Schools Suing Graduates for Defaulting on Loans

By: Time Email
By: Time Email

(Time) - As more college graduates default on their student loans, some schools are taking drastic measures to ensure repayment. According to a Bloomberg report, Yale, the University of Pennsylvania and George Washington University have taken defaulters to court in recent years to try to force them to pay up.

The schools are targeting recipients of Perkins loans, which are subsidized loans usually awarded to lower-income students with exceptional financial need. Unlike the larger federal Stafford-loan program, in which the Department of Education acts as the lender, Perkins loans are administered directly by participating institutions with a mixture of funds from the federal government and the schools themselves. Almost 500,000 of the loan awards are doled out annually.

According to court records analyzed by Bloomberg, the University of Pennsylvania filed at least 12 lawsuits to recoup Perkins-loan money last year. Yale is suing a former student for about $6,500 in outstanding loans, while George Washington University is suing a student for $7,000 in Perkins loans and $15,000 in unpaid tuition costs. Though there’s no comprehensive data that show how often schools are taking graduates to court, defaults grew by 20% from 2006 to 2011, up to $964 million. Overall, federal-student-loan defaults have also been on the rise for several years.

Such amounts might seem like small potatoes in the grand scheme, hardly worthy of litigation. However, Mark Kantrowitz, publisher of FinAid.org, says recent stresses put on the Perkins-loan system may be forcing more schools to take legal action. The loan fund is supposed to be self-replenishing, with debtors paying the money they owe back into the pool of loan money. In the past, the federal government offered cash infusions of about $65 million per year to ensure the program’s solvency, but that funding dried up after the 2008 fiscal year. “The colleges are getting a little bit more aggressive in pursuing these loans,” Kantrowitz says.

Typically, an expensive lawsuit is a last resort for schools. Before taking such measures, they’re likely to send letters outlining the amount of the loan and repayment options, report the default to credit agencies, attempt to garnish a debtor’s wages, and enlist the aid of a collection agency. If a graduate is sued, they’ll also owe expensive collection fees, which are higher for Perkins loans than for other types of federal student loans. The federal government has already taken a tough stance on defaulters in recent years, with debt collectors earning $1 billion in commissions for tracking down federal-student-loan defaulters in 2011, according to Bloomberg.

President Obama has proposed expanding the Perkins-loan program from its current $1 billion in funding to $8 billion by getting more schools involved in the program and awarding federal money to schools that are able to stem rapidly rising tuition costs. However, the interest rates on the loans would increase from 5% to 6.8%, and they wouldn’t necessarily be restricted to students with the same financial needs. The new Perkins-loan model would be tailored more to reducing student reliance on private loans than providing a low-interest vehicle for low-income families.

For those in default, experts recommend trying to reach out to the school to work out a repayment plan instead of trying to dodge a debt. Increasingly, neither schools nor the government are willing to look the other way when there’s money owed. “Schools are required to take efforts to collect on these loans,” says Justin Draeger, president of the National Association of Student Financial Aid Administrators. “When you borrow money from taxpayers, you have to pay it back.”


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