Those who default on their student loans are at risk of having their bank accounts drained and wages garnished — more than 30 years after the fact, according to a Bloomberg report.
Such was the situation that confronted 58-year-old Linda Brice, a first grade teacher in Los Angeles who defaulted on $3,100 she had borrowed more than three decades ago to pay for college.
Goldsmith & Hull, a law firm representing the federal government, withdrew $2,496 from her bank account and seized a quarter of her wages, which amounted to more than $900 a month. This was after the chief federal judge in Los Angeles sided with Brice, ruling that she should pay only $25 a month due to her financial state.
Student-loan debt in the United States totals $1 trillion -- eclipsing the amount owed on credit cards. The average borrower graduating from a public or private institution owes $25,250. When not repaid, the U.S. Education Department is at liberty to turn borrowers’ names over to federal prosecutors, who in turn hire private law firms to retrieve the money. These firms then take a cut for themselves.
As a result of a 1998 change in federal law, student loans can rarely be discharged. Deanne Loonin, an attorney with the National Consumer Law Center in Boston, told Bloomberg that student-loan borrowers who default are being pursued and punished more severely than almost any other kind of debtor -- despite President Obama’s public statements emphasizing leniency on the matter.
H.R. 4170, the Student Loan Forgiveness Act of 2012, was introduced in April, proposing the relief of student loans for current borrowers who have paid the equivalent of 10 percent of their discretionary income for 10 years, or who are able to do so in the future. It would also allow current borrowers to be freed from large fees by converting private loans to federal ones.
In Brice’s case, she says she has no idea that she could be targeted for debts from the 1970s. In 2004, she consolidated some of her debt through an Education Department program that allows students to make lower monthly payments. However, Brice was unaware that $3,100 in default was not included, despite numerous notices sent to her over 9 years by the Education Department.
“If you are a person who gave to your country, who does the kind of work I do, or is a police officer or firefighter -- anyone who gives back to their community -- I think the government needs to give you a break,” Brice told Bloomberg.
Over five million borrowers are in default, meaning they have stopped making payment for 270 days or more. As of September, they owed $67 billion.
The federal government filed 4,841 lawsuits to retrieve money from student-loan borrowers in the year that ended Sept. 30 -- nearly three times the number a year before, says the Justice Department. Ninety percent of the suits were filed by private lawyers, and the Justice Department returned $9.4 million to taxpayers after paying lawyers and related expenses.
Even without a court order, the Education Department can seize portions of borrowers’ paychecks, tax refunds and Social Security payments. Last year, the department retrieved $11.3 billion, and expects to collect 85 cents of every dollar that defaults.
Brice's case is vaguely reminiscent of Francisco Reynoso's tale. His son Freddy, the first in his family to go to college, died in a car accident in 2008, but not before Francisco co-signed on his private student loans -- making the father fully liable if Freddy became unable or unwilling to repay his debt.
Now, the father who makes just over $21,000 a year, is being hounded by debt collectors to pay off his son's loans for an education his late son will never use, and in an amount that is unclear. Because, like home mortgages prior to the 2008 crash, Freddy's loans have been sold and resold, Francisco isn't even sure to which company he owes this hazy figure, ProPublica reports.
One of Freddy's loans -- his federal one -- was canceled after his death, per government mandate. But the majority of the student's loans were private, leaving his father in the midst of relentless phone calls and berating by debtors through his grief. Although death certificates were sent out to all related companies, only the federal loan was relieved.
"Everyone else was not cooperative at all," Dolores Orozco-Serrano, a legal administrator with the bankruptcy law firm handling Reynosos' case, told ProPublica.
Hounding grieving parents aside, debtors also won't be receiving many sympathy votes after it was reported last month that some debt collectors earn upwards of $450,000, more than twice the pay of U.S. Secretary of Education Arne Duncan. Several employees at Education Credit Management, a nonprofit group that works with the government to collect on defaulted loans, made more than $400,000 through commission rates of up to 31 percent.
Last week, Robert Applebaum, a former assistant district attorney from New York, delivered to the House side of the Capitol 1 million signatures from his petition calling for Congress to forgive student debt, as the House and Senate finally reached a deal to prevent interest rates on new loans from doubling to 6.8 percent.
"Forgiving student loan debt would have an immediate stimulating effect on the economy," Applebaum argued. "Responsible people who did nothing other than pursue a higher education would have hundreds, if not thousands of extra dollars per month to spend, fueling the economy now."