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World Changing Ideas

What Would Happen If 40 Million Americans Defaulted On Their Student Loans?

The world might go to hell, but you'd probably survive.

What Would Happen If 40 Million Americans Defaulted On Their Student Loans?

Defaulting on your student loans is probably a bad idea. Despite constant claims to the contrary, you can discharge student debt through bankruptcy, but that’s a little like burning down your house because you don’t want to do the weeks’ worth of dishes piled up in the sink.

But what if not just you, but everybody, defaulted on their loans? The average debt of graduating seniors is over $37,000, making it the second-largest source of personal debt in the U.S., and big business for lenders, so surely the world of finance would collapse, right? Not quite, but the results could be pretty bad for the U.S., and even the rest of the world. Author Panio Gianopoulos takes a look at the consequences of ditching our student loans, both at an individual level and as a possible precursor to "global financial collapse."

Student lenders have things pretty well sewn up, repayment-wise. Student debt is just like private debt if you stop paying, in that your credit score will suffer, the debt will mount up, and the lender can sue you to get recourse. But because it is also a federal debt, and subject to some of its own special rules, student loans are way harder to escape. For starters, if you default, anyone who-co-signed for the loan is also, says Gianopoulos, "100% on the hook" for the debt. 15% of your wages can be shaved off by the government to pay the loan back. Your tax refund will also be gone, and even your spouse’s tax refund can be swiped. "You’ll be haunted by this debt until you die," writes Gianopoulos. "There is no statute of limitations on federal loans, which means there is no limit on how long you can be sued. It’s like contracting financial herpes."

But that doesn't stop some people from trying. Writing in the New York Times last year, Lee Siegel explained why he defaulted on his student loans:

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.

An individual defaulting on even a huge debt makes no difference to anyone except for that individual (and their co-signers). Their creditor takes a hit, but unless it’s a real fly-by-night operation, that hit will be easily absorbed. One common argument against people just refusing to pay comes in the form of the question: "What would happen if everyone decided to stop paying off their loans?" This is, of course, no argument. It’s as misleading as asking what would happen if everyone suddenly quit their jobs and went on strike.

But what if 40 million student debtors did stop paying off their loans? That’s $1.2 trillion, gone.

First, the defaulters would lose credit, which includes mortgage credit. "This could wind up depressing the housing market," writes Gianopoulos, "causing a ripple effect for many other industries that depend on housing (speculators and banks might face the brunt of it)."

Also, six percent of that $1.2 trillion debt is in private hands. "Those lenders might go bankrupt or need federal assistance," says Gianopoulos. "Ultimately, we can imagine the federal government ‘eating’ the loss on these loans, which might irreparably harm the government’s credit rating."

This in turn could lead to rising interest rates, and which would curtail the government’s ability to borrow, which might lead to interest payments being bigger than America’s annual budget. Which could, in an ironic twist, lead to the government itself defaulting.

What happens after that is even more interesting. Gianopoulos posits that it might be in China’s best interests to bail the U.S., and then goes into crazy land, talking about Vladimir Putin taking over the world. But of course, 40 million people won’t default on their loans. The majority will pay them off in full, many by continuing to do jobs they hate, therefore wasting the education that those loans paid for.

And if you do choose the dark side? Lee Siegel has some tips on preparing yourself.

  • Get as many credit cards as you can before your credit is ruined. Find a stable housing situation.
  • Pay your rent on time so that you have a good record in that area when you do have to move.
  • Live with or marry someone with good credit (preferably someone who shares your desperate nihilism).

Or perhaps you could do something really radical, and live your life without credit cards of debt. Like that would ever happen.

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