June 13, 2014
Student Debt Takes a Bite Out of More Paychecks
Government Ramps Up Wage Garnishment of Defaulted Borrowers
The federal government is stepping up wage garnishment of student-loan borrowers who have defaulted, another lingering effect of the nation's ballooning college debt.
Just over 174,800 people who had defaulted on federal student loans saw the Education Department take some money out of at least one paycheck in the fiscal year ended Sept. 30, 2013, according to data requested by The Wall Street Journal. That figure was up 45% from 10 years earlier and excludes individuals working for the federal government.
The trend is picking up steam as more people have trouble paying off their federal student loans and the Education Department—the nation's largest student lender—faces growing criticism that it isn't doing enough to prevent borrowers from slipping into garnishment.
The department said it is working to help students get a college education while also making sure taxpayer money that is funding student loans is repaid. "Wage garnishment is a tool of last resort used by the department to recover defaulted loans," said department spokeswoman Dorie Nolt.
Borrowers are considered to be in default and candidates for wage garnishment after they miss 12 monthly payments on any federal student loans. The Education Department can automatically begin taking as much as 15% of borrowers' after-tax wages, and unlike private lenders, the government doesn't need court approval.
The lapsed borrowers run the gamut from college dropouts to doctors, teachers and other professionals who often took on heavy debt loads while earning their degrees, said Natalia Abrams, executive director at Student Debt Crisis, a nonprofit group that advocates for borrower-friendly loan-repayment options.
Maha McCain, a teacher in South Florida, signed up for student loans to help pay for her undergraduate and graduate degrees. When she finished in 2003, her federal debt totaled about $90,000, and she quickly fell behind on payments, in part because of sudden medical expenses.
For seven years, 15% of her paycheck has been garnished. To make ends meet, she and her husband have taken out short-term, high-interest-rate loans. "Losing that extra few hundred dollars a month, which could pay a couple bills and for groceries, it just starts a chain reaction," said Ms. McCain, 37 years old. "I'm in a bad place financially."
Most borrowers who wind up in garnishment stay there for a while. About 72% of such borrowers in fiscal 2011 still were getting money taken out the following year, according to the Education Department. Many remain in garnishment for at least five to 10 years, said Mark Kantrowitz, senior vice president at Edvisors.com, a Las Vegas-based financial-aid website that tracks student-loan debt.
Pressure has been mounting on the Education Department to rein in its lending as losses have grown in recent years. There was a total of $1.1 trillion in outstanding federal student loan debt by the end of March, up 9.2% from a year prior and 53% from 2007, according to Edvisors.com. Unlike with private student loans, which totaled $170 billion in outstanding debt in March, nearly all borrowers can get approved for federal loans.
Ten percent of federal-student-loan borrowers who entered repayment in fiscal 2011 defaulted on their loans by the end of fiscal 2012, according to the Education Department. That is up from 9.1% the year before and the sixth consecutive annual increase since 2005, when it was a record low 4.6%.
Washington is divided over how to fix the problem. This past week, President Barack Obama issued an order to expand the number of borrowers who qualify for a repayment program that lowers their monthly payments and offers loan forgiveness. A bill introduced by Sen. Elizabeth Warren (D., Mass.) to allow borrowers to lower the interest rates on their loans failed to get enough votes to proceed in the Senate. Congressional Republicans say reworking loan terms doesn't address the larger issue, which is that the federal government's financial aid, including loans, is what is fueling the sharp rise in tuition.
Federal and private student loans usually can't be wiped out when a borrower enters bankruptcy. The federal government also can withhold a portion of Social Security retirement and disability benefits, federal income-tax refunds and lottery winnings.
Still, it takes a long time to end up in wage garnishment, and there are several repayment plans borrowers can try to access to avoid defaulting. For example, the Education Department offers deferment and forbearance options that allow borrowers to delay repayment if they can prove financial hardship, such as unemployment or underemployment.
By the end of September 2013, the number of borrowers whose wages were being garnished accounted for about 8% of the 2.2 million federal-student-loan borrowers who were in default, according to Edvisors.com. This figure grew to 2.5 million federal-loan borrowers by this past March.
Some observers say the federal government should be more aggressive with defaulted loans. The federal government collected $303.6 million from garnishments in the year ended September 2013, down from $343.1 million a year earlier, when the number of new borrowers added to the garnishment list dropped sharply because of a computer-systems upgrade.
Collection agencies and loan servicers that the government uses don't do enough to place borrowers in repayment-assistance programs, said Joshua Cohen, a Connecticut lawyer who represents student-loan borrowers facing garnishment and other issues.
A report by the Government Accountability Office in March found that the Education Department maintained limited oversight of collection agencies. The companies receive payment from the government even if the accounts go into garnishment.
The trade group representing the collection agencies says borrowers tend to ignore the agencies' efforts to help them. "The human nature parts of it is to ignore [calls from the collection agency] and hope it goes away—the reality is it doesn't," says Mark Schiffman, spokesman for ACA International, a Minneapolis-based trade association representing third-party debt collectors.
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