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08-24-2008 11:36 AM |
Student Loans: Should you be able to default on them?
Quote:
View: That Student Loan, So Hard to Shake
Source: NYTimes
posted with the TFP thread generator
That Student Loan, So Hard to Shake
August 24, 2008
By JONATHAN D. GLATER
Tacoma, Wash.
MOST people struggling to pay off their student loans keep quiet about it. They do not want to acknowledge that, perhaps in a fit of naïve, youthful optimism, they borrowed more than they could handle.
Then there is Alan Collinge, who for years has described his struggle with tens of thousands of dollars in student loan debt to anyone who will listen. He has appeared on “60 Minutes” criticizing Sallie Mae, the nation’s largest student lender, and has been quoted in the pages of this and other newspapers attacking loan companies.
“I’m sort of the complaint box for the industry,” says Mr. Collinge, who runs a Web site called StudentLoanJustice.org out of his spartan apartment here.
Student lending is a big business, one that has been the subject of many complaints over the past two years after revelations of questionable ties between lenders and colleges’ financial aid officers. More recently, tight credit markets raised the possibility that some students might not be able to borrow to go to college in the fall.
But much less attention has been paid to what happens to students after they borrow. Lenders who make loans guaranteed by the federal government can more easily take steps against borrowers — like garnishing wages and benefits — than they can with other kinds of unsecured consumer debts. And all student loans, federally guaranteed or not, are extremely hard to get rid of in bankruptcy proceedings, more so than credit card or other debt.
More borrowers may begin to discover the harrowing consequences of reneging on student loans in the current economy. Numbers of borrowers behind on payments and in outright default are rising for some types of loans, and the tight job market makes it harder for graduates to find jobs that let them pay off debts. At the same time, investors are pressuring lenders to raise revenue by minimizing losses. Investors also expect more revenue from those lenders that operate collection agencies.
To many people, the special treatment of student loans sometimes seems appropriate, but at other times unduly harsh. Usually, people do not learn just how powerfully the law protects student loans until something goes unexpectedly wrong in their lives.
Donna Troestler, 47, who graduated from the University of Wisconsin, Oshkosh, in 1998 with a degree in biology and microbiology, was traveling to sell scientific instruments in 1999 when she suffered an injury that caused recurring problems. It took years for her to figure out what kind of work she could do, given her new health limitations; in the meantime, she deferred payments on about $23,000 in loans.
“I never thought in a million years that I was ever going to have a problem with working and making money,” Ms. Troestler said. In 2002, she defaulted on her loans, which then ballooned with fees and penalties to $63,000, she said. In 2003, she found a job at the University of Wisconsin, Madison, where she still works. But then she found that her wages had been garnished, taking about $500 a month from her $2,500 take-home pay, she said.
“All of this was terribly embarrassing to me,” Ms. Troestler said. Later, a man she was dating helped pay off her student debts, in 2006, but then the two split up because of tension over the loans, she said.
IT is hard to tell how widespread repayment problems are. The overall default rate calculated by the federal Education Department was under 5 percent in 2005, the most recent data available. But that figure includes only defaults within two years of beginning repayment.
A 2006 study by the department’s National Center for Education Statistics followed federal loan borrowers for 10 years, ending in 2003-4, and found that nearly 10 percent defaulted. (The average debt among the two-thirds of 2003-4 college graduates who use loans is about $20,000, according to the College Board.) And with more students borrowing, more students are potentially at risk.
Garrett Mockler filed for bankruptcy protection in December 2004, after months of struggling to make payments on credit cards as well as on $40,000 in student loans. He was working multiple jobs as a teacher, dancer and choreographer in Los Angeles after earning a Master of Fine Arts in 2003.
His lenders wanted more than $400 a month on top of credit card debt, Mr. Mockler said. “All my bills started piling up,” he said. “It was either pay one bill or pay another or not eat or not have a roof over my head.”
He had to scrimp to save $200 for the bankruptcy filing. Then he emerged from bankruptcy and found that all his student loans had stuck with him. While the federal government gave him more forgiving repayment terms on his guaranteed loans, he said, the company that had made him a private, or unguaranteed, loan had no incentive to negotiate a payment plan with him because he had no way to avoid the obligation.
While trying to learn more about student loans and his rights in dealing with lenders, Mr. Mockler said he came across StudentLoanJustice.org, Mr. Collinge’s site.
Mr. Collinge founded a political action committee in 2007 that was named after the site. His top goal is to have the bankruptcy law changed to put limits on how and for how long lenders can pursue debtors. His organization now has about 3,000 members, many of whom have shared debt woes on the site. Over the past year, he says, he has raised just over $12,000 — a sum that reflects his constituents’ financial constraints.
To raise awareness of student loans, he embarked last year on a trip that took him through 42 states in an effort to meet with staff members of every lawmaker on the Senate and House education committees. Money raised by his PAC has not yet covered his costs, and the R.V. he drove (and is now trying to sell) still bears scars of the trip.
Representatives of loan companies are not fond of Mr. Collinge’s tactics. He has called loan company executives at home to criticize their corporate policies, and sent the occasional profanity-laced e-mail message to lender advocates.
“He’s had a lot of problems paying his loans back, and he’s spent an awful lot of time out there talking about his problems rather than trying to pay his loans back,” said Tom Joyce, a spokesman for Sallie Mae.
Student loans raise serious issues, Mr. Joyce said, “but he’s just the wrong poster child.”
Mr. Collinge acknowledges that at least some of the e-mail messages and phone calls he has made were inappropriate, but he maintains that the sentiments expressed were genuine. His words may simply reflect the resentment of thousands of borrowers who are too embarrassed to talk about their debts publicly.
