How would a politically induced US default affect my plans?
June 10, 2011 11:13 AM Subscribe
How would a politically induced US default affect my plans?
So assuming the idiots who run everything in this country end up causing a default, what would that entail for me specifically? I'm a rising sophomore at UT Dallas with a full ride scholarship and I'm applying this summer to transfer into UT Austin for the fall of 2012. I haven't calculated anything yet with regards to student loans and cost of living and all that jazz and I'm not even entirely sure that I'm gonna move yet, though I would definitely like to costs aside and so I'm going to apply anyway. At any rate, what would a US default do to the interest rate on my student loans were I decide to make the move? Also, do you think it would ever be so bad that UTD would renege on my scholarship because the state of Texas can't pay UT Dallas because the federal government can't pay the state of Texas? I know this is a crazy hypothetical here and that I have no control over it anyway, but it's been a thing I've thought about from time to time. Thanks.
So assuming the idiots who run everything in this country end up causing a default, what would that entail for me specifically? I'm a rising sophomore at UT Dallas with a full ride scholarship and I'm applying this summer to transfer into UT Austin for the fall of 2012. I haven't calculated anything yet with regards to student loans and cost of living and all that jazz and I'm not even entirely sure that I'm gonna move yet, though I would definitely like to costs aside and so I'm going to apply anyway. At any rate, what would a US default do to the interest rate on my student loans were I decide to make the move? Also, do you think it would ever be so bad that UTD would renege on my scholarship because the state of Texas can't pay UT Dallas because the federal government can't pay the state of Texas? I know this is a crazy hypothetical here and that I have no control over it anyway, but it's been a thing I've thought about from time to time. Thanks.
Best answer: I hope that I am not breaking any rules by suggesting that you are contemplating something very, very unlikely.
It is like asking what happens to you if the Chinese Army invades Texas. It is so unlikely that it is not really worth worrying about.
Everybody knows that the debt limit will be raised. The question is what conditions will be placed on raising it.
Republicans will try to get concessions that will lower taxes or spending (or something similar). They will succeed in getting these concessions, and then they will vote to raise the ceiling.
posted by Mr. Justice at 12:29 PM on June 10, 2011 [4 favorites]
It is like asking what happens to you if the Chinese Army invades Texas. It is so unlikely that it is not really worth worrying about.
Everybody knows that the debt limit will be raised. The question is what conditions will be placed on raising it.
Republicans will try to get concessions that will lower taxes or spending (or something similar). They will succeed in getting these concessions, and then they will vote to raise the ceiling.
posted by Mr. Justice at 12:29 PM on June 10, 2011 [4 favorites]
Assuming your student loans are federally originated... nothing would happen to your interest rates. Those rates are capped by statute, and a federal default wouldn't change that.
posted by valkyryn at 12:52 PM on June 10, 2011
posted by valkyryn at 12:52 PM on June 10, 2011
I'd worry more about keeping up on payments on my volcano insurance and hoping the sun doesn't explode. If the US actually starts defaulting the currency will collapse and the University will probably request its tuition in some combination of gold bullion and buckshot.
posted by frieze at 1:07 PM on June 10, 2011 [3 favorites]
posted by frieze at 1:07 PM on June 10, 2011 [3 favorites]
Assuming your student loans are federally originated... nothing would happen to your interest rates. Those rates are capped by statute, and a federal default wouldn't change that.
What would happen to the rates on private school loans that are tied to the LIBOR?
posted by Thorzdad at 5:44 AM on June 11, 2011
What would happen to the rates on private school loans that are tied to the LIBOR?
posted by Thorzdad at 5:44 AM on June 11, 2011
What would happen to the rates on private school loans that are tied to the LIBOR?
You'd get screwed, in all likelihood, though you'd need to read your loan documents to make sure.
posted by valkyryn at 9:03 AM on June 11, 2011
You'd get screwed, in all likelihood, though you'd need to read your loan documents to make sure.
posted by valkyryn at 9:03 AM on June 11, 2011
Best answer: bookman117: "I know this is a crazy hypothetical here and that I have no control over it anyway, but it's been a thing I've thought about from time to time. Thanks."
