Deadbeat Creditors and Other Tales of Moral Hazard

Some twenty years ago, three years out of law school, my partner and I attended a friend’s wedding in New Jersey.  Both of us had racked up a lot of debt and were struggling to find permanent jobs in NYC.  I was paying more than half the money I made each month to private law lenders in interest alone, and, as what I earned was barely enough to rent an apartment, I knew something was going to have to change.  Ironically, I had chosen to go to law school because my family needed money and I wanted to help them out.  My dream had been to go to art school, but I maturely rejected that path in favor of breadwinning.  A lot of college students from the working class make similar decisions.  Little did we understand how the system was stacked against our success. 

At the wedding, a bunch of us were lamenting our tens of thousands and hundreds of thousands of dollars of debt – trading stories about choices foreclosed, children not born, houses not purchased, dreams deferred, as the educated young from non-privileged backgrounds are wont to do.  We dreamed about debt relief and what it would be like if we could get a fresh start.  Maybe this would allow us to move someplace more congenial or find a job with a real career path.  On hearing this discussion, however, one attendee took to chastising us for trying to avoid our debts.  “Even if they told me I wouldn’t have to repay my loans, I would!” he said fiercely.  We all hung our heads, shamed.

As David Graeber has so masterfully demonstrated in Debt: The First 5000 Years, debt has long been entangled with morality and power.  An element of coercion resides in every loan made, from one with power to one in need.  Or, as Graeber puts it, “A debt is a promise corrupted by both math and violence.”  This is one of the reasons that many societies have created periods of relief, such as the “jubilee” year found in the Judeo-Christian Bible.  Every fifty years or so, all debtors were released from the bondage of their debts (which, in many cases, was actual physical bondage to lenders).  Periodic resets were necessary to ensure that the system did not become so unfair that it no longer worked.  Without these resets there is danger that those with the power to lend will abuse this power and ever more so as time goes on. 

Student borrowers have not felt relief for a very long time, indeed.  And the power of lenders, especially private lenders and companies that “service” loans made by state agencies, has grown over this period as well.  For example, the kind of bankruptcy reform pushed by George W. Bush in 2005 unreasonably took away the possibility of discharging student loans through the bankruptcy process, while making it easier for big businesses to use bankruptcy as a way of evading debts.  Johnson and Johnson, a company making billions in profits, are currently using bankruptcy to avoid paying damages to women who got cancer from using their baby powder.  Trump has filed for bankruptcy six times.  It’s not a fun process, but if you get in over your head, there is a way out.  But not for students!   Even if you do everything you can to better yourself, putting yourself through school, working as much as possible, you might still end up having your social security payments garnished to repay your student loans, as thousands of Americans do.

Bankruptcy reform also made lending to students much more lucrative for private lenders.  For several years, student borrowers, especially those without college-educated parents who could advise them, were unethically directed to private lenders who charged higher rates of interest, added unnecessary fees wherever possible, and failed to provide forbearance measures during times of unemployment or other life hardships.  A person struggling with cancer could easily see an original loan double or even triple in size as interest compounded and late fees racked up.  Something is wrong when the woman suffering ovarian cancer from asbestos in her hygiene product sees her debt triple while the company that gave her cancer gets to keep its profits and shield itself from liability through bankruptcy. 

During its heyday, before the (not-for-profit) federal direct loan program was able to gently push it aside as the primary lender to students in 2014, the giant private lender Sallie Mae made tens of billions of dollars in profits from fees and interest.  Indeed, in some years the fees were more profitable than interest.  Sallie Mae’s CEO, Alfred Lord, was regularly paid $200,000,000 every year.  As with so many “partnerships” between the public and private sector, the US government would ensure defaults, so Sallie Mae’s loans were risk-free.  That encouraged them to market aggressively, especially to to poor, first-generation, and working-class students. 

As the saying goes, plus ça change, plus c’est la même chose.  Sallie Mae became Navient and its business model shifted from lending to servicing, handling $237 billion worth of loans to more than six million people.  In the words of the Consumer Financial Protection Bureau, “The company has cheated borrowers at every stage of repayment, including servicemembers, veterans with disabilities, low-income borrowers, and seniors.”  After years of lawsuits alleging and demonstrating a host of abuses, the federal government finally “demoted” it as its primary servicer.  Navient is still in business.  In 2021 it made $370,000,000.

Those without knowledge of the astronomical profits made by lenders, the rules that stop borrowers from seeking redress, or how individual borrowing has had to replace public subsidies of higher education as state budgets shrink in the face of “tax relief” for the wealthy may judge debtors who do not repay their debts in full as immoral “deadbeats.”  They also see debt relief as an unfair boon to those “immoral” borrowers.  This is the line being peddled by most Republicans. 

If the system were fairly constructed, they would have a point.  But it’s not. The power has too long been in the hands of those who profit from others’ necessity.  We are not talking about discharging debts incurred over private jet travel, too many houses, or even stupid business practices.  Student borrowers are trying to do the right thing, make the mature decision, become breadwinners.  The fact that they have been used as the goose that lays the golden egg for investment bankers is what is morally obscene. 

Biden’s relief plan is not that great. It is a fairly small broad brush for all borrowers, even those who may not be having any problems repaying their debt, while leaving tens of thousands with unmanageable debt that will follow them into retirement and beyond. Still, it is better than nothing. And it sends an important message that we can do this differently, if we want.  True, it is not a jubilee reset, but it gives me hope we might get there eventually.  And never underestimate the power of $10,000 to rewrite a young person’s history and rekindle their dreams about what is possible for their lives.  For hundreds of thousands of working-class borrowers, this will be an individual jubilee. 

To those working-class Republicans who will benefit from this but who feel guilty about it or who talk about “refusing the relief” – stop!  This is what a responsive government does.  And understand that the Republicans’ fighting against the bill are not standing up for you or the taxpayer, but for the private companies who continue to profit out of our necessity. 

Allison L. Hurst, Oregon State University

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