Why Debt Discharging Is Often A Good Thing.
Finances are complicated. We acquire many kinds of debt in life, but some kinds are nearly impossible to shed if they can't be repaid. That needs to be fixed.
Hello, friends,
In last week’s edition of The Progressive Cafe, we talked about how transphobic legislation is endangering people with cancer and other medical conditions.
This week we’re dialing back the dystopia a little (very little), and making our topic of conversation about the discharging of various kinds of debt. This is an area (or, as we’ll see, areas) I’m not an expert in, so be prepared for a few URLs linking you to resources I come across.
But, first, the wins this week! On Tuesday, a certain former President was arraigned for crimes. This was good, but it sucked the air out of other good news. For example, Wisconsin Supreme Court Candidate Janet Protasiewicz won her race to become the swing vote on Wisconsin’s, well, Supreme Court. This is a huge win that might lead to the un-gerrymandering of Wisconsin.
Additionally, also on Tuesday, Progressive Chicago Mayor Candidate Brandon Johnson won his race to, well, be Mayor of Chicago!
I guess Tuesday was just a good day all around?
Anyway, let’s get into - or, perhaps, out of! - debt!
How Does Debt Typically Work?
First of all, it helps to try to identify what kind of debt we’re talking about. This is a non-exhaustive list, but there’s student debt, medical debt, housing debt such as mortgages, car debt, credit card debt, and business debt. Each is a little bit different.
While these are all confusing, they all follow the same basic pattern of functionality. A person, for whatever reason, needs money. They approach someone who has it; this can be a friend or family member, but for the sake of our discussion let’s assume it’s a financial institution. We’ve talked about banks - in particular, the idea of a public bank - before, but there are all sorts of other financial institutions which exist. The institution in many cases examines that person’s credit, then loans that person the money requested.
Now that the person in question has money to pay for what they wanted, they get it. Cool, right!
Except that now they owe the lender the original sum - plus interest.
See, loaning money is a profit-driven business, and to an extent this is understandable. There’s always the risk of default, and there’s always the need for a business to make money. That’s where interest rates - an idea so horrifying that it was literally used as a character’s super-power in Yoshihiro Togashi’s Hunter x Hunter - comes into play. The idea is that interest is the “cost” of “buying” a loan. Making up numbers, here: You borrow $10,000, but the lender charges 3% interest per year. After a year, whatever you haven’t paid back goes up by 3%, or $300 on the total of the original loan.
However, many times the rate of interest is calculated in ways that benefit those who have means versus those who don’t. For things like credit cards, people who have low credit scores or are otherwise viewed as more likely to default are charged a higher interest rate than people who have good credit scores or assets to borrow against. The supposed thinking is, “This loan is riskier.” The reality is, “We’re making this loan riskier, ourselves” by making people who are less well off have to pay more to borrow the same amount of money.
To stick with our previous example: A $10,000 loan at a 3% yearly interest rate will total $10,300. A 6% interest rate on $10,000 will be $10,600. That’s a $300/year difference based solely on who got a better interest rate. Now, imagine interest is calculated monthly, instead, and you see how quickly this problem can snowball out of control.
What Is Discharging Debt?
Let’s say you borrowed that $10,000, but you can’t afford to pay it back. Your loan gets called in, and you’re short funds. You enter into default. There are a number of steps that can be taken. For one thing, you can negotiate with those who you owe in order to hopefully reduce some of the expense to something more manageable. Restructuring debt, or even consolidating multiple debts into one, can make things easier.
But let’s say that fails. Let’s also say that you borrowed that money to buy a car. Well, someone might just come by and “repossess” your car. It’s kind of like stealing, in that your car disappears, but the logic goes that since the lender paid for you to get the car and you didn’t pay it back, it’s technically still their car. That, in all rationality, cancels out the debt - but now you don’t have a car. Plus or minus any penalties for defaulting, your debt is discharged, I.E. you no longer have a debt.
There are other ways to get rid of (most kinds of) debt - namely, bankruptcy. Let’s say you can’t afford to pay back some other kind of debt. Maybe it’s medical debt accrued from a hospital stay or an injury. Hey, did you know health care is really expensive in the U.S. and that we refuse to move to better systems like, say, Medicare For All? Well, now you owe a hospital $10,000 and you don’t have it. While some medical debts, like emergency room visits, are relatively easy to get discharged if you can’t pay, other debts may be harder to get rid of.
So, owing this $10,000, you declare bankruptcy, which is basically saying, “I have no money and can’t pay you.” At this point, the lender might restructure your loan, but they also might demand a smaller percentage of it be paid off by any means necessary. That could mean selling your old baseball card collection that you grew up with. It could also mean selling a car, or even a home. The lender gets back some of what it loaned, and your debt is considered paid in full and discharged.
