Student Debt: A Conundrum With Consequences


Student loan debt is in the news. It has now become a presidential campaign issue. One 2020 presidential candidate has proposed eliminating all student loan debt. In other news, financial aid packages have arrived or will arrive for this year's crop of high school seniors accepted for enrollment this fall. Many of those packages contain hefty loan offers.

Those of you who have read my past articles know that one of my frequent topics is the consequences of heavy loan debt. Today, I'm going to discuss that topic again, this time with some numbers and facts from two authoritative sources. You don't have to believe my opinions. Dealing with hard statistics can be a revelation of another kind.

My sources today are Student Loan Defaulters Suffering More Wage Garnishment: Study, by Andrew Pentis, and The Student Debt Conundrum, by Laurence M. Vance. Each author sets the tone straight away. Pentis notes ...

Many borrowers are having a hard time repaying their federal student loans — and the government and its collection agencies are having an even harder time recouping this outstanding debt.

In the third quarter of last year, for example, less than two percent of federal loans in collections were recovered — just $2.6 billion out of $166 billion.

Unfortunately for delinquent borrowers, however, the Department of Education (DoED) is increasingly leaning on one of its more feared methods of collection: Dreaded wage garnishment is on the rise....

… and Vance underscores the numbers:

Among the Class of 2018, 69 percent of college students took out student loans, and they graduated with an average debt of $29,800, including both private and federal debt. Meanwhile, 14 percent of their parents took out an average of $35,600 in federal Parent PLUS loans.

Americans owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That's about $521 billion more than the total U.S. credit card debt.

11.5 percent of student loans are 90 days or more delinquent or are in default.

Average monthly student loan payment (among those not in deferment): $393.

What makes the statistics even more alarming is that only about 15 percent of student debt is private debt. Most of the money borrowed by students was borrowed from the deep pockets of Uncle Sam....

Wage garnishment is one of the most punitive forms of debt collection. Many college graduates struggle to find employment that will keep them afloat, independent of parental support. Add to that the effect of lower-wage jobs and a rising cost of living, and you have a situation that amounts to a cut or two above stark economic survival.

To that, add wage garnishment -- when a court issues an order requiring your employer to withhold a certain amount of your paycheck and send it directly to the person or institution to whom you owe money, until your debt is paid off -- and you've got a perfect storm raging on a miserable life.

As I've written before, the emotional rush of getting into a so-called “dream school" can turn that dream into a nightmare of debt whenever the implications of the financial aid package are ignored in the rush to enroll. The thrust of what I would like to get across here -- once again -- is the long-term consequences of significant loan debt. To do that, I urge you to read these articles by Pentis and Vance.

To give you a taste of what they're reporting, here are a few excerpts that should get your attention. I'll add some comments along the way.

What about loan delinquencies?

Pentis notes:

Although the time it takes for private student loans to enter collections varies by individual lender, there's single rule when it comes to federal loans: Miss one payment and you're officially delinquent. Fail to make a payment for at least 270 consecutive days, and now you're in default.

Once in default, a federal loan balance accelerates (or becomes due in full). Without arranging to make good on the debt, it could then land with a collection agency.

The 18 private collection agencies contracted by the DoED took on $171 billion in defaulted student loans over the last three years for which data is available....

If you needed a sobering statement about student loan debt, here it is: Miss one payment and you're officially delinquent. Fail to make a payment for at least 270 consecutive days, and now you're in default." I've heard college students casually say, “I'm not worried about missing a payment or two. Sooner or later, the government will cancel these loans, anyway." Dream on. Yes, a presidential candidate may be promising just such a thing, but what is the probability that that will happen? Meanwhile, missed payments and defaults are ruining credit ratings across the land.

Details on Garnishment

Pentis says: … When a distressed borrower doesn't rehabilitate, consolidate or otherwise catch up on their federal loan debt (or is slow to do so), it's the agency who acts first.

