Defaulters on student loans face credit problems

Many of those contributing to the growing default rate for federal student loans include people who want to pay but can't and who end up facing a lifetime of credit problems, The Columbus Dispatch reported Sunday.
Associated Press
Dec 18, 2012

While millions defaulting on loans have chosen to ignore them — costing taxpayers millions of dollars — some borrowers can't pay because of financial trouble due to illness or other problems beyond their control, the newspaper said in a series on credit-reporting problems. The system doesn't distinguish between types of defaulters, and both are treated as financial deadbeats.

Low credit scores for those who don'’t pay — despite the reason — prevent them from buying cars, renting apartments and even getting jobs in some cases.

"The system is extremely unforgiving," said Deanne Loonin, a National Consumer Law Center attorney who directs the Student Loan Borrower Assistance Project for the Boston-based nonprofit agency. "We've chosen, as a public policy, very punitive collection. From a taxpayer-return point of view, it makes more sense to help them succeed."

The student-loan default rate keeps growing. More than 37 million borrowers owe more than $1 trillion in student loans — with the majority government loans — and more than 5 million people are in default, the newspaper reported.

The U.S. Department of Education tracks student loans for the first three years of repayment, and the most recent data show that 13.4 percent of borrowers who were to begin repayment in 2009 defaulted by the end of 2011, defined as not making payments for nine consecutive months.

The Dispatch analyzed a random sample of the nearly 16,000 lawsuits the U.S. government has filed against defaulted student-loan debtors since 2007. Of 394 cases, more than 73 percent were filed a decade after borrowers fell into default and nearly a third were filed 20 years after default.

Because of compounding interest and debt-collection fees, defendants owe a median debt of $8,100 — nearly twice what they borrowed. More than 40 percent owe double what they borrowed.

Terri Crothers of Gallipolis, in southern Ohio, paid on her student loans for nine years until she was hit by medical bills after a car crash. With collection fees and interest, the middle-school teacher now owes nearly double what she originally borrowed and pays $500 a month.

"I couldn't help that I got hurt," she said. "It's not right that I owe so much more than I borrowed, even after paying them off faithfully."

The federal government can garnish paychecks, seize income-tax returns and take Social Security benefits from borrowers who defaulted. There is no statute of limitations covering federal loans, and it's virtually impossible to get rid of the debt through bankruptcy, according to the newspaper.

The Education Department has said borrowers can get rid of default and its negative effect on credit scores through loan consolidation or on-time payments. But borrowers rarely escape federal student loans and the credit problems that result from not paying.

The Education Department responded to the newspaper's findings:

"We want to make sure we are doing everything we can to strike the right balance between helping borrowers who have hit hard times and honoring our responsibility to be good stewards of taxpayer dollars," an email statement said. "Federal student loans are not like other forms of private credit. The American taxpayer lends money to students without any credit or collateral requirements and provides numerous repayment options and benefits."

U.S. Sen. Sherrod Brown, a Democrat from Ohio, said the federal government and universities aren't doing enough to make college affordable or helping students avoid the student-loan trap.

"We say on one hand that you need to go to school, and then too many people are in a worse-off financial situation after they leave college," he said.

Kent State graduate Melissa Babe consolidated her $17,000 student-loan debt with her husband's $100,000 in loans, but he stopped making payments when they divorced. Babe, living in Irvine, Calif., now owes $290,000.

"I've spent many nights crying my eyes out, begging them to work with me, but the answer is always no," Babe said.

 

Comments

grandmasgirl

While I understand some of the reasons that people cannot pay back their student loans, it is no different than any other loan. If you borrow, it needs to be paid back using the contract that you signed. It is a shame that the government won't work with people who are making an honest effort to pay back a loan, but will hand out money to many other people who are unwilling to work or pay back anything.

deertracker

Not that again?

grandmasgirl

Not what again? Didn't understand the comment.

mikel

you borrow it you pay it back! a person goes to college, gets a degree and can't understand that? they must have been a crappy student.

DGMutley

Good comment!

