Ethical Dimensions of Student Loan Income Based Repayment Plans

[beltim]

I don't think bankruptcy makes a good analogy for all those reasons Brewer just mentioned.  This would be more like running up a big credit card bill for a bunch of fancy dinners when you know you're about to file for bankruptcy.  (Not sure if that even works, but hopefully you'll get my point.)  Yes it's legal, yes it might be the rational decision for that individual.  If I ever found myself in that situation I can't say that I wouldn't be tempted, and if a friend of mine did it I wouldn't hold it against them.  This isn't about me trying to hold myself up as some kind of paragon of moral virtue, as Nords was suggesting.  There's just no way it's not a total jerk move to borrow a bunch of money, promise to pay it back, have the ability to pay it back, and not pay it back.  Doesn't matter who you borrowed it from.

I don't think anyone said bankruptcy would be a good analogy.  Indeed, I specifically said we'd be having a very different conversation in that case.

[brewer12345]

Yes, I'm aware of what can happen in default.  I intended to ask for examples of specific companies, but I can see how one could misread my question.  Anyway, we'd be having a very different discussion if RootofGood were going in bankruptcy instead of early retirement.

Also, you can't simply assert that choosing to default has no moral implications.  Most people, including me, strongly disagree with that assumption.

You are entitled to your opinions, certainly.

Ask any lender or bond investor (especially those who traffic in junk) if they assume that noone they lend to would ever default.  They all know that there is risk of default, plan for it going into the deal (if they have an ounce of sense) and price the loan accordingly.  The borrowers never make any promises that things will always go well, and there is explicit discussion of what happens if the obligor default spelled out in the loan docs.  You really think they see any of this in moral terms?  If they do, they are in the wrong business.

"Assuming that no one would ever default" is a strawman in no way equivalent to whether it is moral to default on a loan when one has the ability to pay it back.

Corporate borrowers do so all the time.

[beltim]

"Assuming that no one would ever default" is a strawman in no way equivalent to whether it is moral to default on a loan when one has the ability to pay it back.

Corporate borrowers do so all the time.

Indeed, and people murder other people all the time as well.  That doesn't make it moral.

And my example is only slightly more of a strawman than yours.

[brewer12345]

"Assuming that no one would ever default" is a strawman in no way equivalent to whether it is moral to default on a loan when one has the ability to pay it back.

Corporate borrowers do so all the time.

Indeed, and people murder other people all the time as well.  That doesn't make it moral.

And my example is only slightly more of a strawman than yours.

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

[Hamster]

Yes, I'm aware of what can happen in default.  I intended to ask for examples of specific companies, but I can see how one could misread my question.  Anyway, we'd be having a very different discussion if RootofGood were going in bankruptcy instead of early retirement.

Also, you can't simply assert that choosing to default has no moral implications.  Most people, including me, strongly disagree with that assumption.

You are entitled to your opinions, certainly.

Ask any lender or bond investor (especially those who traffic in junk) if they assume that noone they lend to would ever default.  They all know that there is risk of default, plan for it going into the deal (if they have an ounce of sense) and price the loan accordingly.  The borrowers never make any promises that things will always go well, and there is explicit discussion of what happens if the obligor default spelled out in the loan docs.  You really think they see any of this in moral terms?  If they do, they are in the wrong business.

"Assuming that no one would ever default" is a strawman in no way equivalent to whether it is moral to default on a loan when one has the ability to pay it back.

Corporate borrowers do so all the time.

You are making a false comparison. You should be comparing to collecting government welfare checks or food stamps, not to corporate borrowing.

In the borrowing you are talking about, the purpose of lending is for the lender to make a profit off of the interest (which is based on the lender assuming some level of risk and tying up their capital). In the case of the government guaranteeing and paying off the student loan for someone with financial hardship, it is a totally different scenario. The government is not in this to make a profit. The government is assuming the risk and spreading it among the rest of the taxpayers. Those who are hurt aren't the entities that stand to profit from the loan if it is paid off.

It is government charity, legally exploited. I am requesting that my congress people close this loophole by adding wealth to the means test in addition to looking at AGI. Maybe something both parties could agree on.

