Defaulted Student Loan Debt example essay topic

If you " re counting on government student loans to get you through college or graduate school, count on paying them back. The Education Department has become one of the toughest debt collectors around. Over the past decade, the agency has steadily expanded its arsenal for dealing with former students who don't repay. A 1998 change in federal law made it extremely difficult for people to escape student loans through personal bankruptcy. The Education Department also can now seize parts of borrowers' paychecks, tax refunds and Social Security payments without a court order, a power similar to the IRS's. Access to a government database of newly employed workers has enabled the department to make much more effective use of private collection agencies.

And it can go after even decades-old student loans, because there's no statute of limitations on them, unlike most consumer debt. As a result, the Education Department collected $5.7 billion in defaulted student loans in the past fiscal year, more than twice as much as in 1998. For current loans that go into default, the department now projects it will ultimately retrieve every dollar of principal, plus almost 20% in fees and overdue interest. The aggressive approach has sparked an outcry from some borrowers, consumer advocates and even some bankruptcy-court judges. They complain that the department runs over some former students who have suffered reversals of fortune.

Some who favor a softer stance argue that student loans are a form of financial aid-not quite the same as other consumer credit. They also note that the borrowers have, after all, been encouraged by the federal program to go into debt to attend college. And they say students are usually financially unsophisticated borrowers, lacking an understanding of how debts can pile up. The Education Department responds that taxpayers, legislators and the many students who do repay their loans all expect it to pursue those who don't. It says the federal government, the state agencies that administer the program and the private lenders that primarily make the federally guaranteed loans all work with delinquent borrowers. They offer counseling and a chance to refinance at today's low interest rates.

The government's toughness traces back to the 1980's, when politicians became alarmed by high levels of student-loan defaults. Today the default rate on recently made loans has dropped. It was 5.2% last year, down from 22% in 1990. Studies show that those most likely not to repay are students who, for whatever reason, didn't complete their studies. Federally guaranteed student loans began with President Johnson's 'Great Society' campaign. Now two-thirds of students at private four-year colleges have them, averaging $17,000 at graduation.

Students who go on to private professional schools end up owing an average of almost $74,000. Loans outstanding have tripled over the past decade to $357 billion. Though the U.S. government makes some of the loans directly, most are made by private lenders such as banks, with the government guaranteeing payment. The guarantees plus federal interest-rate subsidies let lenders offer low rates despite students's cant credit history. Repayment generally begins six months after graduation. The repayment term is usually 10 years, but borrowers can choose a longer one.

If no payments are made for 270 days, loans are considered in default. Then state agencies-which administer the loans and offer lenders an initial guarantee-try to collect. If they can't, they kick the loans to the Education Department. The agency has a stable of collection firms it uses. The collectors are entitled to 20% of what they recover. Those fees are added to borrowers' loan balances.

Four years ago, the collectors started using a national directory of the newly employed compiled from state filings. That has helped in tracking down defaulted student-loan debt, which now totals $30 billion. In 1998, largely unnoticed, the federal law governing the loans was changed so borrowers could shed them in bankruptcy only by proving it was an 'undue hardship' to repay. Student loans thus joined a ratified class of obligations, such as child support and restitution in criminal cases, that can almost never be shrink ed. Over the years, some bankruptcy judges have opposed the rule tightening. Bankruptcy Court Judge A. Jay Cristo l, who presides in southern Florida, sees the policy as 'way too harsh.

' The Education Department says the government should make it tough to get out of student loans because taxpayers have already given the borrowers a valuable asset, an education, that can't be repossessed..