Heavy Hand

Education Department Gets Tough on Student-Loan Delinquents

By John Hechinger
Staff Reporter of The Wall Street Journal

If you're counting on government student loans to get you through college or graduate school, count on paying them back. The Education Department has become one of the toughest debt collectors around.

Over the past decade, the agency has steadily expanded its arsenal for dealing with 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 similar to the IRS's. Access to a government database of newly employed workers has enabled the department to make much more effective use of private collection agencies. 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 past fiscal year, 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% in fees and overdue interest.

The aggressive approach has sparked an outcry from some borrowers, consumer advocates and even some bankruptcy-court judges. They complain that the department runs roughshod over some former students who have suffered reversals of fortune.

'We're Here to Help'

Some who favor a softer stance argue that student loans are a form of financial aid-not quite the same as other consumer credit. They also note that the borrowers have, after all, been encouraged by the federal program to go into debt to attend college. And they say students are usually financially unsophisticated borrowers, lacking an understanding of how debts can pile up. So shouldn't they get more slack, the critics ask, than, say, credit-card spendthrifts?

The Education Department responds that taxpayers, legislators and the many students who do repay their loans all expect it to pursue those who don't. It says the federal government, the state agencies that administer the program and the private lenders that primarily make the federally guaranteed loans all work with delinquent borrowers. They offer counseling and a chance to refinance at today's low interest rates, says Terri Shaw, the Education Department's chief operating officer for student aid. "We're here to help," Ms. Shaw says.

The government's toughness traces back to the 1980s, when politicians became alarmed by high levels of student-loan defaults. Today the default rate on recently made loans has dropped. It was 5.2% last year, down from 22% in 1990. Studies show that those most likely not to repay are students who, for whatever reason, didn't complete their studies.

Federally guaranteed student loans began with President Johnson's "Great Society" campaign. Now two-thirds of students at private four-year colleges have them, averaging $17,000 at graduation. Students who go on to private professional schools end up owing an average of almost $74,000. Loans outstanding have tripled over the past decade to $357 billion.

Though the U.S. government makes some of the loans directly, most are made by private lenders such as banks, with the government guaranteeing payment. The guarantees plus federal interest-rate subsidies let lenders offer low rates despite students' scant credit history. Repayment generally begins six months after graduation. The repayment term is usually 10 years, but borrowers can choose a longer one.

If no payments are made for 270 days, loans are considered in default. Then state agencies-which administer the loans and offer lenders an initial guarantee-try to collect. If they can't, they kick the loans to the Education Department. The agency has a stable of collection firms it uses. The collectors are entitled to 20% of what they recover. Those fees are added to borrowers' loan balances.

Four years ago, the collectors started using a national directory of the newly employed compiled from state filings. That has helped in tracking down defaulted student-loan debt, which now totals $30 billion.

In 1998, largely unnoticed, the federal law governing the loans was changed so borrowers could shed them in bankruptcy only by proving it was an "undue hardship" to repay. Student loans thus joined a rarified class of obligations, such as child support and restitution in criminal cases, that can almost never be shirked. It is a very hard test to meet.

Ditch the Cat

Over the years, some bankruptcy judges have opposed the rule tightening. Bankruptcy Court Judge A. Jay Cristol, who presides in southern Florida, sees the policy as "way too harsh." The Education Department's Ms. Shaw says the government should make it tough to get out of student loans because taxpayers have already given the borrowers a valuable asset, an education, that can't be repossessed.

The 1998 change in the law leaves borrowers like Jonathan Gerhardt, 46, little choice but to pay. Mr. Garrett, a cellist, studied at the New England Conservatory of Music, performed with two city orchestras and finally won a spot as principal cellist at the Louisiana Philharmonic Orchestra in New Orleans. Despite climbing this high in his profession, he was earning just $20,000 a year three years ago, including pay for teaching cello at Tulane University. He buckled under his $100,000 in student loans and filed for personal bankruptcy.

Lawyers for the Education Department and another agency sought to make him pay. The lawyers told the court that Mr. Gerhardt could trim his expenses, such as $23.90 a month for Internet access and $48.51 for a gym membership. They also suggested he get rid of his cat.

Bankruptcy Judge Jerry A. Brown, however, said Mr. Gerhardt had to work out to relieve back pain from playing the cello, and needed the Internet to look for extra work.

The Education Department appealed and won. A federal appellate court suggested Mr. Gerhardt find a job as a music-store clerk.

Mr. Gerhardt says he is already working 60 hours a week. He recently moved in with a roommate, saving $50 a month on rent. Mr. Gerhardt says he is now paying $200 a month toward his loan. The government wants $900.

"I wish I had known it would be like this," he says. "I would have gone to a less-expensive graduate school. I will be paying for this for the rest of my life."