"Safety in Numbers": Why Student Loan Repayments Will Barely Resume

As reasonable folk denounce student loan forgiveness with one voice, it’s easy to forget that the issue may already be… academic. Almost 99% stopped making payments on student loan debt when Covid started. The government has repeatedly delayed the resumption of payments. The latest story is that obligations resume on January 1, 2023. Suppose, for the sake of argument, that this really is absolutely positively definitely the ultimate final last extension. We still face a massive question:

How many students will actually start repaying their loans again?

Sure, a few debtors will follow the revised rules to the letter. We saw this during Covid: Some people sharply change their behavior when the rules change because they respect official rules. Many other debtors, however, will try to figure out whether they really have to pay. During Covid, we saw this too: Instead of just following the posted rules, people look around to see whether other people are compliant. If other people aren’t following the rules, why should I?

The logic is clear: There’s safety in numbers. If hardly anyone else is wearing a mask, the odds you’ll get punished for failing to wear yours is trivial. In a like manner, if hardly anyone else is making their student loan payments, the odds you’ll get punished for failing to make yours is trivial.

Can’t the government just make the payments harsh enough to terrify almost everyone back into compliance? In theory, sure. In practice, though, “Safety in numbers” is a high hurdle. Ponder these pieces on the sanctions for non-payment.

From Saving for College:

Having late payments on your credit report can negatively impact your credit score and make it more difficult to open credit cards, borrow money or even get an apartment. 

In the event that you can get a loan, you’re likely to pay higher interest rates.

The longer your loans are past due, the worse the ramifications become. After your direct federal loans are more than 270 days past due, they enter default. 

This process happens much quicker for other loans. Private student loans enter default after 120 days, and Federal Perkins loans can enter default immediately after a missed payment.

Once you enter default, you may face a myriad of consequences. 

Your credit will take a much larger hit than it would for just a late payment. You may also face wage garnishment or other legal action. 

From CNBC:

The government has also been known to sue borrowers. The Department of Justice reports that in the past two years, over 3,300 student loan borrowers have been sued for defaulting. In almost every case, the borrower loses. If the government wins, they can place a lien on your home and even force a sale.

From The Balance:

There is no statute of limitations on the collection of federal student loan debt. Although the government may forgive student loans in certain cases, this does not apply to loans in default. Here are a few areas affected by defaulting on student loans:

• Credit score: This information will be reported to the credit agencies and will affect the borrower's credit rating. That hurts the person's ability to borrow money or even get a job in the future.

• Government payments and wages: The government can also withhold federal income tax refunds, garnish wages, or withhold Social Security payments to settle the debt.

• Career and licensure: Depending on how efficient the government is in updating its electronic records, it can affect a person's ability to renew a driver’s license or professional license and even prevent the borrower from enlisting in the Armed Forces.

Notice: Most of these consequences become a rounding error if non-payment is widespread. Who cares about a few thousand lawsuits a year if you’re one delinquent borrower out of 10 million? What are the odds that states will withhold driver’s licenses from many millions of twenty-somethings?

Even credit rating agencies will think twice about holding non-payment against millions of salaried workers who want a home loan. When non-payment of student loans is rare, non-payment signals a general lack of creditworthiness. When non-payment of student loans is ubiquitous, non-payment mostly signals a lack of willingness to be a sucker.

If half of people don’t pay their student debt, being scared of lending them money is a lot like being scared of a U.S. veteran who followed murderous orders in a war zone. What matters is not moral similarity but actuarial similarity. Morally, murder is murder; actuarially, however, following murderous orders in a war zone barely predicts murdering people on your own initiative in peacetime. So while you might deem Mr. “I Was Just Following Orders” a full-fledged war criminal, it makes little sense to fear for your life in his presence.

What is to be done? Let me start by unhelpfully pointing out that the student loan suspension was outrageous from the get-go. The federal government was handing out massive piles of free money to ensure that meeting your pre-Covid financial obligations was easy. Once the government does that, going on to declare that you don’t have to meet your pre-Covid financial obligations was a travesty from almost any point of view.

Yes yes, but what is to be done now?

First and foremost, this is a perfect time to end government-supported student loans forever. To say, “We thought we could avoid the slippery slope from subsidized loans to free college for all. We were utterly wrong, so we’re killing the program.” At minimum, this is a great time to drastically raise the interest rate to compensate taxpayers for much higher repayment risk going forward.

Second, we clearly need harsh enforcement, ideally backed by new draconian punishments. This won’t just directly encourage individuals to resume repayments. It will help us surmount the “safety in numbers” problem. Without some eye-bugging public examples of the consequences of default, innocent taxpayers will be left holding a bag with almost $2 trillion in student debt.

Unfair? Give me a break. Due to the suspension of all interest payments plus massive inflation, the real value of student debt has already fallen 13% since March. Borrowers have been getting an insanely great deal. It’s high time for this madness to stop.