As empowered by the DoED, collection agencies could collect on your debt by withholding up to 15% of your income, as well as your tax refund, Social Security or other federally administered benefits.

According to our three-year analysis, eight percent of loans in default — or $2.3 billion worth — were recouped through these involuntary wage garnishments.

Agencies appear to be recovering more and more debt via wage garnishment. Almost $230 million was retrieved through garnishment in the third quarter of 2018 — an increase of about $60 million from the third quarter of 2015, hitting the highest level for the three-year period....

Need more convincing? “... by withholding up to 15 percent of your income, as well as your tax refund, Social Security or other federally administered benefits." It's entirely possible that if you graduated from or left college 10, 15 even 20 years or more in the past, the long arm of garnishment could reach out and touch you. Losing tax refunds is bad enough, but what about Social Security? How many millions are depending on Social Security to make it month to month? To have part of this claimed as a result of default could be for some a critical financial blow.

Pentis offers a series of solutions for borrowers who are delinquent, in default and under collection. I urge you to study these recommendations, even if you're not yet delinquent (or worse). There are ways to deal with loan consequences, but the best way is not to borrow more than you can handle in the first place.

As a current college student or graduate with sizeable loan debt, you may be wondering how this overwhelming situation came to be. That's where Vance's article comes into play. He offers some interesting, if not amazing, views on government and loans. For example:

According to the Final Audit Report of the U.S. Department of Education's Office of Inspector General, “Federal Student Aid: Additional Actions Needed to Mitigate the Risk of Servicer Noncompliance with Requirements for Servicing Federally Held Student Loans," Federal Student Aid (FSA), the agency within the Department of Education responsible for servicing all federal student loans, has not been doing a very good job

Naturally, the FSA “strongly disagreed with the overall conclusion that it did not establish policies and procedures that provided reasonable assurance that the risk of servicer noncompliance with Federal requirements was mitigated."

So, it appears that there is some disagreement between audit results and government agency contentions about what allowed the loan crisis to originate, fester and blossom. Points and counterpoints are one thing, but the reality of consequences for borrowers is something else.

Vance notes some additional sobering information, as if you needed more:

Needless to say, the federal student loan program is a mess, and millions of recipients of its loans are mired in debt. So mired, in fact, that, according to two recent studies,

- 40 percent of borrowers may default on their student loans by 2023

- 250,000 borrowers default on their federal student loans each quarter

- It takes 19.4 years, on average, to pay off student loans

And it should be noted that, unlike other forms of federal debt, which are dischargeable in bankruptcy, student-loan debt cannot generally be discharged in bankruptcy....

Those numbers are shocking. Let them sink in. Keep this in special consideration: “ … student-loan debt cannot generally be discharged in bankruptcy…" There appears to be little, if any, escape from what you have borrowed to go to college.

Vance offers his views on the fiscal, philosophical and practical perspectives of student loans provided by the government. They are particularly convincing, but his philosophical aspect comments stood out for me:

From a philosophical perspective, federal student loans are an illegitimate purpose of government. The government is not a bank. It has no money of its own. All the money in the federal treasury has been taken from Americans in the form of taxes. No American should be forced to pay for the education of any other American. Even so, it is not the proper role of government to make loans or subsidize industries....

Summarizing my thoughts about these two articles and the student loan crisis, in general, I have to say that I have little confidence that much will change in the near future. Presidential candidates can offer the moon with promises to magically wipe out well over a trillion dollars in loan debt, and while ongoing insistent warnings from much more convincing voices than mine ring the caution bell loudly, human nature has the ability to rise above common sense with frightening regularity.

Loan debt is a first cousin of national debt. Politicians whistle through the graveyard of $22 trillion in debt that will never be paid off. The analog is the $1.5 trillion in loan debt. The numbers cited above point to the same oblivious mentality of student borrowers. Thus, those of us who voice caution are powerless to slow down the debt train. So, my final comment today about all this is: Don't get on that train!