OPINION: If We Don’t Act Quickly, the Student Loan Default System Could Plunge More Families Into Poverty
This op-ed originally appeared in The Hechinger Report on March 1, 2022
For too long, the dream of pursuing a college degree has turned into a nightmare of loan default for millions of students. Like the well-documented effects of traffic fines and court fees, the penalties resulting from federal student loan default plunge too many Americans deeper into financial instability, perpetuating rather than helping to resolve the vicious cycle of poverty. It is especially abhorrent that a government program intended to create equitable opportunities for all students instead perpetuates racial and economic gaps in financial stability and mobility.
In response to the Covid-19 crisis, the federal government paused student loan payments, interest and collections in March 2020 and recently extended that pause until May 2022. The Education Department also recently announced that default-related seizures of tax refunds and other federal benefit payments will be halted an additional six months after repayment resumes. While this reprieve is critical, if the Education Department fails to provide more permanent protections, millions of borrowers are at risk of economic upheaval when it ends in November.
Even before the pandemic, far too many Americans were struggling to manage their student loan debt: At the start of 2020, one-quarter of Direct Loan borrowers were either behind on payments or in default, and over a million borrowers entered default in 2019 alone. Default disproportionately affects Black and first-generation students, and most of those who experience default entered college from a low-income background.
Federal student loan default, defined as a borrower missing payments for at least 270 days, comes with severe consequences. The entire loan balance becomes immediately due, and borrowers face ongoing damage to their credit scores, along with a range of significant fees. The federal government also wields vast extra-judicial powers to collect student debt, including garnishing wages and seizing Social Security payments and tax refunds based on the child tax credit and the earned income tax credit.
By seizing these benefits, the federal government takes away critical financial lifelines that reduce poverty for millions of families. Ironically, borrowers in default are not even allowed to enroll in income-driven repayment (IDR) plans, which seek to make monthly payments more affordable (as low as $0) and get borrowers back on track.
In addition, the federal government, states and colleges too often impose a series of harsh penalties that are unrelated to collecting payments, including restricting access to further federal aid, withholding a student’s academic transcripts and suspending professional and even driver’s licenses. These measures are not only punitive, they’re also self-defeating: By undermining someone’s ability to cover basic expenses, return to school, keep their job or even drive a car, the student loan default system makes it harder for someone who is already struggling to secure their financial footing.
The vast majority of those who default on student loans have faced persistent economic and social vulnerability. As of 2017, 87 percent of those who defaulted within 12 years of enrolling in college had received a Pell Grant at some point, meaning that they had a household income of less than $40,000. Those who were the first in their family to attend college are also more likely to default: Nearly a quarter (23 percent) of first-generation students defaulted on their loans within 12 years, compared to 14 percent of non-first-generation students.
The effects of systemic racism and the resulting racial wealth gap, along with employment and wage discrimination, mean that Black students are more likely to borrow for college and more likely to struggle with repayment.
Students who started school but never completed a degree or credential are at particular risk of default, as they’ve taken on debt but received none of the associated economic benefits. These borrowers — who represent about half of all those who default — typically owe relatively small balances, with nearly two-thirds owing less than $10,000; more than one-third owe less than $5,000.
Black students in particular face persistent repayment distress. The effects of systemic racism and the resulting racial wealth gap, along with employment and wage discrimination, mean that Black students are more likely to borrow for college and more likely to struggle with repayment.
As long as student debt remains a reality for millions of Americans, policymakers must fundamentally rethink the structure of student loan default so that it no longer plunges families deeper into poverty. Before re-starting repayment this May, the Education Department should place all defaulted loans back into good standing, so all borrowers can start off with a clean slate when payments resume.
The federal government must also make permanent reforms, including protecting low-income borrowers from having their wages and benefits seized; allowing those in default to access affordable repayment plans; limiting collection fees; prohibiting colleges from withholding transcripts; prohibiting states from suspending, revoking or denying licenses due to student loan default; and allowing borrowers to restore their loans to good standing more than once. Congress must also allow real bankruptcy relief for student loan borrowers and reinstate a statute of limitations for federal student loans.
By reforming the student loan default system, the federal government will give struggling families a fresh start rather than pushing them into poverty. Families cannot afford to wait.