U.S. Government Officials Play Hardball On Student Loan Defaults
DAVID GREENE, HOST:
Each and every day, 3,000 people default on their federal student loans. For the federal government, those lack of payments amount to an unpaid bill of $137 billion. For decades, the government has tried to get borrowers to pay up by hiring debt collection agencies to call and send letters. But as Bobby Allyn of member station WHYY reports, a new controversial strategy to collect on student loan debt is being ramped up in cities around the United States, including Philadelphia.
BOBBY ALLYN, BYLINE: On Adriene McNally’s 49th birthday in January, she heard a knock on the door of her modest row home in northeast Philadelphia.
ADRIENE MCNALLY: They actually paid somebody to come out and serve me papers on a Saturday afternoon. I went to the door and he goes, sorry, just handed me the papers.
ALLYN: The papers the papers were from a government lawsuit. The suit represents something more than just an unwelcome birthday gift. It's an example of a program the federal government has quietly brought to 19 federal district courts around the country, including ones that cover Brooklyn, Detroit and Miami. If nothing else works, officials are hiring private law firms to sue to recover unpaid student loans like McNally's.
MCNALLY: Your whole body heats up with frustration because I'm so frustrated over all this. It's been so many years that they've been sending me mail and threatening me on the phone.
ALLYN: McNally filed for bankruptcy in 2006 and cleared out all of her creditors except for the student loans, which are nearly impossible to get rid of in bankruptcy. As many others have found out, it's not easy escaping federal student loan debt. In the last two years, more than 3,300 student loan borrowers have been sued after defaulting, and that brought in $29 million. That's according to data obtained from the Department of Justice. In nearly every one of these suits, the borrower loses and the government wins. And what do they win? A lien on the borrower's assets.
JENNIFER SCHULTZ: I describe a lien as like a marker on the house.
ALLYN: Jennifer Schultz is an attorney with Community Legal Services of Philadelphia. She says if the borrower owns a home like McNally, it's like house handcuffs, people feel trapped.
SCHULTZ: And so any time a person tries to do a transaction involving their house - a new mortgage, a refinance, or if they try to sell it - they're going to be expected that they clear up any debt that's attached to that house.
ALLYN: The government has long been able to garnish wages, take income tax returns and divert Social Security and disability benefits, but targeting a property is a way of applying even more pressure to get former students to pay up.
DREW SALAMAN: It's to try to awaken the avoider from their slumber.
ALLYN: Drew Salaman doesn't do student loan work but has spent his career as a debt collection attorney. He says some of the borrowers are playing catch me if you can. And the lawsuits, he says, ensure that people take responsibility for their debts.
SALAMAN: After all, if we don't have systems in place to recover debts, how can credit be extended? How can banks, stores, merchants extend credit?
ALLYN: But the end result of these suits, the liens, can be seriously threatening to borrowers. That's according to Joanna Darcus, an attorney who works on the student loan team at the National Consumer Law Center.
JOANNA DARCUS: So fighting against these lawsuits is actually a matter of housing preservation. And for folks who are already living on the margins financially, the fear of losing that house can be palpable.
ALLYN: Once a lien is in place, the government can force the sale of a former student's home. Justice officials say that it's, quote, "exceedingly rare" but admitted it does happen. Advocates like Darcus say with the lawsuit program expected to keep expanding, the possibility is a real stick for the government. And with more than 8 million people currently behind on their federal student loans, the private firms won't run out of work any time soon. For NPR News, I'm Bobby Allyn in Philadelphia.
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