[Hamster]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

[beltim]

"Assuming that no one would ever default" is a strawman in no way equivalent to whether it is moral to default on a loan when one has the ability to pay it back.

Corporate borrowers do so all the time.

Indeed, and people murder other people all the time as well.  That doesn't make it moral.

And my example is only slightly more of a strawman than yours.

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

You continue to ask questions rather than make a point.  I'm happy to actually discuss this with you, but at some point you need to make claims rather than ask questions.  You've yet to make any moral claims.

[brewer12345]

The government is not in this to make a profit.

Bullshit.  The gubmint gets greatly increased income and payroll taxes from this as well as a greater GDP from which to draw taxes and borrowing capacity.

[brewer12345]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

[dragoncar]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

I LOLed

[Hamster]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

Wrong comparison. First, the auto bailout money has been paid back, with interest. second, it was a bailout after the fact, to avoid the collapse of the US auto industry, not to allow people to retire early while forcing the public to assume loan payments which they could have made out of savings.

[beltim]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

Was this moral?

[brewer12345]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

Wrong comparison. First, the auto bailout money has been paid back, with interest. second, it was a bailout after the fact, to avoid the collapse of the US auto industry, not to allow people to retire early while forcing the public to assume loan payments which they could have made out of savings.

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone postring on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

[dragoncar]

Why should corporate borrowers be held to a different standard than individual borrowers (and vice versa)?

When the government starts guaranteeing and giving hardship deferrals and loan repayment to corporations, then your argument will make sense.

Hellloooo?!  Anyone recall Government General Motors and Chrysler?  As a GM bondholder that got cornholed, I sure do.

Wrong comparison. First, the auto bailout money has been paid back, with interest. second, it was a bailout after the fact, to avoid the collapse of the US auto industry, not to allow people to retire early while forcing the public to assume loan payments which they could have made out of savings.

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone postring on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

Well at least the thread helped me rationalize my gut feeling, thereby entrenching my beliefs :-)

[bluecollarmusician]

This thread is a soap opera!  Kudos to everyone for their contributions- I had to read every post!


I don't know why I feel compelled to add my $.02- people seem to be emotionally charged and tied to their respective posts.

How is the OP acting unethically because he is "more capable" than all those folks with a $100K of debt, and two degrees in jazz clarinet performance to make money???? WTF, seriously people.  This is a website about FIRE- if it is unethical, it is unethical for ALL- if you are experiencing financial hardship- get the heck out of dodge and do something about it.

OK- so maybe the problem is that we are somehow giving a free pass to people who are "struggling to get by"---again, wtf- my wife and I live like kings on 30K a year and my best bud is constantly stressed about money with 100+k a year in income.   
The gvt set a non-arbitrary definition of partial financial hardship- your defs do not count! Fortunately for the OP their definition of hardship is his definition of retirement income.  Yes, their should be asset test for the loan forgiveness... but that still doesn't address all the jokers out there with degrees they will never pay for- so is it ok for them because they didn't "know" any better??? So that is ok???  The whole thing is wrong- but there are many wrong angles in the whole deal...

It is crazy talk- you can't have a social safety net AND the completely "fiercely independent" American ethic that people are preaching- there has to be a specific definition, because as can be witnessed by the situation with my best friend and myself people define financial hardship differently.

To the op- congrats on your Atlas Shrugged style retirement- you can make a ton of money, but choose not to, and don't need to by playing the game as it is set up in front of you.  Well done.  It might not be how I would have done it- but I am happy, your are happy... good to go.

[MrsPete]

Just out of curiosity, what is your view of the strategic defaulters in the housing crash and why?

It's wrong to enter into a contract and fail to fulfill your part of the bargain; however, it's not quite as bad as failing to pay back a student loan because the bank can "take back" the house and recover its losses, whereas the education cannot be repossessed.

Personally, I think all the talk about the ethics of IBR plans is distracting from the bigger issue -- why is college so damn expensive to begin with?  And how is it that colleges can charge so much for an education in a field that they know will never grant a high enough salary to justify the expense?

