U.S. Gets Tough on Failure to Repay Student Loans

The bill collector called when Clay Stanley, gaunt and suffering from AIDS, lay bedridden in his apartment, back from the hospital after a bout with a viral infection.

It wasn’t about a car or credit card. The call concerned a matter Mr. Stanley, who is 39 years old, says he had long forgotten: student loans he took out two decades before. The private collector, acting on behalf of the U.S. Department of Education, said Mr. Stanley must pay $69 a month or the government would take a larger sum than that each month from his Social Security disability checks, Mr. Stanley recalls. “I didn’t know what to do, so I said ‘OK,’” he says.

Years after a political outcry over high levels of student-loan defaults, the Education Department has become one of the toughest debt collectors around. Over the past decade, it has won a steadily expanding arsenal to wield against former students who don’t repay.

A 1998 change in federal law, for instance, 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 that only the Internal Revenue Service, among federal agencies, regularly wields. Access to a government database of the newly employed has enabled the department to make much more effective use of private collection companies. 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 fiscal year ended Sept. 30, 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 percent in fees and overdue interest, a prediction few private lenders would be bold enough to make.

The aggressive approach has sparked an outcry from some borrowers, consumer-advocacy lawyers and even some bankruptcy-court judges. They complain that the department runs roughshod over some former students who’ve suffered reversals of fortune. “Student-loan debt collectors have power that would make a mobster envious,” says Elizabeth Warren, a Harvard Law School professor and bankruptcy specialist.

For this complete story, please visit U.S. Gets Tough on Failure to Repay Student Loans.