Federal Student Loans: What Happens If You Don’t Pay? [POLICYbrief]


Student loan law right now is kind of a mess,
to be perfectly honest. There is a lot of student loan debt out there. Total student loan debt right now is around
$1.5 trillion. 44 million borrowers have student loans, and
upwards of 70% of students graduating from college are graduating in debt. The loan program makes loans to all undergraduates,
regardless of the program that they study, regardless of their income background, and
regardless of whether or not they’re likely to complete their program, and at two-year
colleges, at community colleges, and at four-year colleges. So, it’s not surprising then that if you don’t
have any criteria on the front end to screen out people who are unlikely to pay, then you
end up with default rates that are somewhere around 20%, 25%. A four-year graduate would typically leave
college with around $30,000 in debt, depending on their circumstances. The federal government doesn’t charge you
late fees if you miss a payment on your student loan. They will continue to charge you interest
on the loan, and if you go long enough without making payments, several months, it can affect
your credit score. So, if you start falling behind on your payments,
you enter a type of status called delinquency. For federal student loans, borrowers can miss
up to nine payments or essentially be 270 days past due before the loan actually goes
into default status. It triggers something called acceleration
where the full balance of the loan becomes due all at once, and that then gives the federal
lenders more opportunities to pursue borrowers. About one in five are in default, and that
equates to … It’s about 8.3 million people who are in default on federal student loan. A 25% default rate, that sounds like a catastrophic
number. That’s the kind of number you would associate
with, uh, a severe economic recession. So, for borrowers who default on federal student
loans, the consequences can be pretty severe. For federal student loans that go into collections,
uh, federal law allows for massive collections cost and penalties that can be upwards of
25% of the outstanding principal and interest balance, meaning that if you have $40,000
in federal student loans and they go into default, that balance can go up to $50,000
as a result of the default. The federal government has additional collections
powers that private entities don’t have. So, the federal government can garnish your
wages without a court order. They tend to do this as a last resort, but
it’s actually done quite commonly. The federal government collects around $600
million a year through wage garnishing on defaulted federal student loans. It is difficult to discharge student loan
debt in bankruptcy because the bankruptcy code was rewritten to largely bar borrowers
with student loans from discharging those loans. It requires something called an adversary
proceeding, which is essentially like a trial in bankruptcy court, in order to show that
the borrower meets the undue hardship standard. A lot of borrowers are not able to meet that
standard. And the reason why Congress prevents you from
discharging your loans in bankruptcy is that there’s no underwriting on the front end for
the loans. So, the government makes loans to anybody
and everybody, and so if you combined it with, uh, easy discharge ability for bankruptcy
on the back end would be a program that’s rife for abuse. I think that, uh, that the system is unsustainable. We need to make reforms that allow borrowers,
uh … or I should say allow students to go to school without needing to borrow, or at
least not needing to borrow as much. I also think that we need to strengthen programs
for borrowers that are already in repayment so that they can have an easier time of dealing
with their loans without having to wade through a- a messy servicing and debt collection system. I think people need to be more careful in
the amount that they borrow, in the amount that they’re going to pay off. I think there are concerns about some of the
potential costs of these programs, particularly if the cost of education continues to go up
and borrowing is allowed to keep pace with the cost of education, uh, and more and more
borrowers are able to get their loans forgiven. At the same time, without some sort of reforms
on the other side, on the cost side, just eliminating these safety net programs might
cause a lot of lower-income borrowers to not be able to reasonably access higher education
at all. Is it worth it to go into debt to- to pay
for the education? I wouldn’t necessarily be turned off by having
to go $30,000 in debt. If that’s the difference between getting an
undergraduate degree and not getting an undergraduate degree, um, then generally $30,000 is definitely
worth it.

44 thoughts on “Federal Student Loans: What Happens If You Don’t Pay? [POLICYbrief]

  1. Bankruptcy doesn't necessarily apply to student loans. You can file for bankruptcy and still owe all of your student loans.

  2. How else are all those stupid kids going to learn what it means to support the Democratic Party?
    College education for everyone means the same thing as health care for everyone.
    In the end, its the gulag for everyone.

  3. Living as frugal as I can and working my tail off of get out of student loan debt. Unfortunately I won’t be able to graduate school unless I can pay as I go because I’m not interested in taking out any loans every again in my lifetime.

