Extra Credit: ‘The language of consumer debt is rife with moral undertones’: Read MarketWatch’s new ‘Extra Credit’ column

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Hello and welcome to Extra Credit, a weekly look at the news through the lens of consumer debt. Your monthly car or student-loan bill may not seem like an obvious frame through which to look at the world, but I’m here to argue that what we borrow and lend — and the way we talk about it — can explain a lot about the most pressing questions in our lives and communities. 

Businesses and investors regularly borrow money to juice their own returns, but the language we use to describe this behavior, “leverage,” is stripped of the baggage of actually owing anyone anything. By contrast the language of consumer debt is rife with moral undertones: a consumer who is behind on their loan payments is delinquent, a word with all sorts of negative connotations that go beyond the financial obligation. 

These are some of the themes I’ve explored covering America’s massive student-loan burden. I’ve seen mainstream views on student loans morph from the idea that they’re an obligation borrowers must pay back to the idea student debt is unjust given how it was created and who it impacts the most. 

Now, I’m extending that approach to other types of debt and I hope you’ll follow along as I dive in. In the business world and financial media, this area of coverage — student loans, mortgages, credit cards and other credit products — are often referred to, somewhat sterilely, as consumer finance.

But here, we’re going to try to cut through that jargon and call these obligations what they are: debt.

This is very much an experiment in progress, so I would appreciate your feedback. Email me with comments, concerns or tips for topics to cover at jberman@marketwatch.com!

The government’s debt-collection powers

Perhaps counterintuitively, the most ambitious plan in a generation to reduce child poverty is also highlighting the extraordinary powers the government has to collect on debt that it’s owed by its citizens. 

When borrowers default on their student loans, the feds can seize their Social Security benefits, wages and tax refunds to repay the debts, including the recently expanded child tax credit. 

The credit provides qualifying families with up to $ 300 per month for every child under six-years old and $ 250 per child, for kids ages six to 17. Single parents earning up to $ 75,000 per year are eligible for the full payment, $ 150,000 is the cutoff for married couples filing jointly and $ 112,500 for people filing as head of household. (Read more of MarketWatch reporter’s Andrew Keshner’s coverage of the expanded child tax credit here). 

Research from Columbia University’s Center of Poverty and Social Policy indicates that the credit combined with other elements of the Biden administration’s American Rescue Plan passed earlier this year could lift 5 million children out of poverty, cutting the child poverty rate in half. 

But advocates warn that impact could be blunted by the way the government treats the roughly 9 million borrowers in default on their student loans. 

That these families could lose some of the funds next tax season is “incredibly problematic,” said Persis Yu, the Director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.  “It defeats the point of these programs first of all, and it unnecessarily punishes families and their children because they couldn’t afford their student loans,” she said. 

Yu and others have been raising alarm for years about the government seizing borrowers’ Earned Income Tax Credit, money the government gives to low and moderate-income working families that members of both parties support as a tool for reducing poverty. One lawyer who represents low-income student loan borrowers described this practice to me in 2018 as “morally suspect.”  

Now, Yu’s organization and the Student Borrower Protection Center are calling on the Biden administration to bring defaulted borrowers current, in part to protect their expanded child tax credit. They’re also urging congress to pass a bill that would protect the child tax credit and EITC from seizure permanently. 

‘Democratizing trust accounts’

A recent announcement from New York City has me thinking about the other side of the net worth ledger — assets — and how important they are to feeling free to plan for your future. 

Broader recognition of this idea and the huge disparity in assets between white and Black households has fueled interest in baby bonds, accounts for every child with enough seed funding and investment from the government that by the time the child is a young adult they have enough money to invest in wealth-building asset of their own, like a house or education. 

New York City was the latest to ride the buzz when officials announced in June that as part of the city’s Juneteenth Economic Justice plan it will create a universal baby-bond program, providing every public-school kindergartener with a college savings account and $ 100 in seed funding. 

New York City was the latest to ride the buzz when officials announced in June that as part of the city’s Juneteenth Economic Justice plan it will create a universal baby-bond program.

If New York City’s program sounds a bit different from baby bonds that’s because it is. In order for an initiative to make a dent in wealth disparities it needs to have a few key features, according to Darrick Hamilton, an economist at the New School and one of the architects of baby bonds. 

