DROM Student Debt
DROM - STUDENT DEBT: FORECLOSING ON THE FUTURE
These days, everyone is telling you that a college degree is the only way to get a decent job. Fear of an uncertain financial future drives many of us toward higher education, especially into exploitative for-profit colleges. Lenders are making profits off of that fear, and so education has become one of the biggest debt traps in our society. Not only have college costs continued to skyrocket, but increasingly you are told that a bachelor's degree is just not good enough; now you need a master's degree too, and these are often the most expensive of all with few grants available to those who are scrambling to enroll.
Two-thirds of students leave college with an average of $27,000 in debt. With too few jobs on the horizon, it's no surprise that default levels are rising like floodwaters; 41% of the class of 2008 is already delinquent or in default. This gives rise to a different kind of fear-that our futures have been foreclosed-leading many into depression and even suicide.
In 2012, total student debt in the United States surpassed the $1 trillion mark. This is higher than credit card debt or any other kind of consumer debt with the exception of mortgage debt. Some analysts think there is a student debt bubble about to burst. This might not be a bad thing for debtors. After all, they can't repossess your degree or your brain. Or at least not yet. But while hedge funds might bet on the outcome, you probably shouldn't.
This section explains how student debt was created, who profits from it and how you can survive as a debtor. Above all, you should know that you are not alone if you are facing default. There are ways of resisting, especially by acting together. In the long term, we need to put the United States back on the sizable list of countries (many of them less affluent) that manage to fund free higher education.
HOW IT GOT SO BAD
Going to public college used to be pretty affordable, especially for those on the GI Bill, or those who went to public colleges like CUNY or the University of California. Starting in the early 1980s, state funding began to erode- public college costs have risen by 500% since 1985. Neoliberal policy-making has transferred the financial burden onto individual students. This means your future salary will be used to pay back the debts you got stuck with to prepare yourself for employability in the first place. Having to pay for education through debt is a form of indenture. And unlike traditional forms of indenture, it can take a lifetime to regain your freedom.
Wall Street has made a killing on this system, especially the queen of student lending, Sallie Mae. How did this happen? Bear with us-it gets complicated. Created in 1972 as a government agency, Sallie Mae has since been fully privatized. Sallie Mae has a hand in both types of student loans: federal and private. They also profit by originating, servicing and collecting student loans.
Between 1972 and 2010, loans were considered federal when originated by financial institutions (including Wall Street banks), but guaranteed and subsidized by the government. In 2010, the Obama administration cut out the middlemen so that any federal loan taken out is now originated directly by the federal government. But don't be fooled, these "federal" loans are still serviced by a group of select private institutions, including Sallie Mae. In addition, federal loans have unjustifiably high rates of interest (6.8%). Is the government profiting? Yes, and the proceeds are used to pay the bill for wars and Wall Street bailouts.
Furthermore, federal loans rarely meet the full cost of education, leaving most students with no choice but to take out private loans to make up the difference. Even though only 20% of all current student loans are private, in ten to fifteen years they will have surpassed federal loans. These private student loans are subject to different terms and have much higher interest rates.
Chances are your university financial aid officials are in cahoots with private lenders. A 2006 investigation by the New York State Attorney General's Office concluded that the business relationship between lenders and university officials amounted to an "unholy alliance." Lenders paid kickbacks to universities based on the loan volume that financial aid offices steered their way; lenders also gave all-expenses-paid Caribbean vacations to financial aid administrators, and even put them on their payroll. In addition, lenders set up funds and credit lines for schools in exchange for being placed on preferred-lender lists.
In spite of these scandals, and despite the NYS Attorney General's recommendation that bankruptcy protections be restored to student lenders, nothing happened. The student loan racket was just too profitable to be reined in by a few regulators. In 1998, federally-backed loans were declared ineligible for bankruptcy, and after prolonged pressure from Wall Street, private loans became ineligible in 2005. As if that's not enough, the government also granted enormous collection powers to lenders. They can garnish your wages and seize tax returns without even requesting a legal hearing first. Even Social Security and disability wages are subject to garnishment.
