Our current system for collecting student loans makes no distinction between deadbeats who cheat and the much greater numbers of people who just don’t have the money to repay. As predatory debt collection agencies ruin the lives of more and more Americans, we are ignoring an easy and fair solution.
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.
The 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.
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.
Why have even liberal politicians been willing to make the student loan repayment system ever more draconian? Partly it’s because, in an age of federal deficits, they’ve been desperate to find ways to boost government revenue without raising taxes. Partly it’s been a general political eagerness to signal that they are not about to coddle deadbeats.
But it’s also because, for years, a number of Democrats have had a vision about how to crack down on freeloaders while at the same time easing the burden on borrowers who through no fault of their own simply cannot repay their loans. The idea is the income-contingent loan, or ICL (see “Answering the Critics of ‘Pay as You Earn’ Plans”), whereby people who take out student loans can repay them based on a fraction of their annual income, rather than fixed payments. The free-market economist Milton Friedman came up with the basic concept in the 1950s as an alternative to state funding of higher education, and it was tested in pilot form by the Reagan administration. But by 1988 Democratic presidential candidate Michael Dukakis was advocating a version of the idea as a way to make student loans more affordable.
Bill Clinton made ICL a central plank in his 1992 presidential campaign. He argued that such loans would not only offer relief to borrowers who never managed to graduate or became unemployed, but would also make it easier for students to embark on socially vital but low-paying public service careers, such as teaching or social work. He also championed the idea that the federal government could save money by making loans directly to students rather than paying banks to do so. In 1993 he signed legislation creating both a direct lending program (the one Obama would expand in 2010) and an ICL option. The hope was that the two initiatives together would provide a cheaper, simpler, and safer alternative to the traditional student loan system. But lobbyists for the banks, whose subsidies were threatened, convinced Congress and Department of Education regulators to limit the reach of the two programs, and for years relatively few borrowers were made aware of them.
Even borrowers who do learn of the income-contingent option often face a bureaucratic nightmare when they try to exercise it. Consider the case of Kayleen Hartman. When she first entered Georgetown University Law Center in 2008, she knew she wanted to become a human rights lawyer, and that such a career would likely give her only a modest income. The only reason she thought she would nonetheless be able to carry the cost of her law degree was that she planned to repay her federal student loans through an updated and more generous version of the Clinton initiative called the income-based repayment, or IBR, program.
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