Over the past 25 years, federal officials have put in place a punitive student loan collection system that is designed to stop “deadbeat” borrowers from ripping off the government by failing to repay their debt.
Among other things, policymakers have made it virtually impossible for student loan borrowers to discharge their debt in bankruptcy, and have removed any statute of limitations on the collection of these loans – allowing the government to unleash an army of student loan collection companies to pursue these borrowers to the grave. They have also empowered the government to garnishee the wages of defaulters without a court order, and seize tax refunds and other federal benefits, such as Social Security payments from elderly and disabled borrowers.
It is certainly unacceptable for students to take out federal loans without having any intention of paying them back. The reality, however, is that many, if not most, people who default on their federal loans do not choose to do because they want a “free ride.” They do so because they simply don’t have the money to make their payments.
Yet, as I wrote in a Washington Monthly article entitled “Getting Rid of the College Loan Repo Man,” our system for collecting on defaulted federal student loans does not recognize that distinction. Borrowers who deliberately skip out on their loans and those who are too financially distressed to repay them are subject to the same harsh treatment.
As a result, many lives are being ruined. Take Gregory McNeil, for instance. At 49, his only source of income comes from Social Security disability payments he recently began receiving after undergoing quadruple-bypass heart surgery. He fears, however, that the government will attempt to seize a portion of his Social Security to pay off the federal student loans he defaulted on two decades ago.
As I stated in my article, his fears are well grounded:
For years, private collection companies acting under contract with the U.S. Department of Education have hounded him. The government garnisheed his wages for a time, and threatened to sue him. He says he always wanted to repay, but has never had the income he would need. Meanwhile, interest continues to accrue on his debt, and has already tripled the amount he owes.
McNeil’s troubles date back to the late 1980s, when, after leaving the Navy, he decided to go back to school to study electronics. He borrowed about $15,000 in federal student loans to attend a local branch of National Education Centers, a for-profit trade school chain that claimed an exceptional track record in helping students find employment. He soon realized, however, that the training was much less than advertised. And he discovered that the company—which later shut down, due in part to a high default rate among its former students that threatened its access to federal funding—would do little to help him find a job. “They considered you placed if you were flipping burgers part time at McDonald’s,” he says.
School officials arranged one interview for him, but after that didn’t pan out he didn’t hear from them again. McNeil tried to carry on with a low-paying factory job, but couldn’t keep up with his loan payments and ended up defaulting. He tried rehabilitating his loan, but after he lost his job in the recession of the early 1990s he couldn’t manage even the reduced payments. In 1994, with only $23 to his name, he felt he had no choice but to file for bankruptcy.
At the time, he thought the judge had discharged all his debts, but in 2001 collection agencies started calling at all hours, demanding payments on his student loans. The government subpoenaed him to appear in court, and the IRS threatened to seize money from his paychecks. Collection agents told him that his loans had not been discharged through bankruptcy after all, because at the time there was a seven-year waiting period before student loans could be erased through that process. In 2002, he filed for bankruptcy again to force the government’s debt collectors to back off. That worked for a while, but in 2007, the calls resumed, and they haven’t stopped since.
For a brief moment in 2008, McNeil thought he had a shot at making steady payments. He had worked as a machinist for fifteen years and reached journeyman status, meaning that his pay would nearly double, to $25 an hour. “This opened the door to me finally being able to get my defaulted student loans under control,” he says. But soon afterward, with the economy in Michigan tanking, he was laid off again. With his health failing, he knew his career was over.
The reality is that no matter how hard the government comes after him, McNeil will never have the money to pay off his loan. He may not even have enough to cover the collection fees that have been added to his debt over the years.
The system is clearly not working. Luckily, there is a better way. We should follow the lead of countries like Australia, New Zealand, and the United Kingdom and create a single student loan repayment system that is entirely based on a borrower’s future income. As I wrote:
Under such a program, employees with federal student loans would see a portion of their income withheld by their employers and used to pay down their debt, much as they see payroll taxes withheld today. Self-employed borrowers would use a simple schedule on their federal income tax forms that would tell them how much they owed on their federal student loans. When a borrower’s adjustable gross income went up or down, so would their monthly payments, with the only enforcement mechanism needed being the Internal Revenue Service. Defaults would be virtually eliminated, along with the need for the government to spend tax dollars on collection agencies. Borrowers with high incomes would simply pay off the loans more quickly than those with low incomes.
While such a system would provide much-needed relief to financially distressed borrowers, it would not absolve borrowers of their responsibility to repay their debt. In fact, with the Internal Revenue Service automatically deducting payments from borrowers’ paychecks, it would become substantially more difficult for individuals to skip out on their loans. In other countries that use an ICL system, such as Australia and the United Kingdom, only a small minority of borrowers fail to meet their repayment obligations.
Borrowers who are too poor to repay their student loan debt should not have to go through the kind of hell that struggling former students like Gregory McNeil have endured.
Tomorrow, Higher Ed Watch’s Kevin Carey will take a look at Silicon Valley’s efforts to breach the walls of higher education. Make sure not to miss it.