This lack of protection has made default wildly profitable for lenders. On average, 120% of a defaulted loan is ultimately collected. In fact, in 2003 Sallie Mae disclosed that its record-breaking profits were due in significant part to collections on defaulted loans. In 2001, Sallie Mae was caught defaulting loans without even trying to collect the debt. This rapacious conduct is the norm in some corners of the industry. As in the subprime mortgage market, many private loans are securitized-packaged and sold to the highest bidder as Student Loan Asset-Backed Securities (SLABS). These SLABS account for almost a quarter-$234.2 billion-of the aggregate $1 trillion debt. Since SLABS are often bundled with other kinds of loans and traded on secondary debt markets, investors are not only speculating on the risk status of student loans, but also profiting from resale of the loans though collateralized derivatives.
THE SOCIAL IMPACT
The human toll of all this is becoming increasingly visible. For a host of disturbing accounts of student debt, it's well worth reading Alan Collinge's book Student Loan Scam: The Most Oppressive Debt in U.S. History-and How We Can Fight Back. And it's certainly not hard to find student debt horror stories on the internet.
A military veteran reports that he has paid $18,000 on a $2,500 loan and Sallie Mae claims the man still owes $5,000. The bankrupt husband of a social worker, bedridden after a botched surgery, tells of a $13,000 college loan balance from the 1980s that ballooned to $70,000. A grandmother subsisting on Social Security has had her payments garnished to pay off a $20,000 loan balance resulting from a $3,500 loan she took out ten years ago, before she underwent brain surgery. These loans increase so rapidly due to compounding interest in combination with deferment and forbearance programs. In fact, only 37% of student loans are in repayment at any given time. The other 63% are accruing interest, adding fees and becoming more and more likely to add to the 5 million student loans already in default.
During the Great Recession, African Americans lost almost all of the economic gains they made after the civil rights movement. As a result, African American students have borrowed more for education than whites, and they are twice as likely to be unemployed on graduation. Worse still, students of color are much more likely to enroll in for-profit schools, which have high non-completion rates and account for nearly half of student loan defaults. It's no surprise that the default rate for African Americans is four times that of whites.
Your loan becomes delinquent the first day after you miss a payment. The delinquency will continue until all back payments are made. Loan servicers report all delinquencies of at least ninety days to the three major credit bureaus. As we've seen in Chapter I, a negative credit rating may make it difficult for you to meet your basic necessities.
Student loans are generally considered in default when you fail to make a payment for 270 days for a federal loan or 120 days for a private loan. If you want to avoid default, try to make at least one payment every 120 or 270 days. If you haven't defaulted but are alarmed about not being able to pay your student loans, do not panic. If you just graduated, many loans provide an automatic six-month deferment period. And if you have federal loans, you can extend this period on an annual basis either through deferment or forbearance programs. Deferment on certain loans halts interest during periods of unemployment, economic hardship, temporary disability and while the debtor is in school. Although forbearance does not stop interest from accruing, it does allow for some breathing room. But keep in mind that this will cause your loan amount to increase.
Typically, the interest is compounding annually, which means that at the end of a year, it will be added to the principal and you will have to pay interest on that too. This can cause loans to mushroom, so check to see if you qualify for deferment before entering into forbearance. It may also be helpful to consolidate all of your loans into one. You can only consolidate federal loans with other federal loans and private loans with other private loans. Often there are incentives for consolidation, such as interest rate reductions for on-time payment or direct debit. It is sometimes possible to ask the originator of the loan to recall it, taking it out of the hands of a guarantee agency and then make arrangements with the original lender.
There are a couple of newer programs that may also be helpful: the Income-Based Repayment Plan (IBR) and Public Service Loan Forgiveness (PSLF). Income-based repayment allows you to adjust payment to meet your income by capping payment at 15% of income based on family size. A single individual with no children making under $20,000 would pay 2.4% of income toward student debt whereas a family of four making under $100,000 would pay 9.9% of their income toward student debt. After twenty-five years, any remaining student loan debt would be forgiven. Public Service Loan Forgiveness provides forgiveness of federal student loan debt after ten years of continuous employment by any nonprofit, tax-exempt 501(c)(3) organization, a federal, state, local or tribal government agency including the military, public schools and colleges or while serving in AmeriCorps or the Peace Corps. You may also be eligible if your employer is not a religious, union or partisan political organization and provides public services.
