I don’t know whether the Supreme Court’s decision on student loan forgiveness on Friday was right or wrong on legal grounds. I do know that it will most likely cause a lot of delinquencies and defaults. Many borrowers simply don’t have the money to repay. You can’t squeeze blood from a stone.
After the court handed down its ruling, I called Constantine Yannelis, an associate professor of finance at the University of Chicago Booth School of Business. In May, he and two co-authors released a research brief that reached a surprising and concerning conclusion: By and large, borrowers who were allowed to pause payments on their student loans didn’t use their spare cash to pay down other debt or build up savings. Instead, they increased other borrowing. And while they were free to keep paying down their student loans if they wanted to, they mostly did not.
Whether the borrowers behaved wisely or not is a fair question. But however you feel about that, the fact remains that a lot of them are in no shape to resume payments on loans that they were told by the Biden administration last year they would never have to think about again.
“I’m really concerned about a wave of delinquencies and defaults once payments resume,” Yannelis told me. “Policymakers should be treating this as a five-alarm fire.”
Yannelis predicted that rather than file for bankruptcy, most stressed borrowers would work out repayment plans with their lenders. The terms will be challenging. They will find it hard to buy homes and cars, and “many may enter wage garnishment,” in which money goes straight from their paychecks to lenders, he said.
This month, the Consumer Financial Protection Bureau reported in a blog post that “about one in five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.”
“This is going to be extremely difficult for tens of millions of borrowers,” Persis Yu, the deputy executive director and managing counsel of the Student Borrower Protection Center, told me.
I wasn’t a big fan of the Biden administration’s student loan forgiveness plan. I argued that it was poorly targeted, providing relief to borrowers with good incomes who didn’t need any help. I said that the best way to reduce defaults is to narrow eligibility for forgiveness while weeding out rotten colleges that don’t provide students with the wherewithal to pay what they owe.
I still feel that way. But as I also wrote, once you create an expectation among borrowers that they won’t have to repay their loans, it’s a big problem to go back and tell them they owe the money after all.
“Once you get used to something, it’s hard to switch,” Maria Douneva, a behavioral scientist and corporate trainer in Berlin, told me in March. “People get used to new situations quite quickly, and that becomes the new default. For a while it was normal that you had to pay back your debts. Then the new normal became that you don’t.”
What now? My colleague Ron Lieber advises hard-pressed borrowers to enroll in an income-driven repayment plan, which bases the monthly payment on one’s income. The Biden administration has proposed a more generous version of that, although as Lieber wrote, “legal challenges to this plan are possible as well.”
One problem is that a lot of borrowers have lost track of who services their loans. (Log on to studentaid.gov to find out, advises Kristin McGuire, executive director of Young Invincibles.) Even if borrowers do manage to locate their loan servicers, the servicers lack enough staff to deal with millions of borrowers at once. Fine points of constitutional law aside, it’s going to be a mess.
The Readers Write
Robert Litterman’s proposal for carbon-linked bonds reminded me of the central-bank-sponsored, bond-backed digital currency that got things moving in Kim Stanley Robinson’s novel “The Ministry for the Future” (2020). In that case you could buy a value-protected currency with carbon offsets and get protection against the possibility of single-government currencies blowing up under the pressure of a climate crisis. Much freakier than Litterman’s soberer idea — but I guess Robinson deserves a shout-out.
Thomas Barson
East Lansing, Mich.
Parking lots are the most rapidly exploitable, widely distributed renewable energy resource we have. Just target some modest tax incentives at installing solar parking lot canopies with on-site storage batteries and grid chargers. Shade enormous asphalt heat islands. Build a matrix of reliable, networked neighborhood microgrids. Widely distributed, cheap, reliable neighborhood power production and storage instead of exclusively remote, unreliable utility monopoly power.
Jerry Wagner
Santa Rosa, Calif.
Quote of the Day
“Catch a man a fish, and you can sell it to him. Teach a man to fish, and you ruin a wonderful business opportunity.”
— attributed to Karl Marx by Erin Barrett and Jack Mingo, “W.C. Privy’s Original Bathroom Companion” (2003)
Peter Coy has covered business for more than 40 years. Email him at [email protected] or follow him on Twitter. @petercoy
Source: Read Full Article
Home » Analysis & Comment » Opinion | The Sheer Pain Coming From the Student Debt Decision
Opinion | The Sheer Pain Coming From the Student Debt Decision
I don’t know whether the Supreme Court’s decision on student loan forgiveness on Friday was right or wrong on legal grounds. I do know that it will most likely cause a lot of delinquencies and defaults. Many borrowers simply don’t have the money to repay. You can’t squeeze blood from a stone.