This is a basic enough explainer for most kinds of debt, but there’s one kind that stands out.
Why Is Student Debt Hard To Discharge?
Student debt is particularly vicious. According to Tate Law’s Stanley Tate, who I can only infer is the boss of a for-profit legal enterprise, this stems from changes to federal law made in 1976. Yes, folks, it’s been about half a century and this one wasn’t fixed. One wonders how that never got fixed when Democrats controlled the legislature and presidency back in 2009, but I guess that’s another story.
The only way these loans can be discharged seems to be if they cause an “undue hardship,” a term which is wildly open to interpretation (Financebuzz.com, Jennifer Calonia). What that means is simple: If you owe a bunch of different debts, student debt almost certainly isn’t getting restructured out of the picture. You’re still on the hook for it unless you can prove it is so overwhelmingly harmful as to be worthy of discharging. Who do you prove that to? A bankruptcy judge.
It’s worth briefly noting that there are technically other “outs” to student debt, such as if your school turned out to be a fraudulently operated institution that failed to provide you what’s judged as a worthwhile education. See also: Trump University.
To his credit, President Biden has made a small effort to alleviate student debt held by the Federal government by canceling up to $20,000 of debt for some borrowers, and less for many others. While this is undoubtedly helpful and welcome, for many people it only trims down a portion of the interest they’ve accrued. This is, of course, being fought against in court by regressives who I’ll just say want to steal from other peoples’ children. He’s also kept repayment on pause, allowing people to save up money to pay for other things and square their finances a bit better.
But why is this, among other types of debt, such a big deal?
Student Debt Is Crippling Our Economy
According to the Council on Foreign Relations, American student debt is somewhere around $1.6 trillion dollars. Only home mortgage debt - much easier to discharge - is higher. CFR reports that Black students typically have to take out more in loans than white students, meaning they are more likely to become victims of high interest rates.
A generation of young people saddled with $1.6 trillion dollars in debt is a generation that will not qualify for a mortgage because of it, at least not for a while. They will be late at buying any kind of home and starting to build a family and future.
When Silicon Valley Bank and all these others crashed recently, the government went into full “use our power” mode to make sure that depositors who wouldn’t normally have had their deposits guaranteed beyond the FDIC’s $250,000 limit were covered. This probably averted a serious economic catastrophe similar to what happened in 2008. That’s good!
But that was an urgent problem for some (not all, but some) of the wealthier risk-takers in the country getting emergency treatment. It was the financial system breaking its leg, getting plenty of morphine, and getting steel pins put in to support it. All in all? That’s a good thing.
Student loan debtors are better compared to a patient who has Tuberculosis but can’t afford medication. The disease takes them, grows stronger, perhaps grows resistant to known treatments, and eventually proliferates to others, worsening life for just about everyone in proximity.
The illness that is student debt is making our entire economy sick, and it deserves the same level of treatment and care that SVB and others got.
Discharged Debt Has Risks, But Rewards
The friend who helped inspire this article in me (who generally prefers namelessness; I’ll revise if he’d rather be named? I’m sending this to you, either way, mate!) and I talked about some of the possible up-and-downsides to making student debt, but also all other more easily debt dischargeable.
If it’s easier to, say, discharge debt related to starting up a business, then more people are going to start more businesses. That’s a good thing! People will be able to turn their dreams into reality and employ other people who are still working their way up. That also means more businesses might fail! That means creditors might take a few extra hits in that regard. It’s kind of an up-and-downside, really.
Also, discharged and/or forgiven debts cause other problems. If I borrow $10,000 but only pay back $3,000 before my debt is erased, then I’ve essentially gotten a free $7,000 from my lender. That’s not really fair to the lender, but that makes sense.
Interest is where it gets funny. Interest is essentially the fabrication of additional dollars of debt. If I owe $2,000 in interest, it’s not as if my lender gave me $2,000. I just owe $2,000 as a payment for a service I was provided. That’s kind of an inflationary pressure in its own right, and if my debt is erased then essentially the economy has conjured $2,000 for itself.
Or…Something like that? To be honest, it’s kind of a headache to think about, and while I’ve taught high school economics, I’m not an economist. It’s wild, and there are multiple schools of economics that each have their own take on things.
I guess my point is that student debt should be written off if we have the resources to drastically expand our willingness to back banks up just because things look grim for them.
Thank you for reading The Progressive Cafe. If this article has helped you, please consider signing up for our mailing list. This article is by Jesse Pohlman, a sci-fi/fantasy author from Long Island, New York, whose website you can check out here.