DISPATCH INVESTIGATION
CONSTANT BURDEN
Federal student loans can become unforgiving monsters of debt for borrowers who default. The most common ways out: Pay up or die.
CONSTANT BURDEN
By Jill Riepenhoff and Mike Wagner THE COLUMBUS DISPATCH
T he decision to pay for college with federal loans turned financially fatal for millions of Americans. Their credit scores have sunk. They’ve been unable to buy cars, rent apartments and, in some cases, land jobs. They are trapped by ballooning student-loan debt that has overshadowed many of them for decades.
Without question, millions of people have chosen to ignore their student-debt obligations, costing taxpayers millions of dollars.
Yet a Dispatch investigation found that many want to pay but can’t dig out of mounting debt, such as a teacher who fell into serious financial trouble after a car crash, a Kent State graduate stuck with her ex-husband’s loans and a woman who quit truck-driving school after two days.
“The system is extremely unforgiving,” said Deanne Loonin, a National Consumer Law Center attorney who directs the Student Loan Borrower Assistance Project for the Boston-based nonprofit agency. “We’ve chosen, as a public policy, very punitive collection. From a taxpayer-return point of view, it makes more sense to help them succeed.”
Republicans and Democrats in Congress recognize problems with federal student-loan programs and have offered reforms in dozens of bills. Yet little has changed, except the size of a growing default rate. The U.S. Department of Education tracks student loans for the first three years of repayment. The most recent data show that 13.4 percent of borrowers who were to begin repayment in 2009 had defaulted by the end of 2011.
But millions of others also are in default, and some have been there for years.
EAMON QUEENEY DISPATCH Twyla Manning stands outside Clark State Community College, where she learned that even after 25 years, she still carried student-loan debt.
To gauge the lingering consequences, The Dispatch collected and analyzed a random sample of 394 cases from the nearly 16,000 lawsuits that the U.S. government has filed against defaulted student-loan debtors since 2007.
More than 73 percent of the cases were filed a decade after borrowers fell into default, which is generally defined as not making payments for nine consecutive months. Nearly a third of them were filed 20 years after default.
The defendants owed a median debt of $8,100 — nearly twice what they originally borrowed, because of compounding interest and debt-collection fees.
TOM DODGE DISPATCH Southern Ohio teacher Terri Crothers faithfully paid on her student loans for seven years before a devastating car crash.
More than 40 percent owe double what they originally borrowed, most owing more in interest than on the principal balance. More than 8 percent owed at least triple the original amount. One owed a total of $15,227 on a $2,500 loan from 1985.
“Interest and fees start compiling and building way beyond what people borrowed, and that’s what makes this problem so traumatizing,” said U.S. Rep. Hansen Clarke, a Democrat from Michigan who introduced a student-loan forgiveness bill. “Student debt is the next big financial bubble to burst. The system needs to be changed to help people deal with this debt.”
Benefits and risks in borrowing
FEDERAL STUDENT LOANS • You will not have to start repaying federal student loans until after you graduate, leave school or change your enrollment status to less than half-time. • The interest rate is fixed and often is lower than private loans — and much lower than some credit-card interest rates. View current rates on federal student loans at http://studen taid.ed.gov/types/loans/interest-rates . • Undergraduate students with financial need likely will qualify for subsidized loans, for which the government pays the interest while you are in school on at least a half-time basis. • You don’t need to get a credit check for most federal student loans (except for PLUS loans). Federal student loans can help you establish a good credit record. • You won’t need a co-signer to get a federal student loan in most cases. • Interest may be tax-deductible. • Loans can be consolidated into a federal Direct Consolidation Loan. Learn about your consolidation options at http://studentaid.ed.gov/repay-loans/ consolidation. • If you have trouble repaying your loan, you might be able to temporarily postpone or lower your payments. • There are several repayment plans, including an option to tie your monthly payment to your income. • There is no prepayment penalty fee. • You might be eligible to have some portion of your loans forgiven if you work in public service. Learn about loan forgiveness programs at http://studentaid.ed.gov/repay-loans/forgiveness- cancellation . • Free help is available at 1-800-4-FED-AID and at studentaid.ed.gov . Source: U.S. Department of Education
PRIVATE STUDENT LOANS • Many private student loans require payments while you are still in school. • Private student loans can have variable interest rates, some more than 18 percent. A variable rate could substantially increase the total amount you repay. • Private student loans are not subsidized. No one pays the interest on your loan but you. • Private student loans might require an established credit record. The cost of a private student loan will depend on your credit score and other factors. • You may need a co-signer. • Interest might not be tax-deductible. • Private student loans cannot be consolidated into a Direct Consolidation Loan. • Private student loans might not offer forbearance or deferment options. • You should check with your lender to find out about repayment options. • You need to make sure there are no prepayment penalty fees. • It is unlikely that your lender will offer a loan-forgiveness program. • The Consumer Financial Protection Bureau’s private-student-loan ombudsman might be able to assist you if you have concerns about your private student loan: http://www.consumerfinance.gov .
