With no way out, for anyone

With 45 million borrowers owing it a total of $1.6 trillion, the federal Education Department is effectively America's largest consumer bank. And like any bank, it sees some of its loans go bad when borrowers cannot pay.

But unlike any other lender, the federal government keeps those bad debts around in perpetuity. There is no simple way for the department to write off those loans, and student debt is nearly impossible to shed in bankruptcy.

Over the years, it has piled up into an enormous problem: More than 7 million people, 1 of every 5 borrowers with payments due, have defaulted and failed to pay, sometimes for decades. Those borrowers live under the shadow of punitive collections tactics while the government throws good money after bad. Now the freeze on student loans that started early in the pandemic is giving the government its best shot in a generation to address the problem.

Before the pause ends, President Joe Biden's administration plans to offer defaulted borrowers the chance to restore their loans to good standing.

That will allow those borrowers to get into payment plans they may actually be able to afford.

Advocates view the novel move as a way to deal with very stale debts — especially if it is paired with the kind of large-scale loan forgiveness that Biden says he is considering.

Should Biden use an executive action to forgive $10,000 per borrower in student debt, he would wipe out the balances of more than 4.6 million people who were behind on their payments before the pandemic, according to Education Department data sent to Congress last year.

The long-lingering debts are a quagmire for borrower and lender alike. Those who took out loans they have little hope of repaying are cut off from other forms of credit and are sometimes pushed into poverty by the government's collection efforts. And those efforts — garnishing paychecks, hiring private debt collectors and confiscating tax refunds and Social Security payments — do not necessarily pay off, sometimes costing the government more.

“At some point, any other lender would have written many of these loans off,” said Persis Yu, policy director of the Student Borrower Protection Center, an advocacy group. “But the way the federal student loan system works is that we don't do that.”

If the government forgave $10,000 for all borrowers, it would free Tomasa Rivera, 63, from a debt that has hung over her head for 32 years. A loan for about $3,000 that she took in 1990 has snowballed, with interest and penalty charges, to nearly $9,000.

“There's late fees and all the things they tack on as the months and years have gone by,” she said. “The original loan was not that big of an amount, but now it's impossible.”

Rivera was working as a receptionist when she enrolled at the Mandl School, a for-profit school in Manhattan, to train to be a nursing assistant. But the education was subpar, and Rivera, who has struggled since her childhood with medical problems, had her studies disrupted several times by hospital stays.