With This Debt I Do Thee Wed
A woman I know was worried about a relative with large student loans. I arranged to phone the young man in Minneapolis. Actually, he did the calling over his Skype, and though I had no video camera myself, I answered his ring and suddenly beheld the head and shoulders of a moonfaced man in his thirties with a modest and appealing smile.
Karsten Lind teaches theater in a private high school; his wife teaches music. Together they earn about $100,000 a year, and they enjoy what they do. They must be good at it too, because neither of them has been out of work during the course of this recession. To make life even sweeter, they have a toddler that they both adore.
In the 1990s, Karsten did just what young people were encouraged to do: he “invested in himself.” In the course of four years of undergraduate and one year of grad school, he amassed a BA, an MFA, and $85,000 in student loans.
But he’d paid that down to $45,000 during his first teaching job. It was at a boarding school where he had virtually no living expenses. Soon his teaching salary went up, but he had household expenses and dropped his student loan payments down to $500 a month. At that rate they’ll be paid off in seventeen years.
It irks Karsten when he’s visited by friends from other countries who graduate debt-free and can take a year off to explore the world. It also bothers him that while the Fed keeps interest rates low, he still pays 8.25 percent on his loan. “I’m basically paying twice as much as current students for a product that is guaranteed by the government. What a deal for the banks.” Unlike most other loans, student loans are not allowed to be refinanced and can’t be discharged in bankruptcy. “Think if you could lend your money out at 8.25 percent and know that unless the U.S. government goes bankrupt, you’re not going to lose a thing.”
A few years earlier Congress considered legislation that would allow student loans to be refinanced like mortgage and other loans, without losing their government guarantees. The proposal was lobbied away by lenders. So student borrowers of Karsten’s vintage were paying up to 8.5 percent while banks got their funds at less than .5 percent. I can see why that annoys him.
Still, $500 a month on a $50,000-a-year job might be regarded as a modest agent’s fee. How sad to think of one’s education in such a mercenary way. Still, to me, Karsten’s debt seemed manageable.
Then he happened to mention something about his house in Washington, D.C. “Wait, aren’t you calling from Minneapolis?”
That’s when I learned that the couple had done something else normal for young families. Once they were “occupationally settled,” Karsten and Anita bought a house.
“We were both teaching in D.C. private schools in June 2006. We were both making somewhere in the fifties at that point, so a little over $100,000 combined. But we had no idea what we could afford. So before we started house hunting, we went to Countrywide—one of those big loan companies that caused all these problems.
“The mortgage broker took down our information, went through all their rigmarole, and said we could borrow $475,000. Which, I mean, in retrospect, it’s preposterous.
“We didn’t have a real estate agent at the time, so the mortgage broker said, ‘Oh, I have a really close friend who is a great agent. Let me give her your name.” (In many ways Karsten is as innocent as his appealing smile.) “The agent took us around the Washington area and did not show us a single house under $400,000.
“We told her that we wanted to pay $250,000, and she showed us one that was $399,000. But it got into a bidding war and sold for $426,000. Basically, she just wanted to show us that $400,000 was a normal price.
“Anyway, I found a listing myself online just outside of the city. It was listed at 299. I went myself, I looked around and called Anita and I said, ‘I think we should get it inspected and put in an offer.’ One of the things the realtor didn’t like about that house was that they were only offering 1.5 percent commission to the buying agent. She basically refused to write a contract unless we upped that to 2.5 percent, which is why we bought a $299,000 house for $301,500.
“So basically we bought a house for $300,000 that had sold ten years earlier for $45,000 and was in need of a lot of work.”
Over the next five years Karsten and Anita put in the work, paint, lumber, and love that made them happy with their house. But they began to be unhappy with their jobs. And when their daughter was born, they realized that they’d rather raise their child somewhere else.
“We saw when we started job hunting that it was pretty much impossible for two performing arts teachers to find work at the same time in the same city.” But when Anita got a permanent job in Minneapolis and Karsten was offered a one-year sabbatical replacement spot, “We committed to coming to Minneapolis and went to put the house on the market.”
That’s when they grasped what had been going on in the outside world while they were busy teaching and starting a family.
“We had an agent over; he was actually the selling agent when we bought the house. He came, looked at all the upgrades we made, and said, ‘There’s no chance you’re going to get more than $200, 000 for this.’
“Funny thing,” Karsten observed, “the Washington area didn’t get hit that hard in the crash. There are parts of Montgomery and Fairfax Counties that are now back above their 2006 high. But we had bought in a transitional neighborhood. It’s a really nice block with lovely neighbors and an organic co-op. But once a year there was a shooting on a block behind our house.”