Recent public attention has singled out the private student-loan market for its toxic products because of variable interest rates and other risky terms. But private lenders don’t have the same arsenal to collect on debts as the federal government and, at some point, the private delinquent debt becomes obsolete.
The Education Department points out that borrowers can erase the default — and its damning credit-score impact — through various programs, such as a loan consolidation or by making a payment. But those options sometimes offer only Band-Aids to financially strapped consumers, and another default often follows.
Borrowers rarely can escape their federal student loans, and the consequences for not paying can lead to a lifetime of credit scars.
ERIC ALBRECHT DISPATCH ABOVE: A student loan has hung like a dark cloud over Susan McNeal since the 1970s. The Canal Winchester woman doesn’t think she’ll ever be rid of it.
Unlike private lenders, the federal government can garnish paychecks, seize income-tax returns and take Social Security benefits from borrowers who defaulted, sending them further into financial distress.
The federal loans aren’t subject to a statute of limitations and are virtually impossible to discharge in bankruptcy.
And the U.S. Department of Education rarely negotiates with defaulted borrowers, even though in some cases, half of the debt is derived from collection fees and compounding interest.
The loans generally follow borrowers until the debts are paid or the borrowers die.
RACHEL KILROY FOR THE DISPATCH LEFT: Malissa Babe, 46, shows off her alma mater, Kent State University, to her daughter Taylor, 17, during a recent college visit. Babe struggles with student loans that she and her now ex-husband consolidated. They owe a combined $290,000
“The federal government currently places a greater priority on recovering defaulted loans than on treating borrowers as human beings,” said Mark Kantrowitz, an expert on financial aid and publisher of the websites FinAid.org and Fastweb.com .
The Dispatch provided the Education Department with a summary of the newspaper’s findings, but officials there declined requests for an interview and sent an email response instead.
“We want to make sure we are doing everything we can to strike the right balance between helping borrowers who have hit hard times and honoring our responsibility to be good stewards of taxpayer dollars. Federal student loans are not like other forms of private credit. The American taxpayer lends money to students without any credit or collateral requirements and provides numerous repayment options and benefits,” said the statement from a department spokeswoman. “Our goal is to prevent borrowers from defaulting in the first place, and the vast majority of borrowers stay in good standing and ultimately repay their loans.”
This year, student-loan debt hit a dubious milestone: It surpassed outstanding credit-card debt as the largest form of consumer debt. More than 37 million borrowers owe more than $1 trillion in student loans — the majority in government loans.
More than 5 million people are in default. An uncounted number of other borrowers are delinquent and struggling to make regular, on-time payments.
U.S. Sen. Sherrod Brown, D-Ohio, said the federal government and universities aren’t doing enough to make college affordable or helping students avoid the student-loan trap.
“We as a nation have failed people in helping them attend college without the burden of these huge debts,” Brown said. “We say on one hand that you need to go to school, and then too many people are in a worse-off financial situation after they leave college. That is a failure of society.”
Plenty of blame
Borrowers, colleges and the federal government all share the blame for student-loan defaults, experts said.