In conversation about anything other than student loans, Mr. Collinge, 38, comes across as laid-back and easygoing. He takes salsa and tango classes and goes bicycling in a park overlooking Puget Sound.
Mr. Collinge said he did not set out to be a student loan activist. But he backed himself into a corner in his research job at the California Institute of Technology in 2001 by asking for a raise. When he did not get one, he quit.
He said he found himself underemployed and gradually overwhelmed by about $38,000 in federal student loans; his lender wouldn’t grant a forbearance, he said. He had borrowed to study toward his two degrees and a certification, all in aerospace engineering, at the University of Southern California.
He went into default in 2001, and over the next three years his debt, with interest and fees, grew to $100,000. His best shot at a job, involving work for a military contractor, vanished when his debts kept him from passing a security check, he said.
The Education Department said in a statement Friday that it and others had tried to work with Mr. Collinge, and in February 2008 offered to waive accrued interest and fees.
Driven by frustrations like the security check, Mr. Collinge has devoted himself full time to learning about student loans and has supported himself with various jobs; this year he spent a few months working for a landscaping business, for example, and received an $8,000 advance for a book on student loans. He has found out what many a struggling former student found out before him: Short of paying them off, student loans are awfully hard to get rid of.
Without a court order, lenders — or, more likely, collection agents — can garnish up to 15 percent of wages of borrowers who have defaulted on federally guaranteed loans, said Deanne Loonin, a lawyer at the National Consumer Law Center in Boston. Lenders and collection agents can also intercept tax refunds, Social Security payments and even this year’s stimulus checks from the government.
“It’s really unbelievable,” Ms. Loonin said.
DEBTORS can shed credit card debt and other unsecured obligations through bankruptcy but can get out of student loans only if they can show “undue hardship.” That term is not defined by the bankruptcy code and, lawyers said, judges often take a narrow view of its meaning.
“The cases are so harsh in measuring what an undue hardship is that anybody who is working and maintaining any kind of home life has very little chance of discharging these things in bankruptcy,” said Cathleen Cooper Moran, a bankruptcy lawyer in Palo Alto, Calif.
There are some compelling reasons to make it difficult for student borrowers to get out of their debts. Lenders have no collateral, like a house or car, to seize. That makes them riskier.
In the case of federal loans, the government is effectively subsidizing students both by guaranteeing the amounts borrowed and by setting loan terms that are usually more favorable than those of private loans. Because the government’s guarantee puts taxpayer money at risk when a borrower defaults, one argument goes, bankruptcy law should hinder the cancellation of federal debts — and it does.
In 2005, Congress modified the bankruptcy code to make it as hard to get rid of private student loans as it is to eliminate federal loans. Private loans have been one of the fastest-growing ways for students and families to pay for college, rising to $17.1 billion in 2006-7 from $2 billion 10 years earlier, according to the nonprofit College Board. Students often use private loans to fill the gap between the cost of attendance and the funds available through federal loans and other aid.
The argument for the change on private loans is a bit different.
“At the time that people graduate from school, almost everybody is technically eligible for bankruptcy because they have debts that exceed their assets,” said Shelly Repp, general counsel at the National Council for Higher Education Loan Programs, whose members include lenders, collection agencies and guarantors. “Why would anyone lend you money if you had the option to walk away?”
But even Sallie Mae, a major source of private loans, is not opposed to modifying the bankruptcy code’s treatment of them, said Mr. Joyce, perhaps by making it possible for students to dump debts in bankruptcy after trying for a specified number of years to pay them off.
“What we’d like to see is that people who have made a good-faith effort to repay their student loans, but for whatever reasons have hit a hard patch or hit a difficult stretch, that there be some flexibility,” Mr. Joyce said. “It may be time to look at that.”
Perceptions of student lending have shifted sharply as tightness in credit markets has led some companies to stop making certain kinds of loans, forcing some students to switch lenders.
Last year, reports of questionable relationships between financial aid offices and lenders cast both in an unfavorable light. Lawmakers in Washington have approved legislation intended to ban such ties and have raised the amounts that students and their families can borrow through federal programs.
Mr. Collinge is not giving up. On a warm and sunny Thursday afternoon this month, a few members of Student Loan Justice joined him to hand out pamphlets in front of the government office building in Seattle where Senator Patty Murray, Democrat of Washington and a member of the Senate education committee, has an office.
“I’m fighting the system,” Mr. Collinge told one young passerby. The man declined to accept a pamphlet then, but when he passed by again a little later, he took one.
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I never took out loans for college. In fact, I was fortunate that I didn't need to continue college and was able to secure work as an IT professional as the industry was just growing by leaps and bounds. I also didn't want to take out loans that I knew I had no choice to pay for.
My parents forecast wasn't as much as what was needed to put me through school. So I gave it up, and let them pay for my sister's schooling. I paid for my schooling, and then when my parents offered to pay me back, I just asked for electronic equipment.
Skogafoss on the other hand took out loans. She is a graduate from NYU with some degree in Radio/TV/Film. She doesn't really work in that industry any longer. We paid those loans off completely before we purchased our first property together.
Borrow money for Liberal Arts degree and then take a job doing something completely related didn't sound like a great idea to me, but I can see doing it. I also didn't see any reason to just take out loans for any reason, so I never have had high debts student loan or credit based.
I agree that student loans should not be forgiven under ANY circumstances. It is something that you will have with you for the rest of your life, just like the education that was given to you. If you didn't do much with that education while in school or even afterwards, that's not up for debate. It frankly isn't my concern for the "few" that have hardship. Life is hard, you make choices and then live with situations that come up after you make those choices. It is what makes life, life. |