Student loans are a big part of why college is so expensive.  Money's available, people are willing to borrow . . . so the schools charge a bit more, and then a bit more, and then a bit more?  And, in their defense, they feel forced to start adding this and that amenity to attract students, who now expect more than students in previous generations (for example, the dorms I used to live in with a roommate are now considered "too small" for two and have become singles).  But now we've reached the "tipping point", and the amounts so many people are borrowing are no longer sustainable . . . so this vicious cycle can't continue.   

That $150 is my fair share of taxes, per the tax code.  Some people "pay" negative thousands of dollars in taxes (refundable tax credits like EIC and Additional Child Tax Credits).

As long as you're doing your taxes honestly, that's fine.  That's kind of like finding the best bargain you can. 
But it's not in any way the same thing as borrowing money and voluntarily deciding you don't want to pay it back. 

Do you think its wrong for early retires on this forum to sit on $500k or more of assets (in taxable and non taxable accounts) and not pay any income tax?

I'd assume that the early retirees paid income taxes on that $500K when it was originally earned, or if it was tax-sheltered when it was earned, they're paying income taxes on it when it's withdrawn.  Money sitting in an account isn't "income", so why would they owe income tax on it? 

[RootofGood]

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone posting on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

I disagree, Brewer!  I decided to repay my student loans in full.  The good posters here persuaded me it is the ethical thing to do. 

[NinetyFour]

Really?  Wow, that's very cool, Root!  Thanks for sharing that.  Makes me feel better about the world.

[brewer12345]

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone posting on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

I disagree, Brewer!  I decided to repay my student loans in full.  The good posters here persuaded me it is the ethical thing to do.

Well I am going squirrel hunting tomorrow (with rabbits and doves as targets of convenience).  The bag limit per day is 5 squirrels.  I bet they will allbe as large as this one:

[RootofGood]

Well I am going squirrel hunting tomorrow (with rabbits and doves as targets of convenience).  The bag limit per day is 5 squirrels.  I bet they will allbe as large as this one:

Best of luck!  I'll be out there with you in spirit tomorrow (although physically out in the woods on the east coast). 

[brewer12345]

Well I am going squirrel hunting tomorrow (with rabbits and doves as targets of convenience).  The bag limit per day is 5 squirrels.  I bet they will allbe as large as this one:

Best of luck!  I'll be out there with you in spirit tomorrow (although physically out in the woods on the east coast).

Thanks.  Hoping to get in the better part of a day before the rain arrives in the afternoon.  Works marvels for stress management when I can get out into the woods and river bottoms.

[RootofGood]

Well I am going squirrel hunting tomorrow (with rabbits and doves as targets of convenience).  The bag limit per day is 5 squirrels.  I bet they will allbe as large as this one:

Best of luck!  I'll be out there with you in spirit tomorrow (although physically out in the woods on the east coast).

Thanks.  Hoping to get in the better part of a day before the rain arrives in the afternoon.  Works marvels for stress management when I can get out into the woods and river bottoms.

Shooting things probably helps relieve stress too. 

Ok, back to our regularly scheduled program - IBR usage if you are "filthy rich" - ethical or not?  Go!

[Hamster]

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone posting on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

I disagree, Brewer!  I decided to repay my student loans in full.  The good posters here persuaded me it is the ethical thing to do.

Wow, seriously? That is very admirable to put principles above principal, so to speak. I am impressed.

[Mazzinator]

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone posting on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

I disagree, Brewer!  I decided to repay my student loans in full.  The good posters here persuaded me it is the ethical thing to do.

You serious, Clark?

[RootofGood]

OK, I am done trying to teach pigs to sing.  As I observed, it is unlikely anyone posting on this thread will change their opinion.  Clearly that includes you and I.  Have fun.

I disagree, Brewer!  I decided to repay my student loans in full.  The good posters here persuaded me it is the ethical thing to do.

You serious, Clark?

Well, I'll keep paying whatever my lender tells me I owe. 

[RootofGood]

Moral/ethical issues aside, I commend you for finding an interesting legal loophole that I'm sure any investment banker/hedge fund manager/corporate exec (or tuition jacking University President) would lose zero sleep over utilizing.  Have you thought about these two issues?

