Student Loans, Social Security and Debts You Carry for Life

Put on your monocle and top hat and pretend you are part of the 1% for a minute. Your first task is to write a set of legal codes about the collection of debt in this country, specifically student debt. And you want to be kind of a jerk about it. What’s the one thing you could do for student debt that you don’t do for any other type of debt, one that would radically shift the relationship between student loan creditors and debtors both practically and symbolically?

How about this, from the Debt Collection Improvement Act of 1996: “Notwithstanding any other provision of law… all payments due to an individual under… the Social Security Act… shall be subject to offset under this section.”

What this means is that when it comes to collecting on student loans, the government can take funds from your Social Security check. There are rules to the offset: the first $750 a month can’t be touched, and only 15 percent of benefits above that can be taken to pay back student loans. But this is still a radical break in the social contract with no equivalent for private debts.

If you look at the original text of the Social Security Act, you can see that Social Security payments were not “subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” My man Franklin Delano Roosevelt understood that basic economic freedom, one part of which is freedom from utter poverty in old age, would come under assault from creditors and debt and that it was important to clear a space that provides a baseline of income that clever debt collectors can’t get to. Social Security is supposed to be just one leg of a three-legged stool for retirement, the amount necessary to keep poverty at bay, and it is crucial that it is protected.

Yet we are willing to snap this leg off the stool as payment for, of all things, loans people take out to educate themselves. In a dynamic economy, education should be risky — whole occupations and industries come and go with technology, and what was a wise investment at one point is a bad one later on. But there need to be rules for what happens when these risks go bad. We have removed every last rule on this kind of debt.

According to the Project on Student Debt, the average debt load for graduating seniors in 1996, when this law was passed, was $12,750. Now it is over $23,200. Also note that, post-1991 and upheld by the Supreme Court in 2005 as it regards Social Security payments, student loan collection has no statute of limitations. This is one of the very few kinds of debts without such limitations. As this site puts it, “Creditors and debt collectors have a limited time window in which to sue debtors for nonpayment of credit card bills… In most states, the statute of limitations period on debts is between three and 10 years.” But in this case, the Department of Education notes, “[b]y virtue of section 484A(a) of the Higher Education Act, statute of limitations of no kind now limits Department’s or the guaranty agency’s ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan.”

It is impossible to discharge bad debts in this system under our normal mechanism for handling bad debts — bankruptcy. When delinquencies happen — say when you graduate into a recession that elites refuse to fix — you get thrown into the fee-churning world of private debt collection. This world was memorably described by law professor Ronald Mann as a “sweat box” of fees and other ways of increasing the total debt owed. With fees churning, there’s no date after which creditors can no longer go after your student loan payment, and they can even go after the baseline measure society has created to prevent poverty in old age.

Now with all this in mind, let’s quickly examine the New York Fed’s recent release of its Quarterly Report on Consumer Credit, specifically this delinquency data:

Student loan delinquencies look to be slowly increasing over time, while credit cards and mortgages go up and down. On the flip side of this dynamic is the amount of loans being “charged off” by private institutions. These are loans that will never be fully replayed, and a cost-benefit analysis tells the lender that it is no longer worth trying to collect the full amount. These are tough estimates to get, but Karen Dynan of the Brookings Institute has one estimate in her “Household Deleveraging and the Economic Recovery”:

As credit card and housing debt become unbearable, there’s a point at which they get written down. That point is too high, but because of various laws regarding debt collection that shift the strategy and potential end results between the actors, there’s a logic to it. As far as I can tell, there’s simply no equivalent chart, or even logic, for student loans. Because of legal choices we’ve made in how to set up this relationship, it stays forever, is virtually impossible to discharge under hardship, churns fees when it goes bad, and creditors can get to anything, including Social Security, to get it repaid. Meanwhile, we have a Great Depression-like event that is throwing college graduates into a labor market that is far too weak.

It is good to see President Obama, as part of his “We Can’t Wait” campaign, pushing to get some fencing around the rules for future student loan debtors through an executive order. According to this press release, the government will accelerate the implementation of laws “to limit loan payments to 10 percent of their discretionary income starting in 2012 [instead of 2014]. In addition, the debt would be forgiven after 20 years instead of 25, as current law allows.” However, according to an early analysis of this move, “[b]orrowers with loans from 2007 and earlier will not be eligible. Likewise, borrowers who don’t have at least one loan from 2012 or later, like students who graduated in 2011 or earlier, also won’t be eligible. Borrowers who are already in repayment will not be eligible.” So the problem remains for now.

How is this not setting a generation up for complete disaster?

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37 Responses to Student Loans, Social Security and Debts You Carry for Life

  1. I believe there is a law that student loans can be waived off after 20 years.

    As for “writing down debts”, that may be a lie. The written down debt is still collectable, and if there is a negotiated settlement for less than the amount allegedly owed, the IRS can tax the debtor on the amount that was “forgiven”.

    So, are debts really written off, or is that a way to simply mask that there is more and more debt?

