loss of a loved one, hiding the experience under a bushel basket ensures that nobody can learn from it, potentially helping others and effecting real change.