Image Credit: Poster was used at the Tea Party demonstration on Tax Day 2010 in Washington, DC Public Domain / Smithsonian National Museum of American History
Although 43 million Americans (26% of the working population) are charged for $1.9 trillion in accumulated student debt, we know little about the makeup of the debt: how much is principal, how much is interest, and how much is negative amortization of capitalized penalties. This last category, the draconian sanctions imposed on thousands of student debtors, is particularly important. Because of these penalties, a very large cohort of borrowers repaid their loan, sometimes twice. Yet they still owe double or triple the amount they originally borrowed.
Congressional testimony is full of stories like the Maryland social worker Deborah Hamburger, who was wrongfully denied civil service loan forgiveness due to his agent’s mishandling of his account. “In 2017, after completing 10 years of public service,” she testified:
I was stunned to receive a denial, informing me that although my payments were made on time and my job qualified, my particular federal student loans were ineligible. Moreover, my loan officers and the Ministry of Education never informed me of this problem. Instead, I was now told that I could transfer my loans to a different program and restart the 10-year, 120-payment clocks.
Borrowers like Deborah Harburger are far from the only ones, but American students and their families have never borrowed $1.9 trillion. Rather, this amount has accrued because the Department of Education allows unregulated, profit-hungry student loan originators and managers like Naviant, Sallie Mae and NelNet to impose penalties, fees and charges. financial at their own discretion. These penalties and fees are capitalized, meaning they are added to the principal of the loan, and the borrowers’ balances grow.
Currently, the best estimates of Responsible Credit Center and Student loan justice suggest that if late fees, interest penalties and other predatory charges were simply eliminated, at least half of all student loan debtors, around 20 million or so, would be debt-free.
Yet if all of these predatory fees were simply removed, we would still have two groups of student borrowers who have suffered severe economic harm because Congress and the Department of Education protected loan officers rather than students, a classic example of what economists call “regulatory capture. Indeed, since the 1980s, lenders have had unchecked power to collect. In five statesamong these powers is the right to have state or federal licenses revoked due to outstanding student loan balances, and prior to 2019, there were at least thirteen states where student loan debt could lead to the loss of a professional license.
Today, in some states, you can even lose your driver’s license due to unpaid student debt. Seniors on Social Security can have their monthly checks garnished by student loan collectors without a court order, a single authority. Other borrowers have had salaries, child support or IRS tax refunds confiscated by student lenders.
What do we know about this group? Almost nothing. But surely this information is somewhere. Injured persons could be traced and some form of restitution could be made.
This still leaves millions of other borrowers whose lenders or managers have placed them in Income Based Repayment (IBR) Plans or Public Service Forgiveness (PSF) to actually deny them the forgiveness that was theirs. from. Under these plans, loan balances were to be canceled after a certain number of years of regular payment. But because the Department of Education failed to curb abuses by duty officers, 98% of IBR or PSF enrollees were not only denied the pardon they were promised and to which they were entitled – but in the case of loans to the IBR – more accrued interest.
Megan Bailey, from Montana, is a social worker and has never missed a payment. But I was still refused the PSF. “I’ve never made more than $45,000 a year working in community behavioral health,” she says:
I owed $177,526.06 in student loans in 2016, worked my entire adult life, including in the military, and live a very modest life. I worry about the path to the health and behavioral health professions and whether today’s high school students will continue to choose careers in mental health and behavioral health, with such exorbitant tuition fees, low wages and difficult working conditions. I can’t imagine encouraging my children to follow in my footsteps.
The good news is that Biden’s Department of Education is preparing sweeping changes to these two programs that will allow borrowers who have been wrongfully denied IBR or PSF, allowing them to reapply for forgiveness. This change is long overdue, but may not account for thousands of dollars in payments made when Bailey’s repairman broke the law.
Until the Biden administration, education secretaries were unwilling to release the data needed to address the student debt crisis. Without this data, it is impossible to develop fair processes to resolve the many faces of the student loan crisis, other than simply pardoning parts of it, as Joe Biden recently did. Here is a list of never-before-published information – no doubt partial – that would be essential to help borrowers at all levels, especially those who fall victim to predatory loan officers.
(1) The amounts originally signed by students and the total of all payments made on all loans. We know how much is currently owed, but neither policymakers nor the public know the overall principal of the original loans. In other words, how much of the $1.9 trillion was actually borrowed, and how much of that is due to unchecked predatory lending and loan servicing practices? The best “estimate” of Student loan justice and Responsible Credit Center is that at least half of the $1.9 trillion owed is made up of late fees and other service and capital charges. We also don’t know how much of the billions in payments to lenders and managers went to principal, and how much to interest charges, late fees, and default costs. These figures should also be disaggregated.
(2) What are the real default rates on student loans? The Ministry of Education says only about 15% of accounts are adjourned or abstained. In contrast, CNBC reported in April 2022 that “about a quarter of student borrowers – or 10 million people – were estimated to be in default”.
In either case, the size of the cohort at risk of default is concerning, but not for loan servicers, who are rewarded with public funds when borrowers default. According to Alan Collinge of Student Loan Justice:
Loan servicers (who usually also own collection companies) would like to see a mass default event. A 16% commission awaits them when they force defaulting borrowers to “rehabilitate” their loans in good standing. For a loan that is in default and inflated to, say, $100,000 with collection costs added, these companies can get an instant payday of $16,000 from the taxpayer when the loan is rehabilitated. These “rehabilitated” loans will default again about 75% of the time, but the collection companies don’t care, they get paid anyway.
Clearly, taxpayers’ money has already gone into the pockets of the student loan servicing industry, but a massive default would dramatically increase the cost to the public. Congress must direct the Department of Education to turn over this information as well. But if Congress doesn’t, the information could still be obtained through a request under the Freedom of Information Act, followed by legal action if that request is denied. There is a precedent for this. In August 2009, Bloomberg won his lawsuit against the Federal Reserve to find out what the Fed did with $13 trillion in Distressed Asset Relief Program (TARP).
More importantly, if this information were public, it would not be difficult to determine how much each borrower owes after eliminating all penalties, fees and late fees; estimate and apply an average interest rate based on the Treasury rate over the life of the loan; then subtracting what they have already paid. If they overpaid that reality-based refund amount, they would get a refund.
At that point, how many of the 43 million borrowers would remain? Who knows? But the Ministry of Education should help us find out.
Susan F. Feiner recently retired from the University of Southern Maine, where she was a professor of economics and women’s studies.