An unpaid $1,250 student loan can become thousands more and land you in federal court

David Jesse

The paperwork hit Detroit's federal courthouse on Jan. 2. The Macomb Township woman hadn't made payments on her student loan and Uncle Sam wanted his money back

The court, the suit argued, should step in and force the woman to pay up, either by cutting a check directly or letting the government garnish her wages and bank accounts for the cash.

Earlier this month, after a process server had served a copy of the lawsuit on the woman but she failed to respond, a judge granted the federal government's request and entered a default judgment against her.

At stake: A $1,250 loan the woman took out in November 1986, plus interest, totaling $4,055.23. But that's not all she's on the hook for — she also owes for the fees the private attorney who filed the suit on the behalf of the federal government, a $400 fee for filing the suit in federal court and interest on that judgment until she pays up, either with a check or through wage garnishment.

The woman isn't alone in having the federal government go to court in an effort to get student loans paid. Just under 500 lawsuits were filed in 2018 in federal courts across the country by private attorneys seeking money for the federal government.

The lawsuits are a mostly unknown part of an industry of private collectors working on behalf of the federal government to track down student loan payments. It's a system that showcases how student loan debt is different from all other kinds of debt: It can't be written off in bankruptcy and, because it's owned by the federal government, long-term unpaid debt is never written off, but relentlessly tracked down.

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Attorneys who filed the suits declined comment, referring questions to the U.S. Department of Education, which did not respond to requests for comment.

It's something the federal government almost has to do, said Jason Delisle, a resident fellow in education policy studies at the American Enterprise Institute.

"It's a huge political problem if they just let people walk away," he said. 

The eastern half of Michigan has been in the top 10 of all federal court districts for these types of lawsuits for about a decade, a Free Press analysis of court filings shows. Experts are unclear why, although a 2015 study showed the nation's poorest ZIP codes often have low student loan debt, but high default rates.

For example, in 2015, ZIP code 48211 had an average loan balance of $24,271 on student loans. But the default rates were "extremely high." Why? The median income in the ZIP code was $18,264.

How it works

It has been about six months since Melissa Williams, 28, of Detroit has made her monthly $120 student loan payment. That's because it has been about eight months since she's had steady work.

"I know I owe it, but I've got to eat and pay rent," the Wayne State graduate said. "That's more important than paying the loan. Once I get some steady income again, then I'll be able to catch up."

If Williams goes 270 days without making a payment, she'll be considered to be in default on her loan.

She won't be alone. Federal data released last fall shows 10.8% of student borrowers who entered loan repayment in 2015 had defaulted within three years. As of December 2017, up to 8.7 million federal student loan borrowers were in default on $154 billion.

Federal student loans are serviced on a month-to-month basis by private companies. That's who borrowers make their payments to. 

Once a person defaults on their loan, it's transferred back to the federal Department of Education, which then sends it to a private collector.

Despite being in default, the interest on the loan continues to be charged. The private collection companies can garnish wages or dock a person's federal tax refund to help get the money.

If it gets to wage garnishment, up to 15% of a paycheck can be taken to pay off the loan. Of that, just under 20% of each payment goes to the private company. 

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The collection companies really want to get the defaulted borrower back into the loan program through a loan rehab — which basically gets the borrower back into the payment system it came from after nine on-time monthly payments. Under the Obama administration, the federal government paid the collection firm $1,400 for each defaulted borrower sent back through rehab. About 40% of defaulted borrowers end up going this route, Delisle said in a study done in 2018.

If the loan is fully repaid, which until recently was allowed to be done with credit card, there is a 24.3% collection fee. 

Now it's in court

If all else fails in trying to collect the money, the education department can turn to federal courts. 

It's not a new program.

In 1986, under President Ronald Reagan, the Department of Justice decided its staff attorneys' time had better uses than student loan collection, so a pilot program was set up, DOJ officials said. The Eastern District of Michigan was one of seven pilot areas picked. 

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The federal government currently bids out the collection work. The contracts are generally one-year deals, with up to four additional rollover years. 

Much of the defaulted loan debt — locally and nationally — is owed by students who attended small private schools specializing in training people to be hairstylists, auto mechanics and other blue-collar jobs, according to a Free Press analysis.

Many of these debtors owe more in interest than they do in principal on the loans, which can stretch back to the 1970s. 

The program hit a peak in 2011, when almost 4,500 cases were filed across the nation, according to statistics gathered by the Transactional Records Access Clearinghouse, based at Syracuse University. About 500 cases were filed last year across the nation.

The Eastern District of Michigan, headquartered in Detroit, was the third highest in 2018, with 37 cases filed. Beating it out were the Central District of California and the Southern District of Florida. The Eastern District of Michigan had the second-highest rate of suits per capita, trailing on the Southern District of Florida and four times the national rate.

It's rare for there to be any drama in the suits. The majority simply march through a court calendar.

That was the case in a suit filed on July 6. A Detroit man was sued for a loan taken out in 1988 to attend a now-defunct for-profit college in Southfield. He had borrowed a little more than $1,300 and made some payments, but defaulted. According to the suit, he owed $615 on the loan, plus $1,363.76 in interest, for a total of $1,979.

At the end of August, a process server gave a copy of the lawsuit to a person believed to be the man being sued. That person never responded in court and the court entered a default judgment against him at the end of October. In early December, a writ of garnishment was issued by the court and the attorney began the process of getting the $1,900, plus a $400 filing fee, plus attorney fees and more interest from the defaulted borrower.

Follow David Jesse on Twitter: @reporterdavidj

This article originally appeared on Detroit Free Press: An unpaid $1,250 student loan can become thousands more and land you in federal court