  4. You know that the video shows 1,500,000,000 (1.5 Billion) when you say "1.5 trillion" (1,500,000,000,000)?

  5. If they want bad credit that's on them because you can pay off your student loans if you work hard and follow the Dave Ramsey plan.

  6. No one blaming the people forcing kids to go to college when they cant afford it? Why are universities bleeding students dry?

  7. I am using my tax savings from the new tax plan and funneling that right into my kids college savings fund. 3k a year for 16 years will be almost 100k. Thanks Trump! 4 more years!!!!

  8. What about the predator lending crisis where they were taking people who qualify for student grants and applied with their information for a fedloan making the student believe that they are getting free education with their grant? Most of these student's wouldn't of qualified for a loan based on credit criteria's such as having a job, not attending the school for a period of time for which the loan would require etc. Why doesn't anyone go into depth about that? Also, what about student's who never received the funds because the school kept it and didn't write a check out to the student it was originally for?

  9. Rack up the debt and emigrate to another country that actually has healthcare and good social programs. Boom.

  10. So if you are in default….They are stealing your tax returns (yes I said stealing because you work your butt off all year and they come take the money you've earned) They, as a result of going into default, have raised the amount you own significantly…..What do you do? Just let them take your tax return each year and eventually garnish the little bit of money that's barely putting food on the table? What do you do. Actual answers…??

  11. I would like to study medicine especially botanical studies but the obvious debt trap they offer to gain that education id be better off with a part job and a low income apartment

  12. talk more about the interest. A ballooning loan/debt is mostly interest. When a student is in default, they stop charging you interest. Isn't that so?

  13. College shouldn’t be free but shouldn’t cost 20k a year make it affordable and or don’t have any interest on loans

  14. End Federally backed loans! They are the key reason colleges keep pushing enrollment costs higher. They know they will get the money at the student’s expense… Take away the easy government money they’ve enjoyed since 1965 and watch them lose their shit. They would try to say that the every day “Joe” would be hurt by this but that’s not true. It’s their bank accounts that would suffer. Eventually they would be forced to once again lower cost and compete for people’s money. Not easy government money.

  15. How is it only $30,000 if the annual tuition fee is $17,000 for a local U.C., $30,000 for an out of state student and $50,000 for Standford, Harvard, and the like? Wouldn't it be more like $120,000 for a bachelor's degree and $210,000 for a master's?

  16. Get 2nd, 3rd job like I did to pay $30k and live frugally. Get rid of your phones, tablets, new cars, TVs, cable, Starbucks and any unnecessary items, live a minimalist lifestyle. You have to sacrifice to get ahead people.

  17. Big question is why are my friends in Sweden getting a free education and not us here in the United States? Oh wait yes we have to spend our money in endless wars all over the world! 60% of our federal taxes goes to the military. Also you are spreading some misinformation by alluding that students would "abuse" a bankruptcy provision as in the past when it was possible to declare bankruptcy it was RARELY abused!

  18. $30,000 dollars sounds extremely low. Does this include food and shelter?…….. Closer to $80,000 is probably more accurate.

  19. So in other words if someone is struggling paying their student loans the Government responds by giving them more student loans?

  20. …At this point, Sallie Mae should end… Colleges will either have to lower their tuitions, or close their doors permanently… Can you guess what a good number of them will do?

  21. Why should I have to pay interest to the federal government when I didn't cause inflation? Also the government is not supposed to profiteer off students.

  22. ‪Why doesnt the US government forgive the accumulating interest on all existing college loans (both private & govt) and let borrowers just pay off the original principals on their loans? Obviously our govt has done nothing except create some incipid repayment consolidation loans that prolong this debt on the graduates who cant find good paying jobs. Unecessary foreign aid could B diverted 2 help subsidize colleges & universities with tools 2 effectively teach curriculums emphasizing science, technology, or medicine (not fine or liberal arts, social studies, law, sports, etc) College tuitions and professor salaries need 2B capped. All future college loan interest should also B capped permanently @ 2% with no compounding. We need smart, educated, proactive people – they are the antidote to a stupid government.‬

  23. Interest rate is the biggest multipliers plus inflation rate. You rather not to chose fed student debt..

  24. I’m telling everyone right now. This is a bubble waiting to burst. It’s just like the housing bubble that caused the recession and they refuse to learn their lesson. We just got out of the recession. If anyone is hurting with debt I hope you get out of it and live a happy life you deserve.

    As for the ones causing this shit storm I hope they get everything that’s coming to them and I sure as hell will not feel sorry for them.

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