Their money is still being spent when it goes to the lender. There are two sides to that equation. Secondly, when folks default and their credit is bad then when they borrow in the future they pay accordingly via higher interest rates. Why should the general public subsidize poor creditworthiness?
I wonder why you are using one paragraph to address these two near-totally disjoint groups.
I’ve made it clear why I think it’s justified to say that people with large student debt burdens are struggling. You don’t seem to process half of what I’ve said in this thread.
I think I’ve been pretty consistent here, but I’m getting mixed messages from you. Either people have made bad financial decisions and are struggling as a result, or they’re not struggling because they made solvent decisions. Which is it?
It’s interesting that you should bring this up. We had quite a lot of threads about walking away from underwater mortgages during the financial crisis.
Whether it’s good or bad is, as I argued in those thread, beside the point. The fact is that a mortgage is effectively a contract. The bank (or whatever) lends you the money, and the house you’re buying is the collateral for the loan. The loan agreement very clearly states that, if you stop paying the loan, the bank gets to take back the house. And that’s precisely what happened in the mortgage crisis.
And the banks created a lot of their own problems. The housing market had been so hot that financial institutions had just kept lending and lending, and were less and less careful about allowing for possible downturns in the housing market. They had been giving large loans, often very close to 100 percent of the purchase price, and when the housing market crashed, the banks found that the assets acting as collateral on their loans were not worth as much as the outstanding debts. That’s at least partly their fault for not making an adequate assessment of the housing market.
If you buy a house for almost $600,000, and a few years later it’s worth less than $200,000, the rational and logical financial decision is to walk away from the mortgage. That’s exactly the situation of one couple, from Salinas, California, described in this excellent law review article from 2009 on the mortgage crisis. Here’s how the author described their financial situation:
The central argument made in that article is that too many people think of these issues in moral terms, and banks and other lenders and politicians do their best to try and focus on the moral issue, telling people that they have a moral obligation to pay what they owe. But, as the author also points out, banks and other businesses make judgments not based on what is right or wrong, but based on what is legal and profitable.
Borrowers can and should, he argues, do exactly the same thing: take the moral stigma out of it and focus on the legal and financial issues. If the mortgage contract says that the penalty for stopping payments is that you hand the house over to the bank, then do that: stop making payments, and let the bank take the house. In some states, the bank can sue you for the difference, but that debt also can be discharged in bankruptcy, unlike the loans we’re talking about in this thread.
And just a few months after this article was first published, the biggest residential real estate deal in American history ended in exactly the same way: the purchaser decided that it wasn’t going to pay the mortgage, and handed the keys–thousands of them–back to the lenders. Tishman Speyer Properties had spent $5.4 billion in 2006 to purchase the Stuyvesant Town and Cooper Village apartment complexes in New York City, but after the housing crisis hit, those properties were worth only about $2 billion, so Tishman Speyer just said to the lenders, “Hey, here’s your property back.” Everyone understood that this was a rational business decision, allowable under the terms of the loan, and yet the banking industry was still carping at individual homeowners about the moral obligation to pay their underwater mortgages.
Rational and logical may not necessarily be moral or what is good for the aggregate over a period of time. Look, as an example, at the decision not to prosecute certain types of theft or vandalism. What is the real impact? It’s to raise prices on everyone, those who engage in that criminal behavior and those who are honest or non-destructive. The rational thing to do, in an area where you won’t be prosecuted for theft under a certain value is just to steal what you want that meets that criteria.
The rational thing to do if you won’t get caught cheating on a test and the outcome has significant monetary or other value is to cheat on that test. If maximizing pleasure is a desire infidelity may be rational. If letting someone die, who isn’t actually terminal, to harvest organs to sell or to save more than one life is arguably rational. Do you really think living in a purely rational world is good?
But the debt has already been incurred. You can’t influence past behavior via moral lessons, so there’s no moral hazard with respect to “irresponsible” borrowing (which isn’t really the issue here – it’s predatory lending). Nobody is saying that every 20 years, you suddenly spring a student debt jubilee and change nothing about how lending works. You reform the system, and address the existing irrational state of affairs to address the exigency of the existing population.
It’s like leaving people in jail for 45 years for crimes that are no longer crimes. For what? To teach what to whom, why?
You most definitely influence future behavior by actions that change the incentives. All behavior has happened in the past, correct? Why have any penalties for poor decisions besides the immediate such as impact from jumping off a cliff?
Why did folks borrow money that had such a poor chance of a decent return on investment? Is there no difference between one who researches the market and borrows $15k to go help fund an education at a public university for an engineering degree vs someone who goes out of state and borrows $60 plus for gender studies? One of these people is a fool. One isn’t. Why should society be on the hook for adults who choose foolishly?