    Until people have the right to negotiate a debt restructure without first being placed in default, main street will continue to lose their wealth to the banks.

  2. Found it very interesting that the Obama admin touted the 30,000 signature-petition that they received on this issue. What other popular petitions have they received and what are they doing about it?

    • The best deal for oneself and the economy around them is to pay back a debt, even if it means waiving all future interest charges and penalties in exchange for an honest attempt to pay it down over time.

      One reason banks aren’t interested in this approach is it would require HIRING 10,000 to 50,000 people to oversee those who can’t pay steadily to make sure they are not gaming the system. Those 50,000 hired is money that bankers strongly believe MUST go to bankers bonuses instead.

  3. GT4 says:

    I think you are pointing a finger in the wrong direction. It’s not the top 1% that benefit from the current student loan structure but the government and government employees. Since almost all student debt is gov’t guaranteed, it’s the government that benefits by disallowing chargeoff in bankruptcy. Also, it’s government employee’s (professors and college workers) that get the money guaranteed by the government and owed by the student.

    Student loans should be dischargeable in bankruptcy. That will solve all these problems, but probably kill the market for student loans. Ultimately, I bet college costs decline if the loan market dries up. The entire system is currently a wealth transfer from the young students to old workers at colleges.

    • Tim says:

      Actually before when you could discharge some, the rate that actually did was so small. Like 1% or so.

      Nobody WANTS to go through bankruptcy.

    • Chris of Stumptown says:

      I went to college and had loans at a time when college loans were dischargeable in bankruptcy. I had no problem getting a loan, but I had a cosigner.

      I am not sure I agree about the wealth transfer part of your comment. Many schools get more money in grants, endowments, and alumni contributions than tuition. And of course educated folks make more money and bring in more revenue so this should be factored in.

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  5. Kim says:

    I have relatives who graduated from college before student loans existed. If you didn’t have or couldn’t raise the money, you didn’t go to school. State schools were affordable with part-time jobs, and by working summers, but once student loans began to be offered, the cost to go to school went up and up and up and up. Meanwhile the quality of the education has gone down with teaching responsibilites going to poorly paid adjuncts and TAs whom the universities have come to rely upon as a cheap source of labor. Not long ago, a young person could find a well paid job in manufacturing, actually a better paying job than recent college graduates loaded with debt can often find today. This abysmal sitation has led to the notion that colleges must become job mills and who cares if students come out of them with a broader perspective and the ability to think. What a nostalgic idea.

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  7. Emme says:

    I would be interested in a follow up blog about solutions to the problem. The nondischargeability of student loans seems linked to the stunning rise in tuition prices. (Many campuses have the well-manicured look of posh country clubs rather than schools – although I suspect students might prefer less fancy quarters and more affordable schooling). Making student loans dischargeable through bankruptcy wouldn’t be enough to solve the problem. BAPCA, the bankrupcy reform act of 2005, made it very tricky for many people to qualify for bankruptcy. If students have the good fortune of getting a job that above the state median income, they may not qualify for Ch. 7 debt liquidation anyway. They would be forced into 5-year repayment plans under Ch. 13 – and if they fail to make the payments under those plans, they are back where they started or worse.

    • Kathy Shrum says:

      Back in 1998, Clinton signed a bill that student loans cannot be discharged under any circumstances. You have them for life. Alfred Lord the CEO of Sallie Mae recently gave himself a 600 million dollar bonus. That is where the money is going. Check out the website Student loan Kids are killing themselves over this.

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  11. ZeroInMyOnes says:

    Students are going to have to vote in higher percentages in order to secure better treatment for themselves. Mortgage debt and credit card debt can be written down, while student debt can not?And no doubt the average age of a home-buyer or credit card holder is higher than the average age of a post-secondary student? Our young people are being treated worse than our mature adults, and their only hope is to fight back with their votes.

    • ZeroInMyOnes, I don’t think your Mortgage debt and credit card debt statements have any accuracy to them. The bottom line is Bankers declare defaults on anyone who wants their debt restructured, and there in lies how the banks are destroying main street.

      Main Street should be allowed to restructure their debts without being forced into a default first by the bankers. I suggest you not create distance between yourself as a student and main street, I believe that is not a winning strategy to take.

    • Kim says:

      I don’t think students see that they need to fight back with their votes. Everything is so short term and Obama didn’t deliver the way they expected in two years. Had young students voted in great numbers for the own economic best interests during the election of 2010, we wouldn’t have the extreme Republican led congress that we have currently.

  12. I, Kahn O'Clast says:

    These are loans taken out at the very beginning of one’s working life while social security payments come at the end. I think this policy is actually rather reasonable. The government lends you money to “get ahead” via education and you fail to repay over a near 50 year time frame? Why should the government (meaning we the tax payers) essentially pay you twice, especially when they are taking back depreciated, post-inflation dollars from your retirement check?

