Refund Semester: Our Choices

Our Choices A work of long form journalism

CHAPTER ONE: Refund Season

The money arrives on a Tuesday.

It arrives the way most consequential things arrive now, as a notification, gray text on a lit rectangle, sandwiched between a message from a group chat and a reminder about a parking permit. Your account has been credited. Four words, no punctuation of significance, no indication that anything has happened at all beyond the ordinary machinery of a large institution moving numbers between columns.

But the number is different from the numbers that were there before it, and everyone on campus knows what it means. There is a name for the week. Students call it refund season, and they say it the way people in other places say harvest.

By noon the campus has changed temperature. The line at the bookstore is longer. The line at the burrito place is longer. Someone is selling a used car in a parking lot and finding, for the first time in three weeks, buyers who can pay. In the residence halls, students who have been quietly rationing a meal plan since the first week of the term are ordering delivery. And in a hundred group chats, in the specific dialect of nineteen year olds who have just discovered a four figure balance where a two figure balance used to be, the same conversation is beginning.

Did yours come in.

Yeah.

How much.

Enough.

Here is what has actually happened.

Some months earlier, a person who was probably seventeen or eighteen years old sat down, usually with a parent and often without one, and completed a form. The form asked about household income, about assets, about family size. It produced a number: the Expected Family Contribution, or, under more recent nomenclature, the Student Aid Index, a federal estimate of what this family can be expected to pay.

Separately, and by an entirely different process, the student’s institution produced its own number: the cost of attendance. This figure is meant to represent the total cost of being a student

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there for one year. It includes tuition and mandatory fees, which are precisely knowable, because the institution sets them. And it includes an estimate of everything else, housing, food, books, supplies, transportation, and a category usually labeled personal or miscellaneous , which is doing an extraordinary amount of work for a single word.

The difference between those two numbers is what the student is permitted to borrow.

The federal government then lends the money. It does not lend it to the student. It sends it to the school. The school applies it first to what the student owes the school, tuition, fees, a dormitory bed, a meal plan. This is the portion of the transaction that has an obvious internal logic: money moves from a lender to an institution in payment of a bill.

And then, frequently, there is money left over. Not because of an error. Because the loan was sized to cover a whole life, rent, groceries, a bus pass, a laptop, a winter coat, and the school only bills for part of that life. The remainder is called a credit balance.

Federal regulation is unambiguous about what happens next. The institution must pay that credit balance to the student. It has fourteen days.

The student receives cash.

The word for this cash is refund , and it is worth pausing on how strange that word is.

A refund is money given back to you that was already yours. You bought a thing; the thing was defective, or you changed your mind; the seller returns your money. The transaction is unwound. You end where you began, minus an afternoon.

This is not that. This money was never the student’s. It is borrowed at a statutory interest rate that, for undergraduate direct loans in recent years, has generally run well above the rate a homeowner pays for a mortgage. On unsubsidized loans, it begins accruing interest immediately, not at graduation, not at the first payment, but on the day of disbursement, while the student is sitting in a lecture hall. That accrued interest will, at the end of the grace period, be added to the principal, and the student will then begin paying interest on the interest.

And unlike nearly every other consumer debt in American life, this one is close to permanent. Credit card debt can be discharged in bankruptcy. Medical debt can be discharged in bankruptcy. A failed business, a mortgage on a house that lost half its value, a car loan on a car that was totaled, all of it can, in the right circumstances, be wiped. Federal student debt requires the borrower to clear a separate and famously punishing standard, and most who try, fail.

So the word “refund” is describing a high interest, effectively non dischargeable, government enforced loan, using a term that means your money, returned to you.

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Nobody chose that word maliciously. It is an accounting term. On the institution’s ledger, the student’s account carried a credit balance, and the balance was refunded to the account holder. Within the four walls of a bursar’s office, “refund” is precise.

It is only wrong once it leaves the building.

The scale is not small.

Total student loan debt in the United States has passed $1.8 trillion, spread across roughly 42 to 45 million borrowers, depending on the quarter and the counting method. Federal loans account for more than 90 percent of that total. It is the second largest category of household debt in the country, behind only mortgages, ahead of auto loans, ahead of credit cards.

Nobody knows how much of it went to spring break.

This is not a rhetorical flourish. It is the literal state of the evidence, and it will occupy an entire chapter of this book. The federal government lends roughly a hundred billion dollars a year to students, disburses a meaningful fraction of it as unrestricted cash, and does not systematically ask what the cash was spent on. The surveys that exist are small, private, self reported, and commissioned mostly by lenders and comparison shopping websites with commercial interests in the answer.

What those surveys suggest is that the overwhelming majority of refund money goes exactly where you would hope. One survey of a thousand borrowers who had received refunds found that the most common uses were textbooks, supplies, groceries, and basic living expenses , the mundane substrate of being alive while enrolled. This should be said early and said clearly, because the alternative framing, the one that leads with the beach, is both statistically dishonest and politically convenient for people who would like to believe that student debt is a discipline problem.

But the same survey found something else, quieter and more suggestive. Borrowers who had spent some portion of their loan funds on dining out, entertainment, or gambling were more likely to have later missed a student loan payment. The effect was small. The sample was self reported. It proves nothing on its own.

