Are Conscientious Student-Loan Defaulters a Threat?

Some think defaulting on student loans might be the new draft-card burning, and could force the government to address rising tuition and $1.2 trillion in student debt.

A group of students called the Corinthian 100 purposefully defaulted on their student loans. It was a play to protest Corinthian Colleges, a private, for-profit school chain that has been called predatory and has been accused of misleading low-income students into considerable debt for degrees that some have called worthless. The protest worked. On June 8, the government announced that it would forgive the students' loans.

Each year, tuition rises at private and public colleges, as does the amount of debt students carry with them after graduation. So while the Corinthian students had somewhat unique circumstances (for-profit degrees have recently come under attack), their defiance raises the question: What if hundreds of thousands or even millions of students defaulted on their loans as a form of protest—a massive movement to "burn" the promissory note?

Andrew Ross, a professor at New York University, wants people to do just this.

"It's a widespread consensus that this is a huge crisis for future generations," Ross says.

Ross was an early member of the Occupy Wall Street movement. He is the author of a book called Creditocracy: And the Case for Debt Refusal. He also contributed to the Debt Resisters' Operations Manual, published by Strike Debt, an offshoot of the Occupy movement.

The Occupy movement has focused a lot on debt, having created organizations like Rolling Jubilee, which buys health care and student debt (about $32 million so far, according to its website), and the Debt Collective, which helped organize the Corinthian student-loan protests.

The reason for the debt focus, Ross says, is because an education is the best way to improve a person's standing in life, yet the U.S. educational system is widening gaps of inequality. "It's been turned into the cruelest of debt trap," Ross says, "where students from only the most well-heeled families can escape."

Student Debt Crisis is another organization that focuses on student debt. And while it supported the Corinthian 100, Executive Director Natalia Abrams doesn't ask people to default. What the group has done is propose two federal bills in 2012 and 2013 that would have repurposed money from corporate welfare to help pay off student debt, a move the group believes would have stimulated the economy from the bottom up.

More than 1.2 million people signed a petition in support, but both bills fell short in Congress. Abrams advises against voluntary default because "it's just so detrimental, I can't in good faith ask people to do that."

Student loans are different than almost any other type of debt. Adam Minsky, a lawyer who specializes in student loans, says the government doesn't even have to take a debtor to court. Without a court order, the government can garnish wages (typically around 15 percent of income), and withhold any federal stream of money, like tax refunds and Social Security.

"They can literally pursue you until you die," Minsky says.

In nearly two dozen states, defaulters can have their professional licenses revoked. In a few, they can even lose their driver's licenses. With all this, plus back interest, students who default will likely end up paying much more than they originally borrowed. In addition, defaulting can ruin someone's credit.

"Credit companies don't care if you didn't pay the loan because you were deadbeat or making a protest," says David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institute.

What hasn't been talked about much, however, is the potential impact on the economy if such a movement were to actually gain popularity.

The average college senior who graduated from a public or private nonprofit college in 2013 owed $28,400, according to a report by The Institute for College Access & Success.

Some simple math would lead one to conclude that if 1 million people were to default, this would mean a $28 billion bargaining chip for "conscientious student-loan defaulters."

"You really have to break that up in two different parts," says Douglas Webber, an associate professor of economics at Temple University. "There are government-backed student loans and private student loans, and it's very easy to predict what will happen in the private market."

In the private market, Webber says, that massive default would increase existing student-loan interest rates. Lenders would reduce the amount of money they loaned to students, and possibly, stop lending altogether.

"It's a little more difficult to talk about what will happen on the government end," Webber says. The government would recoup it somewhere, either from taxes or cuts to services, or it could just lump it into the national debt ($18.2 trillion and counting), he says.

The federal government can sue universities for that money. But this is unlikely to happen unless, as in the Corinthian case, there are legal grounds to believe the school preyed upon its students. Most likely the government will reclaim it from the debtor.

The idea of a wide-scale conscientious student-loan defaulter movement has even less of an impact given that about 650,000 people defaulted on their loans last year, and there was no irreversible effect set in motion on the part of banks or the government.

Ultimately, both Webber and Wessel say, any impact to the economy would be minimal.

What a collective default could do, though, they say, is focus political awareness around rising costs of tuition, and an educational system that is increasingly stratified and unequal.

What Ross and the Debt Collective hope to accomplish is to emphasize that an education is a social right, and that the U.S. should join the growing list of countries that provide a free college education. With a collective default, Ross says, someone's bound to pay attention.

"It's not just about money, it's about democracy," Ross says. "If you look back at the civil-rights movement, one of the most righteous demands was to open the collegial doors to a population who had been denied the right to an education. And now the right to education has been replaced by the right to access educational loans."