“It didn’t transition fast enough?” I asked.
“It took a dive. Look it up if you like. The zip code is____. In the six months before we went to sell, not a single house in that zip code had sold that wasn’t either a foreclosure or a short sale.” In a short sale you sell a house for below the mortgage debt with the bank’s agreement that it will accept the sum you get as full payment. Short sales are notoriously difficult to negotiate with banks.
At that moment the Linds had a buyer who’d agreed to pay $115,000 for the house, but his commitment ran out in three weeks. They were waiting for approval from two banks that jointly held the mortgages. They had tentative approval from one.
“While we’re waiting, we’re paying mortgage, utilities, insurance, taxes in D.C., which comes to $3,000, and $1,100 rent in Minneapolis and going further into debt each month.”
“Who’s lending you all that money?” I asked.
“Credit cards,” he answered.
“Oh,” I said.
Karsten’s expression acknowledged the dubiousness of that recourse. The couple already had $30,000 in credit card debt. “Twelve or 13 percent, I think,” Karsten said in answer to my query about his interest rate. He called off camera to confirm those numbers with his wife. But no matter how high the interest it was imperative, they felt, that they keep paying on the D.C. house.
“Our lawyer says this short sale, by itself, will knock about 100 points off our credit scores—between 100 and 150. If you also don’t pay your mortgage during the six months leading up to your short sale, that knocks another 200 points off your credit. So if we stopped paying our mortgage, we’d be looking at a 300-point ding in our credit, which would decimate our chance of ever getting another mortgage. So we’re doing our best to keep paying till our short sale is approved, and we’ll only take about a 100-point ding.”
Good Lord, this young couple is sacrificing not to keep a roof over their child’s head but to keep open the possibility of buying another roof. They’re renting a four-bedroom house in Minneapolis for less than half of what it cost them to be “owners”—owners who paid $36,000 a year for six years and can hope for no gain from the sale of their property beyond the possibility of emerging without a huge debt.
The whole thing was so depressing that by some mutual impulse we segued from mortgages to a subject that delights us both: musical theater. Karsten told me with enthusiasm about shows he’d done with his students. We talked with pleasure about musicals that we liked because they’re also good plays. Karsten is one of those generous souls who frankly acknowledges that he couldn’t make it in the professional theater world yet has not soured on either theater or himself.
“So let me get this straight,” I said, bringing us back to the couple’s finances. “You’re paying $3,000 a month on a house you’re not living in, $1,100 a month on the place you’re renting, $500 a month on your student loans, $1,600 a month for day care, and your credit card minimum is?”
Their minimum was $650, Karsten told me. “We try to pay $1,000 a month when we can.”
“So you must be living a bit less affluently than two teachers usually do,” I ventured.
“We have mostly cast-off Goodwill furniture; we would never go out and spend a thousand dollars on anything. My wife is an amazing pianist; I would love for her to have a great piano. But we just can’t do that.
“There are so many people,” Karsten explained earnestly, “who can’t afford to buy the luxuries that their parents could, or things that people without that mass of debt can afford.”
“By the way,” I asked, “do your own parents understand how difficult things are these days? Or do they think, ‘Those kids made bad choices’?”
“I think my parents believe that we made the right decisions for where we were. I don’t think they’re judgmental about that. But, God, they would love for us to have another child. As would we. I would love for Eva to have a sibling! And we still may if we can get rid of this house. But, you know, if it takes another two or three years for us to get back on our feet financially, that may not be a possibility.”
“You mean the window of opportunity will have closed?”
“In a way that’s the price we pay,” Karsten says.
“The price you pay for what, though?”
“The price we pay for having been part of a burst of a bubble and for having bought into something that seemed right but that”—he pauses—“was wrong.”
When the housing boom suddenly went bust, about one-quarter of American mortgage borrowers were left with “negative equity,” meaning that like Karsten and Anita they’d wind up owing the bank if they sold their houses. Economists worried that that would leave the traditionally flexible American labor force less mobile. People who’d have to lay out $200,000 or go on paying $3,000 a month in order to move might decide to stay put. The other option, if the job was good enough and the mortgage bad enough, was to simply walk away. A lot of people were doing that.
But the Linds had the daring (or naïveté) to move for work and assume that they could work it out with the bank. Maybe they will. But in their short sale two lending banks have to agree to take a loss. We’ll soon meet people whose bank negotiations stretched out for a year and a half. I wonder how long the Linds will keep paying on two residences if delays arise?