BEING IN DEFAULT
If you are about to default on a student loan, remember that you are not alone. There are approximately 4 to 5 million other Americans that have already done so. While default can be a political act (especially when done en masse), these are the consequences you may be subject to: o Your loans may be turned over to a collection agency. o You will be liable for the costs associated with collecting your loan, including court costs and attorney fees. o You can be sued for the entire amount of your loan. o Your wages may be garnished. (Federal law limits the amount that may be garnished to 15% of the borrower's take-home or "disposable" pay. This is the amount of income left after deducting any amounts required by law to be deducted. The wage garnishment amount is also subject to a ceiling that requires the borrower to be left with weekly earnings after the garnishment of at least thirty times the Federal minimum wage, per 34 CFR 682.410(b)(9), 34 CFR 34.19(b) and 15 USC 1673(a)(2).
o Your federal and state income tax refunds may be intercepted. o The federal government may withhold part of your Social Security benefit payments. The U.S. Supreme Court upheld the government's ability to collect defaulted student loans in this manner without a statute of limitations in Lockhart v US (04-881, December 2005). o Your defaulted loans will appear on your credit history for up to seven years after the default claim is paid, making it difficult for you to obtain an auto loan, mortgage or even credit cards. A bad credit record can also harm your ability to find a job. The U.S. Department of Education reports defaulted loans to TransUnion, Equifax and Experian (see Chapter I). o You won't receive any more federal financial aid until you repay the loan in full or make arrangements to repay what you already owe and make at least six consecutive, on-time monthly payments. You will also be ineligible for assistance under most federal benefit programs. o You will be ineligible for deferments. o Subsidized interest benefits will be denied. o You may not be able to renew a professional license you hold.11
These measures are harsh, but you can continue to fight as an individual. Unfortunately, bankruptcy is not an option for student debtors, except occasionally in cases of permanent disability or "undue hardship." Although it is difficult to get credit reporting agencies (CRA) to remove defaulted student debt from reports, it is not impossible. You can use the strategies and resources outlined in Chapter IX to demand that CRAs and debt collectors prove that the amount of your debt is fully verifiable. This will require a concerted letter-writing campaign, but you may be pleasantly surprised by the results. Often, record keeping is poor and there are no accessible records tying you to a debt. Although a court judgment is not required before your paycheck, bank account or tax return is garnished, you are entitled to an administrative hearing if you request one.
If you want to get out of default, you can often rehabilitate your loan by entering into an agreement to make twelve consecutive on-time payments to the original lender or guarantee agency in exchange for the removal of the prior delinquency history from your credit report. Be sure to get this agreement in writing and to be clear about how this will be entered on your credit report.
KNOW YOUR LOANS
As the amount of middlemen standing between you and your loan continues to increase, it can be hard to know who guarantees, originates, services and collects your loans. To find this information about your federal loans, visit the national student loan database at nslds.ed.gov/nslds_SA. It's a little more complicated when dealing with private loans. FinAid is a great first resource for understanding the different institutions involved: finaid. org/loans/studentloans.phtml. It's important to fully understand your own situation, since the laws can differ. For example, state guarantee agencies are exempt from the Fair Debt Collections Practices Act, but any private collection agency hunting you down must comply with this law. So be aware of their illegal practices and know your rights. This FinAid page about defaulting on student loans is a good place to start: finaid.org/loans/default. phtml. Abusive debt collection behavior is also highlighted in Chapter IX. We recommend you read it carefully.
COLLECTIVE ACTION TOWARDS CHANGE
If we fight this system alone, the best we can hope for is to keep our heads above water. The good news is that those suffering with student debt have begun to organize. Collective action is the only true solution. At this point, there are several campaigns under way.
Student Loan Justice (founded in 2005) and Forgive Student Debt to Stimulate the Economy (founded in 2009) aim at persuading lawmakers to reform the system. Both organizations have pushed for policies restoring bankruptcy protection and partial debt forgiveness. Unfortunately, these reasonable proposals have produced little in the way of legislative change. Four attempts at restoring bankruptcy protection have ultimately failed. And in spite of over one million names on a petition urging Congress to pass a ten-year partial forgiveness program, lawmakers, heavily beholden to the finance industry, have not budged. Unfortunately, these measures will not de-commodify education nor claim it as a public good.
