Federal Student Loans: What Happens If You Don't Pay? [POLICYbrief] - YouTube

Student loan law right now is kind of a mess, to be perfectly honest.

There is a lot of student loan debt out there.

Total student loan debt right now is around $1.5 trillion.

44 million borrowers have student loans, and upwards of 70% of students graduating from

college are graduating in debt.

The loan program makes loans to all undergraduates, regardless of the program that they study,

regardless of their income background, and regardless of whether or not they're likely

to complete their program, and at two-year colleges, at community colleges, and at four-year

colleges.

So, it's not surprising then that if you don't have any criteria on the front end to screen

out people who are unlikely to pay, then you end up with default rates that are somewhere

around 20%, 25%.

A four-year graduate would typically leave college with around $30,000 in debt, depending

on their circumstances.

The federal government doesn't charge you late fees if you miss a payment on your student

loan.

They will continue to charge you interest on the loan, and if you go long enough without

making payments, several months, it can affect your credit score.

So, if you start falling behind on your payments, you enter a type of status called delinquency.

For federal student loans, borrowers can miss up to nine payments or essentially be 270

days past due before the loan actually goes into default status.

It triggers something called acceleration where the full balance of the loan becomes

due all at once, and that then gives the federal lenders more opportunities to pursue borrowers.

About one in five are in default, and that equates to ... It's about 8.3 million people

who are in default on federal student loan.

A 25% default rate, that sounds like a catastrophic number.

That's the kind of number you would associate with, uh, a severe economic recession.

So, for borrowers who default on federal student loans, the consequences can be pretty severe.

For federal student loans that go into collections, uh, federal law allows for massive collections

cost and penalties that can be upwards of 25% of the outstanding principal and interest

balance, meaning that if you have $40,000 in federal student loans and they go into

default, that balance can go up to $50,000 as a result of the default.

The federal government has additional collections powers that private entities don't have.

So, the federal government can garnish your wages without a court order.

They tend to do this as a last resort, but it's actually done quite commonly.

The federal government collects around $600 million a year through wage garnishing on

defaulted federal student loans.

It is difficult to discharge student loan debt in bankruptcy because the bankruptcy

code was rewritten to largely bar borrowers with student loans from discharging those

loans.

It requires something called an adversary proceeding, which is essentially like a trial

in bankruptcy court, in order to show that the borrower meets the undue hardship standard.

A lot of borrowers are not able to meet that standard.

And the reason why Congress prevents you from discharging your loans in bankruptcy is that

there's no underwriting on the front end for the loans.

So, the government makes loans to anybody and everybody, and so if you combined it with,

uh, easy discharge ability for bankruptcy on the back end would be a program that's

rife for abuse.

I think that, uh, that the system is unsustainable.

We need to make reforms that allow borrowers, uh ... or I should say allow students to go

to school without needing to borrow, or at least not needing to borrow as much.

I also think that we need to strengthen programs for borrowers that are already in repayment

so that they can have an easier time of dealing with their loans without having to wade through

a- a messy servicing and debt collection system.

I think people need to be more careful in the amount that they borrow, in the amount

that they're going to pay off.

I think there are concerns about some of the potential costs of these programs, particularly

if the cost of education continues to go up and borrowing is allowed to keep pace with

the cost of education, uh, and more and more borrowers are able to get their loans forgiven.

At the same time, without some sort of reforms on the other side, on the cost side, just

eliminating these safety net programs might cause a lot of lower-income borrowers to not

be able to reasonably access higher education at all.

Is it worth it to go into debt to- to pay for the education?

I wouldn't necessarily be turned off by having to go $30,000 in debt.

If that's the difference between getting an undergraduate degree and not getting an undergraduate

degree, um, then generally $30,000 is definitely worth it.