Kimo

My wag, Obama will get blamed for this.....

rickross2

If they would have taken Romneys advice and borrowed from their parents, they wouldnt be on the hook for the loot. Giving any Tom, Dick, or Harry a student loan takes away from college being a priviledge. There is so many people that have degrees now, there isnt enough dgree worthy jobs to be had for everyone. Alot of people refuse to work a job that doesnt utilize their degree. So what we have are a bunch of indebt people that really had no business going to college to begin with. Dont even get me started on the people that take college on the internet. Pretending that you're a college graduate even tho you toook every test in your pajamas. This country is a joke! I make more money than most the people I graduated with that went to college and I never set foot in a college class. They are all in debt with loans and most living at home with parents. College isnt the ticket to success anymore. Hardwork and saving is the key now-a-days.

rickross2

Long story short.....this isnt Obamas fault, but he is throwing gasoline on the fire.

goofus

Seeing as how his ego took over and single handly took all student loans from private companies and made them government loans, why shouldn't he be blamed!!!!!

2cents

And some just live off us tax payers LOL, another POS is born every day!

http://www.youtube.com/watch?v=L...

Justme...

I blame, at least partly, university admissions and financial aid. I read somewhere that a rule of thumb would be not taking on more debt than you can expect to earn in your field the first year. Universities are not on the hook for these defaults. They just want to enroll students and they get paid no matter what. Kids, especially first generation college students, don't always understand what this debt means. Statistically a college education still pays for itself, but those who need to take on a huge amount of debt need to choose majors with fields that are high paying, and/or with lots of job prospects. Who is advising these kids??

Dwight K.

How about not making it so darn expensive to get an education

DGMutley

Good point. The costs of higher education are whacked. The government loans for education have fueled a feeding frenzy for higher fees from providers.

ladydye_5

If I do not pay my car loan, they repo it. If I do not pay my mortgage I get forclosed on. You take a LOAN, you sign a contract, YOU PAY the bill!. I have NO sympathy for them. I honestly do not know why people put themselves in debt and then still work a deadend job that has NOTHING to do with the degree they earned. They barely teach "how to live in the real world" at schools now-a-days. There is no balance your checkbook. Applying for a loan. How to plan a budget and LIVE on it. All they do is shove COLLEGE down your throat.

deertracker

Make up your mind! Do you want them to get a job or be on gov't assistance? A 'dead end" job is better than no job and would you put food on the table first or send every dime to the government? That's not a rhetorical question!

Informed

Grandmasgirl, student loans are different from every other loan--they can't be discharged in bankruptcy like other loans can be. Most students or parents cannot afford to attend college without them (most people cannot save $80,000-$100,000 per child for college tuition). I am not saying it is okay for people to be irresponsible, but sometimes tragic, unexpected life events affect someone's ability to pay back a loan they have been paying on time faithfully for years (like in the example in the article). I don't know what the answer is, but some people on this board are pretty harsh. It's a hole some people can never get out of because they can't get hired for a decent job due to bad credit. Talk about a vicious cycle.

2cents

I know a guy with loans on two degrees. H had his discharged by claiming a mental disability. LOL, it worked. He receives disability and I bet in a few years land a good job and the past will disappear.

Justme...

I've never heard of bad credit preventing someone from getting a job. Not saying its never happened, but that has to be extremely rare. I get what you are saying. But if you take out $80,000 in loans and you have no safety net (ie parents to help you after graduation), you better choose a field like nursing where you know you'll get a job. And I don't think a person would spend $80-$100,000 on a degree at, say, BG Firelands. Of course some people hit circumstances that are unavoidable, but I'm betting most of these cases of people not paying their loans could be avoided through better choices.

DGMutley

Happens all the time.

grandmasgirl

I understand that. All I am saying is that if you take out a loan of ANY kind, you should be prepared to pay it back. I also said that it is a shame that the government (or whomever the loan is taken from) cannot work with the people who are willing and TRYING to pay it back. There are many out there who think because it is a government loan, they don't have to pay it back. One person I know made quite a bit of money as a nurse and 35 years later is still paying on it. I know she made good money, but she did not make paying her loan back her number 1 priority. I do sympathize with those who are trying, but just can't.

Informed

Just me, you are aware that Firelands College only offers a few 4-year degrees? Otherwise you ave to go to main campus. And not everyone is cut out to be a nurse. I also know two nurses that couldn't find a job for almost a year. However, whether or not someone has a job doesn't prevent tragedies like bad accidents from happening.

Justme...

Yes, I'm aware of that. Everyone has to choose the path that works for them, financially and otherwise. (ex. don't borrow $80,000 to get a degree in Social Work). 13% default, and that's only tracking the first 3 years. Some of those have valid reasons, but some made bad choices. I know people who defaulted because they dropped out, or were unwilling (not unable - unwilling) to relocate. I can deal with those with circumstances beyond their control, but the others, I believe, make up the majority of that 13%.