Colleges don’t adequately counsel students about the debts they take on. Borrowers are blindly signing loan contracts without fully understanding the risks. And the federal government, including Congress, has created a system that is punitive, unbending and short on key data.
But in the end, “the consequences are borne by the borrowers,” Kantrowitz said. They signed up for the debt, and those who don’t pay on time or completely face ruined credit.
Schools present loans as part of total financial-aid packages to students and their parents. It’s a confusing tangle of paperwork in which some of the aid could be in the form of scholarships and various different loans: subsidized and unsubsidized, federal and private. For many, the process of accepting loans is done electronically during college registration — and without a single conversation.
Colleges aren’t required to provide debt-management counseling, even as they enroll students whose financial situation clearly puts them at high risk of default. Students who drop out are four times more likely to default.
The Education Department said it now requires students to undergo financial counseling, but it did not say where or how, and it has asked schools to be more transparent about costs and financial aid with its students.
The federal government doesn’t track defaults on parent loans, which are made directly to parents for them to help finance their children’s educations. It doesn’t know the average debt at graduation by field of study, and its loan limits don’t consider borrowers’ ability to repay the debt. “They don’t have a basic heartbeat of the system,” Kantrowitz said.
And over the past two decades, after the government took heat for allowing too many borrowers to skate from their debts, Congress has eliminated the last-resort safety nets for borrowers in deep financial trouble — the statute of limitations and bankruptcy, even though few took that route.
“There’s no way out for a borrower. There’s no way to get a clean slate,” Kantrowitz said. “These borrowers are in perpetual purgatory. The more time that passes, the bigger the hole becomes.”
Highest default rates
The only way Dorothy Kellicut could endure more years of having her husband out on the road was to climb into the cab with him and take turns helping him maneuver an 18-wheeler across the country.
The Michigan woman’s children were almost out of school, so the time seemed right for Kellicut to make the transition from homemaker to truck driver.
In 1988, she borrowed $3,333 from the federal government for a three-week program that, upon completion, would earn her a commercial driver’s license and more time with her husband.
But two days into the program, Kellicut learned that she wouldn’t be allowed to drive with her husband for at least a year and would have to be on the road with another driver.
“The school deceived me, and it wasn’t what I signed up for,” said Kellicut, 59, who has been married almost 41 years and has two children and seven grandchildren. “I borrowed that money and never got anything out of it.”
Kellicut dropped out, and the for-profit, Michigan truck-driving school kept the money she borrowed.
For-profit schools, which typically offer certificates for trades such as cosmetology and welding, have the highest student-loan default rates in the country. Among borrowers who attended a for-profit school and were to begin repaying in 2009, more than 22 percent had defaulted within three years, the most recent Education Department data show.
For-profit schools also have low completion rates, a risk factor for default. The Education Department has taken aim at schools with high default rates and will ban them from the student-loan program if more than 30 percent of their loans fail three years in a row.
But that’s little consolation to Kellicut, who has been paying $65 a month since she settled her student-loan court case in 2008.
“I blame myself somewhat, but once you get into this situation, no one really cares about the circumstances,” she said. “Whether it’s a truck-driving school or the University of Michigan, people better know what they are getting into when they borrow that money.”
Crushing interest and fees
It took three days to help make the high-school gymnasium look like a Rave party for the prom, but finally, Terri Crothers had hung the last of the decorations. She was driving home to shower before her chaperoning duties in the spring of 2008 when an oversize pickup truck smashed into the back of her car.
Though the middle-school teacher in Gallipolis, in southern Ohio, spent just 10 hours in the emergency room, lingering injuries required expensive surgery and stints in rehab and left her with one leg shorter than the other.
The medical bills soon piled up for the 49-year-old who, until the accident, said she had a good credit rating and paid her bills on time, including her student-loan debt.
Crothers had left her unfulfilling job as a customer-service representative in 1995 and enrolled in college to become a teacher when she was in her mid-30s.
She borrowed about $40,000, which helped pay for her bachelor’s and master’s degrees.
For seven years, she made monthly payments on her student loans. Then came the crash. She started drowning in her debt.