1.  Can you earn "income" if it's paid solely as a benefit or you apply the dollars to an individual 401(k)?  In other words, can you do contract legal work and instead of your client paying you wages that you pocket, can they pay you by making a direct retirement account contribution or a health savings account contribution or pay you and you deposit the cash in a benefit account? 

2.  And I know it won't happen to you, but what happens to someone else if they follow your plan and their wife departs either via divorce or death?  What's the game plan at that point?

I don't think you can avoid the income.  You could contribute some of the income to an SEP IRA or solo 401k depending on how you are set up. 

What happens if the wife departs?  If it's a final departure, her loan indebtedness is forgiven completely (student loans act as a form of life insurance).  If it is by divorce, I guess she gets half and I get half.  Then I have to figure out if I can live on $20k/yr or so.  Probably not, so I'd get a job or some other source of income.   

[yanmp]

I have no moral/ethical problem with it, but I'm unable to see a fundamental difference between this practice and say, able-bodied people who live on welfare such as Social Security Disability  + Food Stamps + Section 8 housing, as they, as in this case, meet the requirements as written.

So, more power to you, and to them.  Not that you or anyone else in this thread necessarily does - but I don't see a way that you could attack people who 'take advantage' of welfare without being hypocritical about it. 

[chasesfish]

I think this is an issue created by the government taking over the student loan business.  Now repayment will be based on political favoritism and "need", instead of objective business decisions.  There's also not much difference between what an art major can borrow verses and engineer, which is absurd.   Borrowing capacity should be based off earning potential with the expectation 100% of the loan would be repaid.

As for the original question, I'm on the fence about the moral/ethical delimma.

If the loan was consolidated with the federal government, I'm sure Rootofgood is still a net payor into the system. 

I think the moral hazard is like another poster said, I wish I had run up $250k in student loan debt living the six year dream in college, then I could just go work for the FDIC for 10 years and all is forgiven.   It would have been much more fun than working my ass off and finishing in 3 years while holding a job.

[Captain and Mrs Slow]

This reminds me of a massive flame war Derreck Foster got into after he published his book about early retirement. People got massively upset that he had the gall to collect the child tax credit (or what it was back then), just cause he was smart and frugal!

We're having the same argument in Canada right now with the TFSA, how dare you be frugal and save and invest, and horror of horrows, collect GIS (welfare for seniors) while having investments. Tax the Rich!

To quote Garth (Turner greater fool) anytime the goverment gives you free money take it!

Pardon any typos done on my iPad on holidays

[Captain and Mrs Slow]

Oops this was meant to be in response to gaming REPAYE

[RocketSurgeon]

Not sure if I'm adding to the discussion, but I will be taking advantage of IBR and PSLF. The lender has offered me a deal; Work for us, meet these conditions, and make X payments and I'll forgive your loan. Don't see the ethical problem, as 'abilty to pay' isn't even relevant.

Some more food for thought; my loans are, I believe, well below market rates. If I agreed that it was unethical to accept the forgiveness, would you then push me to pay back the interest at market rates? (which I can quite easily afford.)

e: And just to cover all my bases, I  do not have experience with the world of corporate finance, especially in the junk world. :p

[RootofGood]

Wow, it's hard to believe this thread is over 2 years old.  Since I started the thread, I've been retired the whole time but pulling in a decent income from my side hustles (my blog, a few hours per month of freelance writing, plus now a couple hours of consulting each week). My wife is still getting paid full time (for working an 80% of full time schedule). 

Our current IBR based repayments are $34 per month in spite of our six figure income.  A continued example that the IBR is not a program for the poor or lower income people, but one aimed squarely at the solid middle class (who tend to go to college in larger numbers). 

[arebelspy]

Wow, it's hard to believe this thread is over 2 years old.

I had that same thought when I read this, then clicked on your welcome thread from the first post and read through it.  You've been FIRE'd over two years!  It was fun reading your 4 month updates and such.  :D

Your first two years of FIRE seem pretty ideal, to me.

[RootofGood]

Your first two years of FIRE seem pretty ideal, to me.

I can't complain!  :)

My biggest surprises were the 6 months of decompressing (I figured I would be immune!) and the fact that keeping up with a 1 year old is more work than I thought it was. 

Now that I've decompressed and the kid is 3, life keeps getting better.