The Occupy Student Debt Campaign (OSDC) emerged in 2011 in tandem with Occupy Wall Street as part of a global uprising against neoliberalism. To fight the debt-financing of education, OSDC proposes diverse collective strategies of direct action, including a campaign of collective debt refusal. For more details, refer to the OSDC website (below).
OSDC believes that our public education system must be free, that any future student loans must be offered at zero interest, that all university institutions must be transparent and accountable, and that all current student debt must be cancelled. These principles, or principles like them, should be the foundation of any student debt movement.
All of these movements can be found online if you want to find out how to join a larger collective to help effect change.
FinAid (finaid.org) Forgive Student Loan Debt to Stimulate the Economy (forgivestudentloandebt.com) Income-Based Repayment Info (ibrinfo.org) Occupy Student Debt Campaign (occupystudentdebtcampaign.org) Student Loan Justice (studentloanjustice.org)
ARTICLES AND BOOKS
Jerry Ashton, "America's Financial Institutions and Student Lenders-Attention: OWS 'Occupy Student Debt' Committee Has Something to Say," Huffington Post, November 21, 2011 (tinyurl.com/DROMAshton). Pamela Brown, "Education Debt in the Ownership Society," AlterNet, June 27, 2012 (tinyurl.com/DROMBrown). George Caffentzis, "Plato's Republic and Student Loan Debt Refusal," Interactivist, December 31, 2011 (tinyurl.com/DROMCaffentzis3). Alan Collinge, The Student Loan Scam: The Most Oppressive Debt in U.S. History-and How We Can Fight Back, (Boston, MA: Beacon, 2009). Malcolm Harris, "Bad Education," n + 1, April 25, 2011 (tinyurl.com/DROMHarris). Brian Holmes, "Silence=Debt," Occupy Student Debt Campaign, 2012 (tinyurl.com/DROMHolmes). Sarah Jaffe, "Meet 5 Big Lenders Profiting from the $1 Trillion Student Debt Bubble,"AlterNet, November 28, 2011 (tinyurl.com/DROMJaffe). Anya Kamenetz, Generation Debt, (New York, NY: Riverhead Books, 2006). "Private [Student] Loans: Facts and Trends," The Project on Student Debt, July 2011 (tinyurl.com/DROMPSD). "Some Options," EDU Debtors Union, 2011 (tinyurl.com/DROMEDU). Jeffrey Williams, "Student Debt and the Spirit of Indenture," Dissent, Fall 2008 (tinyurl.com/DROMWilliams2).
1. Mark Kantrowitz, "Student Loans," FinAid, 2012 (tinyurl.com/DROMKantrowitz3). 2. Steve Odland, "College Costs Out of Control," Forbes, March 24, 2012 (tinyurl.com/DROMOdland). 3. U.S. Department of the Treasury, Lessons Learned from the Privatization of Sallie Mae,(Washington D.C.,: GPO 2006) (tinyurl.com/DROMTreasury). 4. Doug Lederman, "'Deceptive Practices' in Loan Industry," Inside Higher Ed, March 16, 2007 (tinyurl.com/DROMLederman). 5. Tyler Kingkade, "Private Student Loan Bankruptcy Rule Traps Graduates with Debt Amid Calls for Reform," Huffington Post, August 16, 2012 (tinyurl.com/DROMKingkade). 6. Alan Collinge, Student Loan Scam: The Most Oppressive Debt in U.S. History-and How We Can Fight Back, (Boston, MA: Beachon Press, 2009). 7. Malcolm Harris, "Bad Education," n + 1, April 25, 2011 (tinyurl.com/DROMHarris). 8. Collinge, Scam. 9. Julianne Hing, "Study: Only 37 Percent of Students Can Repay Loans on Time," Colorlines, March 17, 2011 (tinyurl.com/DROMHing). 10. "What are these Programs? IBR and PSLF," IBRInfo (tinyurl.com/DROMIBR). 11. Mark Kantrowitz, "Defaulting on Student Loans," FinAid, 2012 (tinyurl.com/DROMKantrowitz2).