After the court handed down its ruling, I called Constantine Yannelis, an associate professor of finance at the University of Chicago Booth School of Business. In May, he and two co-authors released a research brief that reached a surprising and concerning conclusion: By and large, borrowers who were allowed to pause payments on their student loans didn’t use their spare cash to pay down other debt or build up savings. Instead, they increased other borrowing. And while they were free to keep paying down their student loans if they wanted to, they mostly did not.
Whether the borrowers behaved wisely or not is a fair question. But however you feel about that, the fact remains that a lot of them are in no shape to resume payments on loans that they were told by the Biden administration last year they would never have to think about again.
“I’m really concerned about a wave of delinquencies and defaults once payments resume,” Yannelis told me. “Policymakers should be treating this as a five-alarm fire.”
Yannelis predicted that rather than file for bankruptcy, most stressed borrowers would work out repayment plans with their lenders. The terms will be challenging. They will find it hard to buy homes and cars, and “many may enter wage garnishment,” in which money goes straight from their paychecks to lenders, he said.
This month, the Consumer Financial Protection Bureau reported in a blog post that “about one in five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.”
“This is going to be extremely difficult for tens of millions of borrowers,” Persis Yu, the deputy executive director and managing counsel of the Student Borrower Protection Center, told me.
I wasn’t a big fan of the Biden administration’s student loan forgiveness plan. I argued that it was poorly targeted, providing relief to borrowers with good incomes who didn’t need any help. I said that the best way to reduce defaults is to narrow eligibility for forgiveness while weeding out rotten colleges that don’t provide students with the wherewithal to pay what they owe.
I still feel that way. But as I also wrote, once you create an expectation among borrowers that they won’t have to repay their loans, it’s a big problem to go back and tell them they owe the money after all.
“Once you get used to something, it’s hard to switch,” Maria Douneva, a behavioral scientist and corporate trainer in Berlin, told me in March. “People get used to new situations quite quickly, and that becomes the new default. For a while it was normal that you had to pay back your debts. Then the new normal became that you don’t.”
What now? My colleague Ron Lieber advises hard-pressed borrowers to enroll in an income-driven repayment plan, which bases the monthly payment on one’s income. The Biden administration has proposed a more generous version of that, although as Lieber wrote, “legal challenges to this plan are possible as well.”
One problem is that a lot of borrowers have lost track of who services their loans. (Log on to studentaid.gov to find out, advises Kristin McGuire, executive director of Young Invincibles.) Even if borrowers do manage to locate their loan servicers, the servicers lack enough staff to deal with millions of borrowers at once. Fine points of constitutional law aside, it’s going to be a mess.
The Readers Write
Robert Litterman’s proposal for carbon-linked bonds reminded me of the central-bank-sponsored, bond-backed digital currency that got things moving in Kim Stanley Robinson’s novel “The Ministry for the Future” (2020). In that case you could buy a value-protected currency with carbon offsets and get protection against the possibility of single-government currencies blowing up under the pressure of a climate crisis. Much freakier than Litterman’s soberer idea — but I guess Robinson deserves a shout-out.
Thomas Barson
East Lansing, Mich.
Parking lots are the most rapidly exploitable, widely distributed renewable energy resource we have. Just target some modest tax incentives at installing solar parking lot canopies with on-site storage batteries and grid chargers. Shade enormous asphalt heat islands. Build a matrix of reliable, networked neighborhood microgrids. Widely distributed, cheap, reliable neighborhood power production and storage instead of exclusively remote, unreliable utility monopoly power.
Jerry Wagner
Santa Rosa, Calif.
Quote of the Day
“Catch a man a fish, and you can sell it to him. Teach a man to fish, and you ruin a wonderful business opportunity.”
— attributed to Karl Marx by Erin Barrett and Jack Mingo, “W.C. Privy’s Original Bathroom Companion” (2003)
Peter Coy has covered business for more than 40 years. Email him at [email protected] or follow him on Twitter. @petercoy
Source: Read Full Article