    • Kim says:

      Yes, but I’ll bet when you went to school it didn’t cost so much to go, and when you finished you likely had the reasonable expectation of finding a job. This is not the scenario for most of today’s young graduates. Also, there are people in their mid years who have gone back to school due to losing a lifelong job. When they finish, they finish often finish with student loans. That’s not bad if they are able to find a job once they get out. I haven’t seen any studies about this, but I wonder how many people in their forties or over are finding jobs once finishing a degree program. Anyone know of any studies? Has there been any follow-up to what happens to people in their mid life who go back to school? Are they doing any better at finding work in their new field than the young?

      • Maja Kerry says:

        You are right on when you mentioned people going back to school in their 40’s and 50’s. I’m for one one of those students. I was a single mom and wanted to better myself with an education to have an income that would sustain me and my children. Yes, I graduated with a degree in Finance, but at that time (32 years ago) this was a field dominated by males, and with a recession and high unemployment I could not find a job in my given profession. I ended up doing whatever to survive. Sometimes I could barely survive and I had to sell everything including my house. My student loan was only $4,000 and now it’s $22,000. Now I’m 78 years old and I had to stop working last year due to illness. My only source of income is Social Security that enables me to live in subsidized housing. Now I have learned that the government is going after my Social Security to offset the loan balance. I find it criminal that the protection of the Social Security is stripped away. I have worked and worked to make it on my own without help from the government and paid my bills. I know what it’s like to make sacrifices. We need total reform in Congress. They make millions, while they burden the general public with laws that are detrimental to the well-being of society. Something needs to be done! It should be clear that without decent jobs people cannot meet their obligations.

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  16. Old Hickory says:

    I want do some research to find out just who was in Congress when the 1995 Act was passed, as well as who sponsored & voted for the earlier non-discharge legislation. It would be interesting to see who is still in office. Pointless exercise, really, but I’d like to know. I’ll bet the odious Phil Gramm had something — perhaps a lot — to do with it.

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  21. Unemployed But Surving says:

    Well, I for one am one of those young graduates who in 2004 got my bachelors (in Computer Science) after years of hard work to find myself slinging pizzas for minimum wage and doing any kind of min. wage job i could to pay for my car. Well my student loan was “bought out” from Wachovia Bank by a finance company without my permission they had my loan in ever tom, dick, and harry’s hands until one company finally settled and said “we now own you”. Well it’s been almost 8 years since i graduated and I have yet to be able to find a job in the computer science field. Don’t listen to all the pomp and propaganda you see and hear about that being a booming field and the “thing to be in” because what they don’t tell you is that if your not networked out the wazoo with friends in the right places and you don’t have all the certifications to go along with the degree AND some sort of co-op or internship opportunity then you are basically left out in the cold. And these people could care less if you can find a job in your field or not. It says right on the dept of education website that your student loans cannot be forgiven “just because you cannot find work”. I too think that’s a criminal act that these institutions basically sell the lie that just because you get that piece of paper means it’s gonna help you get a job, that’s sets the trap for students to enroll. All it does is get you in loads of debt that you may never be able to repay. But this will burst before too long and young kids will wake up and see that feeding the system doesn’t pay except to the banks, finance companies, and those “I’ll give myself a 600 million dollar bonus” CEO’s.

    • Sadly, 1% of the occupiers are involving themselves in online petitions designed to save homeowners from unfair foreclosures even though 100 times as many occupiers have signed the no unemployment penalty for student loans petition.

      This is called narcissism.

    • Kim says:

      I graduated in 2006 and found a good job in my field, mostly because I was lucky to find related work in my field through school, and could move once I finished school. A relative of mine graduated in 2010 in graphic design, something he has not yet found a job in his field, 1.8 years later. He thought he was going into a “hot” field. People ask me sometimes what are the hot fields today and I feel at a loss to answer the question. We keep hearing that there are jobs that are hard to fill. If so, what and where are these jobs? Machinists? I’ve met unemployed engineers, a field my dad was in and made a good living from all of his working life.

      If there jobs out there that are hard to fill, how come companies don’t raise wages, following the laws of supply and demand? I’d really like some answers to these questions, but I haven’t found any. Just this vague notion from people like Thomas Friedman that there are jobs out there going unfiled. Meanwhile a kid talked to me two days ago about going into computer science because she had read it was a “hot field.” She’s trying to figure out what to do to make a decent living and is at a loss.

  22. Kim says:

    So, to follow up what I wrote before, now a group of students, who met my older relative in school, are trying to develop gaming applications for the phone and Internet. They want to use him for the illustration/graphic design part. They only get money if the games sell. Is there money to be made in that? Why is there so little information out there about how to get something beyond a $10 an hour Wal-Mart job or working into the ground for short-term gig after short-term gig?

    • I would suggest demanding that all city and state pension funds ONLY invest in state banks that invest locally. I think it’s time to pull the plug state and city tax revenue investing offshore.

      Is someone who is employed wants to invest their own earnings offshore, that is their right, but to use the force of taxation and then use that force to invest offshore is unethical and why there are less jobs locally.

      Higher local and state business tax structures force businesses to cut out employment opportunities.

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