It’s not often that you get advice on such a respected media platform as the New York Times to default on your loans, certainly not federally-subsidized student loans that cannot be forgiven in bankruptcy and with the prospect of garnished wages and withheld incomes tax refunds.
But that’s exactly what happened when Pulitzer Prize-nominated author Lee Siegel wrote an op-ed piece in the Times on Saturday.
Siegel wrote that when confronted with the decision between taking a job in a well-paid industry that he hated, or defaulting on his student loan payments, he made the less common decision. “I chose life. That is to say, I defaulted on my student loans,” he wrote.
“As difficult as it has been, I’ve never looked back,” he said. “The millions of young people today, who collectively owe over $1 trillion in loans, may want to consider my example.”
This is very poor advise, according to just about every financial expert familiar with the pitfalls of lingering, defaulted debt from college loans that can haunt a borrower for decades.
The federal government has many different income-driven repayment plans to help graduates reduce their monthly payments on student loan debt. The Pay As You Earn Repayment Plan, or Income-Based Repayment Plan (IBR), offer the ability to pay monthly payments that are as low as 10 percent of discretionary income. Moreover, after 20 years of qualifying payments, your debt goes away completely.
Contrast that with this scenario: If you straight out default, in the manner Siegel wrote, the government can garnish 15 percent of your discretionary income and will withhold any federal income tax refunds you would have had coming your way until you resolve your student loan obligation. Even your spouse’s tax refund can be withheld due to your default if you file jointly.
Oh, and by the way, your credit profile takes a major hit, making it difficult or much costlier to buy a home, a car or get new credit cards — mostly because of higher interest rates for borrowers who have defaulted. Furthermore, Chapter 7 bankruptcy protection doesn’t cover federally subsidized loans.
Throughout his Times piece, Siegel actually makes a good case for reversing his own action:
“Forty years after I took out my first student loan, and 30 years after getting my last, the Department of Education is still pursuing the unpaid balance,” Siegel writes. “My mother, who co-signed some of the loans, is dead. The banks that made them have all gone under. I doubt that anyone can even find the promissory notes. The accrued interest, combined with the collection agencies’ opulent fees, is now several times the principal”
That excerpt from his Op-Ed piece should be enough to dissuade student loan borrowers from following Siegel’s lead.
His ordeal seems far-fetched, illogical and unnecessary — compared to simply trying to pay the loan with help from the government’s own plan to reduce payments due to financial hardship — or by any other means short of a willful and uninformed default.