The loans went into default, and the balance quickly escalated to $70,000 because of interest and collection fees.
Crothers is making payments of $500 a month and expects to repay the debt about the time she turns 80.
“I did things the right way with paying back my loans,” Crothers said. “I couldn’t help that I got hurt. It’s not right that I owe so much more than I borrowed, even after paying (on) them … faithfully.”
No one knows how many borrowers fall behind after years of on-time payments. Experts say that’s key data to collect to help people who fall on an unexpected financial hardship.
Crothers’ credit history was severely damaged, and she almost lost her home after the student loans defaulted.
She now mainly worries about how she will help her 12-year-old daughter pay for college.
“It’s terrible to think I will still be paying for my education when I am trying to help her,” she said. “No one can take away my education from me, and I love being a teacher. The loans just have me trapped.”
Congress gets tough
The thought of filing for bankruptcy made Twyla Manning sick to her stomach, but she believed there was no other way to escape from the defaulted student-loan debt that had crippled her financially.
She had borrowed about $3,000 in the late 1980s to earn a teaching degree, but by 2003, it had grown to almost $20,000 with compounding interest and fees.
She knew bankruptcy would destroy her credit, but she needed those loans cleansed from her financial past.
“I met with a lawyer and he told me the student-loan debt would be erased and I would get a clean start,” said Manning, 54, of Spring-field. “But he was wrong, and those loans stayed right with me.”
Fearing that borrowers would finance expensive educations with government money and then wipe out the debt through bankruptcy, Congress in the 1990s declared that student loans could not be erased except in rare circumstances.
Today, borrowers have to prove “hopelessness,” a standard that means the borrower has no reason to expect their dire financial circumstances to change.
Of 72,000 bankruptcy cases filed nationally last year, only 29 were able to discharge all or part of their student loans, said Kantrowitz, the financial-aid expert.
Consumer advocates have long asked Congress to return bankruptcy protections for federal student loans.
“Bankruptcy is not a panacea,” Kantrowitz said. “It’s 10 years of great difficulty.”
But at the end of that period, debtors can rebuild their financial lives and credit scores.
Manning, who lost her full-time job in child development last spring, remains in debtors’ hell. She tried to return to school again this past September at Clark State Community College in Springfield and thought her student-loan mess was gone. She had made some payments, and both her wages and income-tax-return checks had been garnished several times.
But the admissions check revealed that she still owed $3,200 — more than she had borrowed 25 years ago.
“I took out those small loans to better my life, and it was the worst mistake of my life,” she said. “It’s been more aggravating than anything I’ve dealt with.”
More stress than cancer
The expectant mother, exhausted from another round of night classes, pulled on the car door with all her might, but it was frozen shut and she couldn’t open it.
In that frustrating moment in 1977, even though she needed just two classes to finish her degree, Susan McNeal surrendered to the rigors of school, work as a clerk at a police station and her pregnancy.
She stopped taking classes at a small college in Illinois, but her quest to pay off about $4,000 in federal student loans has continued for more than 35 years.
McNeal, 56, of Canal Winchester, said she couldn’t afford her student-loan payments initially, but her income-tax returns have been garnished by the government on and off since 1981.
McNeal, who eventually earned a degree in 1985, estimates that she already has paid about $12,000 —three times what she originally borrowed. That includes payments she made over the years, as well as the money from tax returns.
She still owes $8,775.
“The student loan is something I can’t get away from,” said McNeal, who earns about $46,000 a year in an accounting tech job for the federal government. “It just keeps following me.”
McNeal has twice battled breast cancer, had a double mastectomy last year and is still undergoing treatments.
But she says the student-loan debt has caused her more stress than the cancer.
She now makes payments of $77 a month.
“I will probably die before I pay this off,” she said.
Consolidation can cripple
The likelihood of 17-year-old Taylor following in her mother’s footsteps and attending Kent State University increased as she strolled through its spacious student media center the day after Thanksgiving.
Malissa Babe basked in her daughter’s excitement from a few feet away, but her mind drifted to the student-loan debt that has haunted her for the past several years.