These paranoid tendencies of yours can be directed towards positive ends, if you don't let it consume you. The best thing you can do to prepare for this is keep your passport up to date, familiarize yourself with the work visa process, and learn a foreign language in school. Even if the government doesn't fall apart, you'll be better off than most people your age to work in a global economy.
The basis for my advice is simple: economic downturns affect recent graduates more than existing employees. And so many things in finance are based, directly or indirectly, on US treasury rates (aka "riskless rate of return") that a default would destabilize many large companies (and quite a few nations with real problems). In a country full of unemployed people with more experience than you, diversification is going to have to be your greatest tool. Not all countries have a highly skilled workforce, but many will still be growing in the absence of a strong US recovery. In addition to that, I'd expect the budget cuts to dramatically affect the legions of software engineers / developers working for defense contractors will find themselves jobless and competing with you on the market.
But I must stress, these are highly improbably scenarios. The US is not in any way, shape, or form, facing "bond vigilantes" or trouble in the markets. Last I looked short term treasuries were trading at .01 percent interest. The far greater risk is that you'll graduate to the same high unemployment and stagnation that's going on right now. Build relationships with employers, and a portfolio you can show them. Try to keep in touch once a semester with your fellow students, even if you feel they're not people you'd hang out with. Especially the ones that study something other than computers and programming.
posted by pwnguin at 10:07 AM on June 11, 2011
These paranoid tendencies of yours can be directed towards positive ends, if you don't let it consume you. The best thing you can do to prepare for this is keep your passport up to date, familiarize yourself with the work visa process, and learn a foreign language in school. Even if the government doesn't fall apart, you'll be better off than most people your age to work in a global economy.
The basis for my advice is simple: economic downturns affect recent graduates more than existing employees. And so many things in finance are based, directly or indirectly, on US treasury rates (aka "riskless rate of return") that a default would destabilize many large companies (and quite a few nations with real problems). In a country full of unemployed people with more experience than you, diversification is going to have to be your greatest tool. Not all countries have a highly skilled workforce, but many will still be growing in the absence of a strong US recovery. In addition to that, I'd expect the budget cuts to dramatically affect the legions of software engineers / developers working for defense contractors will find themselves jobless and competing with you on the market.
But I must stress, these are highly improbably scenarios. The US is not in any way, shape, or form, facing "bond vigilantes" or trouble in the markets. Last I looked short term treasuries were trading at .01 percent interest. The far greater risk is that you'll graduate to the same high unemployment and stagnation that's going on right now. Build relationships with employers, and a portfolio you can show them. Try to keep in touch once a semester with your fellow students, even if you feel they're not people you'd hang out with. Especially the ones that study something other than computers and programming.
posted by pwnguin at 10:07 AM on June 11, 2011
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a) no default: congress passes a bill to increase the debt ceiling in time to pay interest/principal on time.
b) technical default: where interest payments are delayed, but they are eventually paid and we are still good on our debt.
c) real default: we decide not to pay our debts and tell everyone else to go screw themselves or take a steep discount and/or lengthened payment terms on the debt.
(a) is most likely to happen. In that case, your short to mid-term goals will be fine. The USA will continue to hold its AAA rating and our T-bills and bonds are still viewed as safe havens by other people around the world. Over the longer term, because the country does not rein in spending and/or raise revenues, your longer term planning may be at risk, e.g., future entitlements (social security, medicare)...
(b) is likely, but not very... This will create a real shock to the financial system. In this case, your short-to-mid term planning shouldn't be affected much... I think the worst we can imagine will be a repeat of the subprime/credit crisis of 2007/2008 leading to another recession.
(c) is unlikely at all. If it happens, all hell breaks loose. This is because many underpinnings of practical modern finance view US T-bills/bonds as "RISK-FREE". Now that we default, all of these will be thrown out the window and it will be BAD for everyone... Stock up on self-cranked radios, rice, and beans.
UT-Austin is nice. Enjoy it! :)
posted by jchaw at 11:44 AM on June 10, 2011