Washington Monthly - September/October 2012 - (Page 47)

numbers of people who just don’t have the money to do it. Few policymakers understand what happens to such people once they fall into the clutches of collection agencies, or even who they are. And for many borrowers, there is no way out. Unlike mortgages and credit card debt, student loans these days cannot be erased through bankruptcy except in rare cases of extreme hardship. And there is no longer any statute of limitation for prosecuting those who fall behind on their loans. As Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, has written, “Even rapists are not in this category since there is a statute of limitations for rape prosecutions, at least in federal law and in most state laws.” Over the years, politicians, even liberal ones, have paid too little attention to what happens on the back end of the student loan system to those who can’t afford to make their payments. Instead, Democrats have focused on trying to broaden access to higher education by making student loans more available and less costly on the front end. In 2010, the Obama administration achieved a major victory in this access agenda when he signed legislation ending the wasteful practice of subsidizing banks to make student loans. Since the summer of 2010, all federal student loans are now made directly by the government, saving the Treasury $68 billion over eleven years (half of which is going to expanded Pell Grants for needy students). But this monumental reform of the front end of the student loan system leaves the back end untouched, meaning that more and more Americans— people like Gregory McNeil—are left at the mercy of predatory debt-collecting contractors. Having kicked the banks out of the student loan business, it’s high time to get rid of the repo men, too. he federal government first started underwriting student loans in 1965. At the time, the Johnson administration and Congress made clear that federal loans would be available to all eligible students, regardless of their credit history. Students would also not have to post any collateral to obtain loans. The risks proved to be quite manageable. A 1977 GAO report found that less than 1 percent of student loans were discharged in bankruptcy. Nonetheless, stories of deadbeat doctors and lawyers escaping their federal loans in bankruptcy took hold in the public imagination, much like those about welfare queens. In response to these anecdotes, Congress barred federal student loan borrowers from being able to discharge their debt in bankruptcy during the first five years of repayment unless they could prove “undue hardship.” Lawmakers took this action over the objections of Michigan Democrat James O’Hara, then chairman of the House Subcommittee on Postsecondary Education, who argued that Congress was trying to remedy “a ‘scandal’ which exists primarily in the imagination.” In 1981, Ronald Reagan’s Department of Education began contracting with private companies to collect on defaulted federal student loans. In 1982, a new law allowed the government to withhold federal benefits (not including Social Security) from those in arrears. But the real crackdown came in the early 1990s, after student loan default rates skyrocketed as a result of widespread abuses by unscrupulous trade schools. Worried that these scandals would jeopardize popular support for the federal student aid programs as a whole, Democrats joined with President H. W. Bush’s administration to rein in the trade schools and strengthen the tools the government uses to collect on defaulted loans. Congress extended the waiting period before which federal student loans could be dischargeable in bankruptcy to seven years. And, much more significantly, it changed federal law to put default on student loans into the same criminal category as murder and treason by eliminating the statute of limitations under which student loan borrowers could be prosecuted. t Our current fearsomely complex student debt management and collection system makes no distinction between deadbeats who don’t plan on paying back their loans and the much greater numbers of people who just don’t have the money to do it. Liberals went along with many of these crackdowns, and even proposed some of their own. President Clinton, for example, signed a law that made it even harder to discharge federal student loans through bankruptcy and allowed the Education Department to tap into a federal database— originally designed to enforce child support payments— to track down and garnishee the wages of those who defaulted on student loans. George W. Bush’s administration proved even more zealous. It aggressively collected on long-overdue debt, by, for the first time, seizing Social Security payments from elderly and disabled defaulters and signing legislation ending bankruptcy protection for borrowers who take out risky private student loans. Nor has the Obama administration been shy; last year, President Obama called on Congress, as part of a larger deficit reduction proposal, to allow collection agencies to use automated dialing to contact defaulted borrowers’ cell phones. Washington Monthly 47

Washington Monthly - September/October 2012

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