She currently owes about $290,000 in student loans, even though she borrowed only a fraction of that amount to attend Kent State in the early 1990s.
“I’m hopeful and fearful for my daughter,” said Babe, 46, who traveled with Taylor from Irvine, Calif., for the visit. “I will do everything in my power to make sure what happened to me doesn’t happen to my daughter.”
Babe’s mistake was consolidating her $17,000 student loan with her then-husband’s $117,000 debt. At first, Babe and her ex-husband were exempt from making payments because they taught in low-income Ohio school districts and were granted forbearance by the government.
After the couple divorced in 2005, the loan eventually went into default. Babe’s former husband didn’t tell her that he had stopped making payments. Because of the consolidation, that massive debt belonged to her as well.
It wasn’t until she moved to California in 2008 and attempted to finance a car and obtain home loans that she learned the truth: Her credit score, which was once 800, had dropped into the 500s, making her ineligible for credit. After learning of the loan mess, Babe contacted the collection company, but it refused to give any information, saying it was an invasion of her ex-husband’s privacy, even though her name was listed on the loan.
“I’ve tried to fix this over and over, and I’ve always paid something on the loans,” Babe said. “But I’m powerless in this situation.”
Babe earns $85,000 as a middle-school teacher but lives paycheck to paycheck. She has drained her savings, maxed out her credit cards and, at one point this past summer, she had $2 remaining in her checking account.
Through the government’s income-based repayment plan, Babe pays 15 percent of her discretionary income — about a $1,000 a month — toward her loans.
But for reasons unknown to Babe, the collection company hasn’t done the same to her ex-husband, who still lives in California.
Government officials, including President Barack Obama, have touted the income-based repayment option as one solution to the student-debt crisis. Rep. Clarke’s proposal would make the option a requirement and eliminate the need for third-party debt collectors, saving borrowers such as Babe thousands of dollars.
The Education Department hires debt collectors to chase defaults. Those nongovernment businesses tack on as much as 30 percent of the loan amount to the balance and share the collection fees with the government.
Babe’s balance now stands at more than $290,000, and she has been unable to get a true accounting of how the balance skyrocketed.
“I’ve spent many nights crying my eyes out, begging them to work with me, but the answer is always no,” Babe said. “Consolidating those loans was the biggest mistake of my life, and it’s draining everything I have.”
Her daughter doesn’t know all the details of her mom’s ordeal, but it serves as a constant reminder of how daunting it will be to pay for a college education.
“It’s not something you want to think about on a college visit,” Taylor said. “The cost of college is out of control, and most of us have no choice but to borrow money to make it through. You just have to hope you can pay it back when the time comes.” jriepenhoff@dispatch.com
@jriep mwagner@dispatch.com
@mikewagner48
Those struggling with loans have options
The U.S. Department of Education says that if borrowers are struggling to pay their federal student loans, they should contact their loan servicer to discuss options for relief such as:
• Income-based repayment, which can tie payments to borrowers’ discretionary monthly income. It also can extend the life of the loan for up to 25 years.
• Consolidating federal loans into a single, monthly payment. The fixed-interest-rate loan can be repaid over 30 years.
• Forbearance, temporary relief for those facing a short-term financial hardship. During forbearance, payments are suspended but interest continues to accrue. Those who have defaulted — generally meaning they haven’t made a payment in nine consecutive months — also should contact the agency attempting to collect the debt. Options to clear the loan from default include:
• A repayment plan.
• A loan rehabilitation, in which the borrower and the Education Department agree to a monthly amount followed by a series of on-time payments. Online help Details about both federal and private loans can be found at the following websites:
• Consumer Financial Protection Bureau: http://www.consumerfinance. gov/students
• U.S. Department of Education: studentaid.ed.gov
• Finaid!, a privately-run website that provides comprehensive information on student financial aid, advice and interactive tools: http://www.finaid.org
• Project on Student Debt, by the Institute for College Access & Success, which works to increase public understanding of financing higher education and the implications of that for families, the economy and society: projectonstudent debt.org .
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