June 23, 2006 — Report

As the cost of financing our nation’s higher education system falls increasingly on students and families, student loan debt is rising at alarming rates. Most borrowers have to make some sacrifices to repay student loans. The problem, as discussed and documented in this paper, is the extent of these sacrifices. Many student loan borrowers face a lifetime of debt with little or no chance of escape.

If all goes well, college graduates earn significantly more money than those with high school degrees. However, this is not always the result. Some may find that their professions are not as lucrative as they hoped or may lose their jobs. Others will confront unexpected life traumas such as disability, divorce, or death of a family member. Still others will choose career paths where success is not measured in dollars. The problem is that borrowers are allowed very little margin for error and can easily become overwhelmed by student loan debt.

The government has extraordinary powers to collect student loans, far beyond those of most unsecured creditors. The government can garnish a borrower’s wages without a judgment, seize his tax refund, even an earned income tax credit, seize portions of federal benefits such as Social Security, and deny him eligibility for new education grants or loans. Even in bankruptcy, most student loans must be paid. Unlike any other type of debt, there is no statute of limitations.

While collecting funds is important for the government and taxpayers, there comes a point of no return where the government’s ceaseless efforts to collect make no sense, monetarily or otherwise. Even borrowers who are able to make affordable payments often end up defaulting because of an overly complicated system and lack of effective communication between collectors and borrowers. There is some relief available for borrowers, but this relief is generally insufficient.

The purpose of this paper is to describe the reasons why student loan borrowers get into trouble and why problems spiral so quickly. Descriptions of current policies are followed by suggestions for reform. The goal is to spark discussion among analysts, higher education and industry leaders, students and their advocates about ways to improve these policies.