Monday, June 13, 2011

Defaulting on your student loans

There's a controversial article over at Above The Law where the author, Elie Mystal, shares his experience defaulting on his student loans from law school.  It certainly sounds like the author thinks he's "above the law"; he has a remarkably cavalier attitude towards remaining essentially impoverished so there's nothing for the debt collectors to take:
Actually, I’d go so far as to say that living in world where your creditors are constantly angry with you is kind of liberating. I mean, I pay my federal loans back, so it’s not like anybody is going to garnish my wages. Beyond that, what can they really do? Send in a SWAT team? Every six or eight months they call and they tell me that I need to be paying more money. Every six or eight months I send them a pay stub and say, “Really?” They threaten. I say, “Well, you could take this money I am paying you or I could stop paying, you could sue me, and in two years a judge will order me to pay you pretty much what I had been paying you.” It’s not like I have any assets. You don’t get into the situation I’m in if you have stocks and bonds and trust funds and all that. You get into this situation from owing more money than you can pay back.
You want my advice? Having your student debts go into default is survivable. The world will not end. Your girlfriend will not break up with you. The creditor will not show up at your house with a guy named Rocco looking for a few hundred dollars.
Survivable, but not desirable. If I could go back 11 years ago, I wouldn’t have taken out the debt in the first place. If I could go back eight years ago, I would have made minimum payments to keep them out of default. Of course, if I could go back 30 years ago, I’d tell my mom to invest in Apple. Whatever. Hindsight is blinded by obviousness.
And so I refuse to be an indentured servant to my debts. Life is too short. You can never be truly free of your debts (until they’re paid off), but you can be free from the fear of them. Debt collectors feed off of your fear. And most people are all too willing to allow fear to dictate their decisions.
This attitude really rubbed me the wrong way and maybe that's the point, but for some more accurate information about the legalities and rules around defaults and discharging student loans you can turn to The Atlantic's excellent rebuttal to the Above The Law article which sets the record straight:
But unless everything I've ever been told about settling student loans is wrong, Mystal is giving people a dangerous misimpression that they can default and get their debt burden substantially reduced.  I've seen some cheering for his post on various blogs that link it, presumably because they think this is a way to really stick it to the banks.  But I would hate to see a lot of people follow his lead, and then find out that they've trashed their credit score--and in some cases, their employment prospects--in order to get a "deal" that's no better than what they could have achieved by just making their payments.  Can any readers comment? Anyone have success settling student loans for pennies on the dollar?

Update: Commenter SPQR9, who IIRC is a bankruptcy attorney, says
Like you, I think Mystal is completely wrong.  For that matter, last time I checked, student loans had no statute of limitations in addition to being largely non-dischargeable.  And the "hardship" provision through the DOE is largely "so you are a quadraplegic?  Well, maybe we'll give you a hardship discharge ..."
In other words: it's a very, very bad idea. And trying to stay judgement-proof for 60 years is likely to be more miserable than repaying your loans.
That last point is really key - there is almost no getting out of student loans and if you try you will likely be more miserable for a longer period of time than if you had just paid up.

What do you think about strategic defaults or Mystal's article?

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  1. I just can't get into the mentality of people like this, where they realize that they made bad decisions but leave it to someone else to take on the burden of cleaning up after their mess. Student loans will forever be on your 'record' and even bankruptcy won't wipe them out, so this person definitely will not end up with the last laugh in this case.

  2. Personally, I'd rather live a tougher life for a few years, pay them off, and be done with it.

  3. Money Beagle and Danielle - Agreed on both counts!

  4. wow that's so irresponsible. They do realize that somebody is paying for their loans right? By defaulting, they offset the burden to the common taxpayer.

    It's one thing to default due to hardship and events beyond your control, but to do this strategically? People like this piss me off.

  5. This is really idiotic on their part. Don't they even realize that their due debt amount is being tracked on a legal basis and no matter whatever they go through, they will have to clear off the borrowed money by hook or by crook?