Student loan system is ‘a forever debt system’, says Education Ministry official



Failure to pay your student loans could lead to the federal government withholding your salary, tax refunds and possibly Social Security earnings — a process that is both brutal and punitive, a government official said.

“Even if you were a hard-nosed accountant who only cared about raising money for taxpayers, it makes no sense to try to collect a loan by plunging borrowers into poverty and preventing them from recovering. on foot,” said James Kvaal, undersecretary of the Department of Education. said in his opening remarks at a virtual panel hosted by the Student Borrower Protection Center.

“There are lives at stake here,” he added.

According to Kvaal, more than 7.5 million student borrowers, or one in six borrowers, were in default before the pandemic. In fact, before the pandemic-era payment pause began, Kvaal said, one million debtors defaulted for the first time every year.

“There really isn’t anything good that comes out of student loan defaults except for debt collectors… any defaults only drive borrowers who are already facing financial difficulties into an even deeper hole” , Kvaal said.

Failure to pay can have far-reaching effects on a borrower’s life. Along with having their wages garnished, Social Security checks garnished and tax refunds withheld, borrowers can take a hit to their credit scores — “raising the cost of every financial product,” Kvaal said.

“The consequences of defaulting are so punitive, it’s like whoever designed these policies is assuming that borrowers are somehow trying to beat the system,” he added. “Defaulting your student loan is about the furthest thing from a get-rich-quick scheme. It’s more like a program to hold debt forever.

Related: Here’s what government intervention has done to Americans’ credit scores

The Biden administration has repeatedly extended the student loan collection pause decreed by the Trump administration in response to the economic impact of the pandemic. This payment break has been a boon for millions of student debtors, according to a new report from the New York Federal Reserve.

Over the past decade, before the payment pause on federal student loans, about 15% of borrowers had delinquent or defaulted loans in 2019. The pause on payments — and debt collection — helped a large swath of the 38 million debtors who hold federal student loans, with the share of borrowers with a delinquent or defaulted loan falling to 7.5% at the end of last year.

Before the pandemic, student loan delinquency rates were highest in Mississippi, where 21.6% of borrowers were in arrears, followed by Puerto Rico, at 20.1%, and Louisiana, at 20. %. Southern debtors “had the highest borrower default rates,” the New York Fed added, “claiming ten of the top twelve states.”

The pandemic pause on collections, along with the new ability for borrowers to rehabilitate defaulted loans, has cut delinquency rates in half.

The Biden administration approved nearly $28 billion in debt relief for 1.4 million student borrowers, Kvaal said. “More borrowers are qualifying every day,” he added, “and we will continue to work hard to ensure that all who qualify get the relief they are entitled to.”

The administration is also trying to make it easier for student borrowers who fail to repay their debts to find a way out of their financial hole. The Department for Education announced in April that it would give defaulting student debtors a “fresh start” by restoring their loans to their current state to give them a better chance of repayment.

“Overall, borrowers who default on their loans are people who have been let down by lagging policies and investments in college affordability,” Kvaal said. “They provide the most compelling evidence that the student loan system needs fundamental change.”

“Failure to repay a student loan shouldn’t be a life sentence of financial struggle and despair,” he added.

Read more: Borrowers on edge – will Biden cancel student debt or not? Here’s what happens.

See also: Canceling student loans will help narrow America’s racial wealth gap, new report says, but others call it ‘costly and ineffective’

Write to MarketWatch reporter Aarthi Swaminathan at [email protected].

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