03-06-2025
How the Consequences of Defaulting on Student Loans Became So Harsh
ROBYN BECK
By the time Patricia Gary contacted a lawyer to help her deal with her student loans, she'd paid $23,000 towards them and still owed $3,882. That was the case even though she only borrowed $6,000 in the first place.
What prompted the call was a notice in 2019 that the government planned to take some of her Social Security check in order to repay the debt. Gary needed that money to afford food and medications, so she raced to figure out how to stop the feds from taking it.
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Gary first took on student loans in the 1980s to attend a for-profit beauty school. She left after about a year, amid concerns she wasn't receiving a valuable education. The school later collapsed in scandal.
Still, the debt Gary took on to attend followed her for years. She would periodically hear from debt collectors and make agreements with them to throw some money at the loan each month. There were stretches where Gary didn't hear from anyone about her loan and so she assumed she'd handled it, but somehow it would always pop up again.
In the meantime, she went back to school with help from her employer and later paid out of pocket to earn a master's degree. Those credentials helped her make a career of working with foster youth.
So how did someone who helped others escape their circumstances find herself at risk of struggling to afford basic needs because of her student loan?
The answer, I found in researching my book, Sunk Cost: Who's to Blame for the Nation's Broken Student Loan System and How to Fix It, is decades of rhetoric that fueled an image of student loan borrowers who didn't pay as people shirking their responsibilities. The result is that a program meant to help low- and middle-income Americans attend college features consequences for falling behind that are harsher in some cases than those credit card users face.
Now those penalties are looming over borrowers as the Trump administration restarts student debt collection following a five year pandemic-era pause. About 5 million borrowers are at risk of having their Social Security checks and tax refunds taken as well as their wages garnished over defaulting on student loans.
But the march towards these punitive consequences began decades before the Trump administration. Over the years, lawmakers layered on policies that made it nearly impossible for borrowers to escape their student loans and delivered punishing penalties when they fell behind.
This pattern started in the mid-1970s when Congress changed the way the bankruptcy court treats student loans. Probably one of the most well-known facts about student debt is that it's nearly impossible to discharge in bankruptcy. But that wasn't always the case.
About 10 years after policymakers created the broad-based student loan program, newspapers across the country chronicled how seemingly easy it was for borrowers to get rid of their student debt. There were stories of graduates with professional degrees and from elite law schools discharging their loans through bankruptcy.
One article in Pennsylvania newspaper, the Lancaster New Era, told the story of a woman in Ohio who got rid of her $4,100 in student debt by filing for bankruptcy. Ultimately, she found a job that would have paid her enough to repay the loan.
A major source for that story was the executive director of a state-backed organization that worked for the government as a middleman in the student loan program. In other words, the organization had an interest in ensuring it would be difficult for borrowers to escape their loans.
The head of the organization described to the paper what he called 'pre-planned bankruptcies.' They, 'really make you sick,' he said. According to the article, he worked with a congressman in his region to draft a bill that would ban borrowers from discharging loans in bankruptcy within five years of graduating.
During congressional debate around this idea, it became clear that stories of widespread efforts from borrowers to get rid of their loans were just that — stories. For example, one congressman cited data indicating a 225% increase in student loan-related bankruptcies over one year in Pennsylvania. That really amounted to an uptick to 13 cases from four.
Despite this evidence, the proposal became law. Lawmakers ultimately expanded the provision to make it nearly impossible to discharge student debt throughout the lifetime of the loan.
Roughly two decades after members of Congress first changed the treatment of student loans in bankruptcy, lawmakers quietly pushed through another change that would make it nearly impossible for borrowers to escape their student loans. For most consumer debt, there's a maximum amount of time a lender can sue to collect, called a statute of limitations. But in the early 1990s, lawmakers eliminated the statute of limitations on federal student loans. In other words, borrowers can be sued or face collections on the debt until they die.
This decision was made without much fanfare. Lawmakers used a process that was meant for technical, non-substantive law changes to push it through. In their limited comments around the decision, members of Congress wrote that student loan borrowers shouldn't be able to escape their debt because their ability to repay the loan would theoretically increase over time.
The wording echoed arguments in favor of making student loans more difficult to discharge in bankruptcy, portraying borrowers who weren't paying their student loans as people looking to escape their debt.
That logic was part of what drove lawmakers to allow the government to take borrowers' Social Security benefits and tax refunds to repay defaulted student loans. In the mid-1990s, a bipartisan pair of lawmakers was looking to make it easier for the government to collect on debt of all kinds to help the federal budget.
In defending the proposal, Carolyn Maloney, then a Democratic congresswoman representing New York, wrote in the New York Times that 'many delinquent debtors are able to pay,' with little data to back up the assertion. Mainstream media outlets fueled that perception, sometimes calling those who owed the government money — including former college students, military veterans and foreign governments — 'deadbeats.'
To address these concerns lawmakers passed the Debt Collection Improvement Act in 1996, which among other things allowed the federal government to take a borrower's Social Security check and tax refund to repay a defaulted student loan.
Years later, borrowers like Patricia Gary have coped with the fallout from decades of policies that assumed borrowers who didn't pay were doing it simply because they didn't want to. In my reporting on the student debt crisis for MarketWatch I've spoken with borrowers who wrestled to navigate the student loan system and then had their Earned Income Tax Credit — a tax credit with bipartisan support that largely helps working parents — taken, making it more difficult for them to afford the basics like shoes for their children.
The data on borrowers who default indicates that most people who fall behind on their student loans are people like Gary or other borrowers I've encountered. They aren't paying because they don't have the money or are struggling to navigate the complexity of the student loan system — not because they're trying to shirk their debt. Borrowers in default are more likely to be unemployed and less likely to have finished school.
Despite this, the government keeps using harsh consequences to essentially pull blood from a stone. That's because the groundwork has been laid for decades to prime policymakers and ordinary Americans to believe that borrowers defaulting on student loans are trying to outrun them, even though the data indicates otherwise.
That begs a question Gary asked me about the efforts to collect her debt during the interviews we conducted for Sunk Cost: 'Does it ever stop? 'Or they just want to keep taking money because they can do it?'
Originally Appeared on Teen Vogue
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