Student loan struggles expose system flaws
When C.W. Hamilton took out his first student loan in 1977, the Education Department wasn’t even a federal agency. The $5,250 he borrowed to complete an associate’s degree at Cochise College in Arizona was supposed to be an investment in his future, not a lifelong burden. Yet after more than 40 years of payments and bouts of default, Hamilton still owes almost as much as he first borrowed.
“It’s like an anchor around my neck,” said Hamilton, a 72-yearold Army veteran in Reno, Nev. “I live on peanuts. … I can never get from underneath this debt.”
There are nearly 47,000 people like Hamilton who have been in repayment on their federal student loans for at least 40 years, according to data obtained from the Education Department through a Freedom of Information Act request. About 82 percent of them are in default on their loans, meaning they haven’t made a voluntary payment in at least 270 days.
“This is sort of a monumental failure,” said Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “There are so many relief programs in the student loan system to address some sort of financial distress. But it’s this real patchwork, and borrowers struggle to navigate it. The department itself and its servicers often can’t navigate it either.”
While these borrowers represent a sliver of the 43.5 million people with federal student debt, their existence is an indictment of policies meant to help people manage their loans. Years of administrative failures and poorly designed programs have denied many borrowers an off-ramp from a perpetual cycle of debt. Even as the Biden administration tries to remedy these problems, the fixes could still leave vulnerable borrowers like Hamilton on the sidelines.
Cycle of debt
To understand how tens of thousands of people could be in debt for decades, consider the options for repaying federal student loans. When borrowers leave school, they are automatically assigned to a standard 10year repayment plan. Others extend the period by enrolling in graduated plans that increase payments over time or income-driven repayment plans that tie their monthly bill to earnings and family size.
People can also temporarily pause their payments through deferment or forbearance, which can lengthen the timeline. From the time student loan borrowers’ first loans enter repayment, the median length of time it takes to pay in full is 15 years, according to the Education Department. How much you borrow, how much you earn and whether you get your degree can all play a role in how quickly you pay off the debt.
Those last two factors played a starring role in Hamilton’s struggle to repay his student loans. After a dispute with an instructor, he left Cochise before completing his aviation studies. That led to a series of low-wage jobs and relocations for work. School loans were low on the list of priorities for the father of five.
“The job market was really tight at the time, so I was taking different jobs for a while and didn’t have a locked-down address,” Hamilton recalls. “We didn’t have cellphones at that time, so they couldn’t call and say, ‘Hey, you’re behind on your loans.’ ”
But the debt caught up with him soon after he began receiving Social Security disability benefits. Injuries from stints fighting wildfires and fixing airplanes left Hamilton unable to work, and his federal benefits became fair game for collection. Through the Treasury Offset Program, the federal government has been garnishing his disability benefits on and off since 2002.
Before the Education Department paused payments and collection in 2020 because of the coronavirus pandemic, he’d involuntarily paid more than $13,000. Treasury last deducted $175.05 from his $1,165 monthly Social Security check to service fees and interest on his loans — leaving Hamilton still owing $4,963.
“It’s tough because they’re taking all of this money, for all of these years, and nothing is going to the principal,” Hamilton said.
Given his disability, Hamilton applied for a discharge of his loans through a program for totally and permanently disabled borrowers but was denied. He opted for student loan rehabilitation, a one-time process that brings a borrower back into good standing after nine consecutive payments. But Hamilton fell back into default.
A fresh start
An analysis of federal data from July 2003 to April 2016 found 70 percent of borrowers in default were able to bring their student loans back into good standing within 10 years but the rest remained in default. The Consumer Financial Protection Bureau found that up to a third of borrowers who exit through loan rehabilitation default again within two years. It’s a problem that reflects the limitations of the system, said Brian Denten, an officer with Pew Charitable Trusts’ project on student borrower success.
“You only get one shot at each of these options,” Denten said. “After that, if you default again, you can either pay off your entire loan in full or essentially sit there and have your wages, Social Security or tax refund garnished until your obligation is resolved.”
The Biden administration is temporarily waiving the rules governing default, offering 7.5 million people like Hamilton a “fresh start” by placing their loans in good standing when the payment pause ends even if they’ve defaulted multiple times in the past.
The initiative will eliminate borrowers’ record of default before the repayment pause and reinstate their eligibility for federal Pell grants, work-study and additional student loans to help those who may have dropped out before completing their degrees. It will also spare people from the seizure of wages, tax refunds and Social Security benefits.
The one-time initiative isn’t exactly seamless. Rather than being automatically enrolled, people in default must contact the department’s Default Resolution Group or their loan holders to take full advantage of the program. They will have one year from the end of the student loan payment pause — set to expire later this year — to make payment arrangements. Failure to act will throw borrowers back into default.
“A big part of it will be getting the word out,” Denten said. “We know from speaking with servicers and borrowers that it can be hard to establish a regular line of communication.”
With the advent of income-driven repayment nearly 30 years ago, borrowers could avoid being saddled with education loans in old age: If you keep up with payments, the federal government will forgive your remaining balance after 20 years for undergrad loans or after 25 years for graduate school debt.
But in the early days, the Education Department and its student loan servicers did little to publicize them.
The National Consumer Law Center said that with the existence of income-driven plans, no one in the federal student loan system should be in repayment for more than 25 years. The Education Department has previously disclosed that 4.4 million borrowers have been repaying their debt for at least 20 years, with half of them in default.
Yet a 2022 Government Accountability Office report found that the department had erased the balances of only 132 people as of June 2021 under the IDR plans. It said the agency failed to ensure that payments were accurately tracked until a decade after the first income-driven plan was implemented. As a result, some people with older loans are at high risk of spending more time in repayment than necessary.
Advocates have long questioned the rationale behind the federal government’s relentless pursuit of student loan payments from distressed borrowers.
Unlike the Education Department, banks and lenders in the private market routinely write off the debt they can’t collect, and there is a statute of limitations on collection, Shaforth said. While the federal student loan program is not as flexible, she said, the department does have the power to settle, compromise and terminate the collection of debts.
“I would think that 40 years should be a reasonable time,” Shaforth said.