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, the Biden 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 President Joe 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 than it gets back.
"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, and we keep these essentially uncollectable debts on the books."
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.
She eventually got her diploma, but when it arrived in the mail, it listed her field of study as "receptionist" — the job she had when she enrolled. Without telling her, the school decided she had fallen short of its nursing requirements and switched her program, she said.
Rivera fell behind on her payments, and health problems pushed her onto Social Security disability in the early 2000s. Her attempt to have her debt canceled through a relief program for those with permanent disabilities was denied because of what her lawyer, Johnson Tyler of Brooklyn Legal Services, suspects was a technical mistake: Her form was signed by a physician assistant instead of a doctor.
So when the pause on student loan payments ends, the government will again seek to garnish $90 of Rivera's $840 monthly disability check.
"It's a maze," she said. "You're left in limbo."
Student loan defaults rose steadily every year before the pandemic, peaking at $172 billion owed by 8 million borrowers. The pause in place since March 2020 has, for the first time, halted those collections and broken a cycle that even internal government auditors and watchdogs have called deeply dysfunctional. A 2016 report from the Government Accountability Office found that government seizures of Social Security checks from older borrowers pushed tens of thousands of people each year into poverty.
"It's a life sentence, literally. They'll keep taking the money until you die," said Abby Shafroth, a lawyer with the National Consumer Law Center.
The best solution for many defaulted borrowers would be an income-driven payment plan, which can give low earners small payments — as low as $0 a month — and wipe out any remaining balance after 20 or 25 years. But people in default are normally barred from moving directly into such a plan — one of many bureaucratic obstacles that makes it hard for even motivated borrowers to cure a defaulted loan.
The Biden administration plans to remove that hurdle.
Before payments restart — which is scheduled for September, though Biden is widely expected to delay the date again — the Education Department plans to restore all 7.5 million borrowers with defaulted loans to good standing and remove the black mark from their credit reports, according to a department official who spoke on the condition of anonymity to describe plans that are still being put into final form. The administration hopes many borrowers will use that opportunity to enroll in income-driven payment plans, the official said.
The borrowers would not be the only beneficiaries; defaulted loans are a problem for the government, too.
Federal student loans are exempt from the statutes of limitations that apply to most other consumer debts, and they are rarely discharged in bankruptcy. The government has a protocol for declaring some debts uncollectable, using rules known as the Federal Claims Collection Standards, but lawyers and experts said they had never heard of any student loans being eliminated through it. The Education Department said it could not provide data on whether it had ever written off any loans that way.
Before the pandemic, the department spent hundreds of millions of dollars each year paying private debt collectors to pursue borrowers. In 2017, the last full calendar year for which data is available, they retrieved about $10 billion.
But at times, their fees eclipsed their recoveries: An analysis by the Consumer Financial Protection Bureau found cases where the collectors were paid as much as $40 for every $1 they brought in. (The Education Department ended its collection contracts in 2021 and has said it expects its regular loan servicers to take over pursuing defaults once the payment pause ends.)
There are hidden costs, even when the government is able to collect the money.
One of the department's most successful — and draconian — collection mechanisms is the Treasury Offset Program, which garnishes government payments. In 2019, the Treasury Department seized nearly $4.9 billion from tax refunds and other payments to go toward student loan debt, according to an analysis of Treasury data by the Seldin/Haring-Smith Foundation. The biggest chunk, nearly $1.7 billion, came in February — the prime filing time for people collecting the earned-income tax credit, a support measure for low- and middle-income families.
"The social safety net is intended to protect people from crushing poverty," said Abigail Seldin, the foundation's CEO. "It isn't intended to reconcile government debts."
Many defaults, especially those that have stretched out for decades, involve murky situations that can be nearly impossible to untangle. Walter Jones, 65, was not even aware that he had a loan in arrears until the government confiscated a chunk of the Social Security survivor benefits he applied for in 2018 after his wife died.
When his first checks arrived, Jones discovered that $134 of his $891 monthly payment was being withheld to pay off a $4,000 debt for a program at Sutton Business School, which closed decades ago. He had never heard of the school and insisted that he had never attended it.
In the late 1980s, when the loan was taken, Jones was in a job-training program and filled out a mountain of paperwork. His lawyer, Tyler, suspects someone forged or falsified the loan application — a tactic for which many for-profit schools have been busted. Tyler filed two applications challenging the validity of the debt; the government denied both.
Jones, an Army veteran who spent 30 years as a school bus driver but stopped working during the pandemic, finally got some breathing room when the payment freeze halted his checks' garnishment. He is hoping Biden will follow through on his campaign pledge to eliminate $10,000 in debt per borrower. That would spare Jones the work of further contesting his debt or enrolling in an income-driven plan, which would require him to recertify his income every year for as long as two decades.
"I don't want to have to deal with it," he said. "It's depressing. Draining, too — very, very draining."