It is also the closest thing to a longitudinal signal that exists in the public record, and it points in a direction nobody has followed.

Consider what the system is actually asking of the person holding the phone.

She is nineteen. She has, in all likelihood, never had more than a few hundred dollars at one time. She has never held a mortgage, never negotiated a lease, never watched compound interest

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do its work on anything. Her formal financial education consisted, in most states, of nothing at all, and in the best states, of a single semester course taken at sixteen and forgotten by seventeen.

Her required federal loan counseling, the mechanism by which the government satisfies its obligation to ensure she understands what she is signing, is a web module. She completed it in a computer lab or on a laptop in bed. It contained accurate information about interest, amortization, and repayment obligations, presented in the register of a compliance document. She clicked through it in somewhere between four and eleven minutes. She has already forgotten it, and it would be unreasonable to expect otherwise, because the module was not designed to change behavior. It was designed to establish that she was told.

And now, months later, without further comment, $4,000 has appeared in her checking account.

There is no letter. There is no phone call. There is no human being sitting across a desk from her saying: This is borrowed. This costs you seven percent a year starting today. If you keep all of it and pay it back on a standard schedule, this four thousand will cost you closer to six by the time you’re done, and if you end up on an income driven plan and your balance grows for a decade first, it could be considerably more than that. Here is a printout. Read it before you spend anything.

There is a balance. And there is a group chat.

The system has, with no malice and considerable regulatory care, constructed a nearly perfect behavioral trap: it has given a lump sum to a person with no comparison class for a lump sum, labeled it with a word that means “yours,” delivered it through the same interface she uses to check whether her paycheck cleared, and provided no salient signal of cost at the moment of decision.

Behavioral economists have a term for money that gets spent differently depending on how it arrives and what it’s called. They call it mental accounting, and the finding is robust and thirty years old: people do not treat a dollar as a dollar. They treat a windfall differently from a wage, a bonus differently from a salary, a refund differently from a loan.

The disbursement system did not read that literature. Or it read it, and could not think of what to do about it that wouldn’t hurt the students who need the money most.

It should be said plainly, because it will be the subject of a full chapter later: the fourteen day rule exists for good reasons.

It was not written to shower teenagers with cash. It was written because institutions, particularly, though not exclusively, in the for profit sector, had discovered that a student’s credit balance was

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a very attractive thing to sit on. Hold it long enough and it becomes working capital. Hold it against future charges and you have insulated yourself against attrition. Make it difficult to retrieve and some portion of students will simply give up.

Students were being denied money that the federal government had borrowed on their behalf, for their living expenses, while they went hungry.

So the rule was written. The institution must pay the balance to the student. Fourteen days. No conditions the student has not agreed to.

This is a consumer protection. It protects real students from a real abuse that really happened. Any reform proposed in this book, and reforms will be proposed, has to survive that fact. The reader who reaches the end of this chapter thinking just don’t give them the money has not yet met the students in Chapter Seven, who were sleeping in a car and for whom that money was the entire difference between a degree and a withdrawal.

The problem is not that students receive the surplus. The problem is that the system releases it in a lump, calls it a refund, attaches no cost signal, and then, fifteen years later, when the consequences arrive, treats the outcome as a matter of individual character.

Fifteen years later is where this book is going.

The trip is the least interesting part of the story. It occupies four days on a beach in a life that will run eight decades, and by the time it matters it will have been half forgotten, a phone full of photographs nobody looks at, a sunburn, a memory of being briefly and completely free in a way that will not recur.

What matters is the tail.

It matters in the fourth year of repayment, when she calls the servicer and is placed, after forty minutes on hold, into a forbearance she does not fully understand, and interest continues to accrue.

It matters in the ninth year, when she and her partner sit at a kitchen table with a mortgage pre approval worksheet and discover that the debt to income ratio does not work, and the house they looked at on Saturday is not going to happen, and neither is the one after that.

It matters in the twelfth year, when the balance on the statement is higher than the balance she started with, despite having paid every month, and something in her recalibrates permanently about whether effort produces results.

It matters in the fifteenth year, when the letter arrives about administrative wage garnishment.

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And it matters in a way that cannot be put on a spreadsheet at all: in the specific quality of shame that attaches to this debt and no other. Nobody feels morally deficient about a mortgage. Nobody apologizes for a car loan. But a person carrying student debt at forty carries it as evidence, of a bad decision, of a wasted degree, of a beach in 2011, and the carrying is heavier for being private.

That shame is the most efficient policy instrument in the entire system. A borrower who believes the debt is her fault does not call her congressman. She does not join a class action. She does not tell her friends the number. She pays what she can and says nothing, for thirty years.

By Thursday of refund week, the flights are booked.

They were booked Tuesday night, actually, four hours after the notification, on a phone, in a residence hall room, by three people sitting on a bed with a laptop and a fourth on speaker. The trip is in eleven weeks. The total is $2,400 apiece, all in, flights, a room split four ways, an all inclusive band around the wrist that means the food and the drinks are already paid for.

It is, by any ordinary standard, a reasonable purchase. It is roughly what an American household spends on a vacation. It is less than a used car, less than a year of childcare, less than three months of rent in the city where two of them will eventually live. If a thirty five year old with a salary bought this trip, no one would remark on it.