For one, the funding should be an endowment from the government that’s large enough so by the time the account-holder reaches young adulthood it can make a meaningful difference in their lives — not simply a tool to encourage saving through seed and match funding. In addition, reckoning with racial and economic inequality means the investment should be progressive, Hamilton said. 

“It is democratizing trust accounts in a way that’s not limited by birthright,” he said. 

New York City’s program looks more like an idea that’s distinct from, but related to, baby bonds: Children’s Savings Accounts. Over the past couple of decades, localities across the country have been providing young children with college savings accounts and seeding them with small amounts of funding. 

These accounts did a couple of things: actually provide a mechanism for low-income people to save — financial products for this demographic can often be hard to find or predatory — and pushed students towards college.  

In thinking about baby bonds, Hamilton said he built off research and discussion of these accounts. “They did a whole lot of work shifting the conversation beyond income and talking about asset poverty and asset security and also addressing the question — can poor people save? Of course, poor people can save,” he said. 

‘Unless the government, philanthropists and others provide a significant amount of money, baby bonds won’t narrow the gulf in wealth between Black and white and rich and poor households.’

— William Elliott, University of Michigan

But unless the government, philanthropists and others provide a significant amount of money, the accounts won’t narrow the gulf in wealth between Black and white and rich and poor households, said William Elliott, a professor of social work at the University of Michigan, who has been studying children’s savings accounts for years. 

“Education in itself will never reduce wealth inequality in America, it can be a part of it and it’s really important, but if we’re talking about inequality, you’ve got to have wealth and start off with assets,” he said.

The debt model of financing school we have now means that the opposite happens: Americans start young adulthood with liabilities, he said. 

Elliott said he’s hopeful that a model like the one in New York, which is planning to leverage the city’s spending through philanthropy, investment returns and other means can help bridge the gap between children’s savings accounts and baby bonds. Already, young New Yorkers and their families can access more than the initial $ 100 in a variety of ways. In addition, community fundraisers have bolstered some of the accounts, including at New York City Housing Authority’s Astoria Houses, where students already have over $ 1,000 in their accounts, according to the city.  

More localities hopping on board to the baby-bond concept could also encourage the federal government to launch its own baby bond program. In Connecticut, lawmakers recently passed legislation that would provide $ 3,200 to every child born into poverty — funds that are expected to grow to nearly $ 11,000 by the time those children turn 18.  The feds are the only entity with a big enough budget and the budget flexibility necessary to make widespread baby bonds fiscally viable, Hamilton said. 

“I applaud states that are taking the initiative because that’s how we build momentum,” he said.  

Are income-sharing agreements predatory loans?

During my time covering student debt, I’ve been pitched countless stories about surprising ways to fix the student-debt crisis, but only one has really gained traction: Income-share agreements. 

Under these deals, students pledge a portion of their future earnings in exchange for tuition financing. Several four-year colleges, including Purdue University and University of Utah, offer ISAs and a major philanthropic effort directed towards HBCU students is planning to provide funding to students essentially in the form of an ISA. 

They’ve also taken off among coding bootcamps and other programs that don’t have access to federal financial aid — a pattern that’s worrying to consumer advocates. In fact, one recent lawsuit alleges that a company providing computer-science education misled students about the cost of their income-share agreements. 

What will be critical to whether ISAs take off more widely is how they’re defined. That’s a battle supporters and detractors have been waging in the media and elsewhere over the last few years. To investors, philanthropists and the schools that offer ISAs, they’re a way to help students pay for college that protects against bad luck — ISA holders only pay when their income is at a certain threshold — and don’t have the psychological weight of a traditional student loan. 

But to detractors, the agreements are just debt by a different name. As Melody Sequoia, the lawyer representing the students in the recent ISA lawsuit put it: “ISAs were presented as new and novel and innovative, but they’re really not,” Sequoia said, noting that the federal student-loan program allows borrowers to repay their debt as a percentage of their income.

“This is a loan, even if they say it’s not. The reason it’s a loan is because the student doesn’t pay up front and instead they agree to pay more at a later time,” she said.

Whether ISAs are loans or something else may seem like semantics. But how they’re defined will impact how they’re regulated. ISA supporters are pushing for clearer guard rails around the products — an effort that consumer advocates say is aimed at carving them out from anti-discrimination laws that cover traditional debt. 

We’ll be watching to see how it plays out.