And back to the subject of forgiveness or amnesty or whatever. Does an immigration amnesty lead to a reform and a tightening of borders? No. Does leniency in prosecution lead to a reduction in crime? Crime statistics, perhaps, but criminal behavior?
And if you want folks to have more money to spend, obviously in an inflation free world, why not do general stimulus payments to the populace? That way you aren’t distorting specific markets nor are you penalizing savers and rewarding the spendthrift.
Oh. I appreciate this concession. This is ultimately about penalizing people. You think debt is punishment. You’ve been dancing around it with the suggestion of some kind of utilitarian argument, but you think they’re bad boys and girls, and they should be treated as such.
This clarification avoids the frustrating exercise of me trying to understand why you keep talking about influencing future behavior when it’s already been explained why that’s not relevant. You aren’t a utilitarian, you’re a retributivist. You want the government to harm the right people.
Perhaps not, but in the case of mortgages, stopping payment when you’re badly underwater and letting the bank take the house, as happened in the mortgage crisis, is also morally sound. As I said, the mortgage is a contract that spells out very clearly, before the fact, what is required of both parties, and what the consequences of default are. By stopping payments and handing the keys over to the bank, the borrower is completely within the parameters of the contract, which makes their actions not only rational and logical, but legally but morally justified.
Look, if you want to keep finding new analogies when your previous one gets ripped apart, have at it, but I’m not following you around the thread in a game of “Here’s a new hypothetical.”
I do believe it’s a good thing we have a legal process that allows people to walk away from debt. When I took out loans for my mortgage or an automobile, the bank understands that they’re accepting a risk that I might default on the loan. They charge me interests based on their risk assessments and there are provisions in my contract stating when I must make payments, the minimum I must pay, and what happens when I default. I owe about $140,000 on my house right now. If it was suddenly valued at $70,000 I would have no qualms about strategically defaulting. Banks and businesses do this without hesitate when it makes sense so why shouldn’t I?
The mortgage crisis was caused by reckless and greedy lenders giving out loans they knew would result in default, but I don’t see you bemoaning the moral lapse of the housing industry.
The college debt situation has some similarities to the mortgage crisis. When there are little or no qualifications for getting nearly unlimited amounts of loans, consumers will take out huge loans and prices will skyrocket. Right now there is no downward pressure on student loans amounts or school prices. Any student is free to take out just about as much loans as they want. The lender won’t say no. The school won’t say no. If a C+ student wants to go to a $50k/year school and meander along for 5 years to get a degree in a low-paying field, no one will say no. Schools raising their prices isn’t the cause of the loan crisis. The crisis is caused by lenders making a nearly unlimited spigot of money available to students. If lenders took a more critical look at the student’s ability to repay the loan, students would only be able to take on an appropriate amount of debt.
After the mortgage crisis, the amount of paperwork needed to get a loan has greatly increased. No longer can a part-time cashier get a $500k mortgage. There are a lot more requirements and income verification needed, which ensure someone is only taking on a mortgage which is appropriate for their financial situation. Without something similar in college lending, the problem isn’t going to be fixed with things like loan forgiveness.
I can’t denounce every injustice in every thread now can I?
That’s the thing, tho, with student loans - lenders are almost guaranteed to get repaid, with interest, since a student loan cannot be discharged by bankruptcy. These loans a great deal for lenders.
The similarities with mortgages are not that strong, tho. With real estate, the bank can take back the house or building, and then resell it. With a college education, the bank cannot take that back - it belongs to a person and cannot be given back.
The unlimited access to loans was what was compatible. Before the mortgage crisis, pretty much anyone could get qualified for pretty much any mortgage and very unqualified people got way too much in loans that they had no hope to pay back.
The bankruptcy immunity for student loans should probably be changed. If lenders had a risk of not getting paid, they’d be more likely to turn down loans to students who are unlikely to pay it back. I could see bankruptcy discharge being done on a graduated scale, where under $50k is not dischargeable, $50k-75k is 50% dischargeable, $75k-$100k is 75% dischargeable, and $100k+ is 100% dischargeable in bankruptcy. So if a bank wants to loan a student $200k, they would a lot of motivation to make sure it’s a good loan. Right now there is no motivation for them since, as you say, they know they’ll get it paid back no matter what.
Ah. I see - yes, agree.
Because college loans tend to equate to “educated populace”, which is an ongoing benefit to the nation at large. A more educated population leads to advancement in long-term economic prospects across the board (Underwater Basket Weaving notwithstanding) while mortgage or auto loan forgiveness does not.
That makes no sense. They already have the education. Forgiving the loans doesn’t make them more educated, it just puts more money in their pockets.
The education is of public benefit, though- that’s why it could be justified as a matter of public policy in a way that consumer loans could not.
Again, the benefit has already been obtained. Not to mention the ridiculous idea that any but a few people who have outstanding college loans have benefited the public in some way that should be rewarded.