When it comes to federally subsidized student loans, the saying that we pay for the sins of those who have gone before us certainly hits the mark. For years, many grads readily blew off installments that they couldn't or wouldn't make while the government often looked the other way. But all that's changed for the latest generation of debt-ridden alums.
Over the past two decades, tuition at colleges across the country has skyrocketed and students, forced to mortgage their futures, are borrowing record numbers of federal dollars to bridge the gap. By the early 1990s, default rates hit an all-time high, with more than 20 percent of borrowers failing to repay their government-guaranteed loans. To help stem the loss, the Department of Education, in conjunction with the Department of Justice, is now aggressively using the law to rein in latepayers, who find themselves prey to strong-arm tactics designed to squeeze them for the overdue cash.
Enter law firms like the Long Islandbased Sharinn & Lipshie or Mullen & Iannarane P.C., whose attorneys act as bottom-dollar bounty hunters for the government's toughest student-loan cases. Outfitted in suits and armed with just a name, social security number, and sometimes an old address, they track the most evasive borrowers and, more important, their assets. If they locate the debtors, these hired guns contracted by the feds after state loan agencies fail to uncover those in arrears try to persuade them to enter into a payment agreement within 30 days before forcing their loans into default. Such a move not only allows the government to tack a 20 percent collection surcharge onto the interest-accruing debt, but also results in a damaged credit rating for seven years. In worst-case scenarios, the lawyers sue to garnish both wages and income-tax returns.
"Once we find assets, where a person banks, works, or if they own property, we can recover a case," says Francis Mullen, of Mullen & Iannarane P.C. In 1987, the firm was hired by the DOJ to participate in the fledgling Private Counsel Program, a Congressional-sponsored initiative intended to alleviate the overwhelmed U.S. Attorney's office by recovering various forms of government debt; soon after, student-loan debt was added to the program.
But such assistance doesn't come cheap. For firms that secure overdue funds by settlement or suit, their compensation runs, on average, at 30 percent of the total owed. Although only 5 percent of the 10 percent of those who default are actually sued, these actions are testimony to how seriously the government which has allowed students to rack up more than $100 billion in loans is taking repayment. "By the time a case gets to the Private Counsel Program, we have exhausted all attempts to get a borrower onto voluntary payments," says Kathleen Haggerty, a director for the DOJ's brand of rough justice. Currently, the agency has 34 law firms hunting down thousands of debtors.
Zeroing in on violators, according to Harvey Sharinn, of Sharinn & Lipshie, depends on how active a person is. Databases such as credit reports, real estate, and employment listings are the weapons used to nail delinquent borrowers. No doubt today's technology and the booming business of selling information on purchase habits, magazine subscriptions, and credit-card transactions has made pinpointing individuals' whereabouts easier.
Ironically, most agree that the majority of borrowers fall into repayment problems because of legitimate financial hardships. "A small percentage think they can get away with it, but I haven't found that to be a real attitude," says Mullen. Collectors say in the early years of the program they went after delinquent loans dating as far back as the early 1970s and those who owed big bucks. But current cases involve graduates who have been out of school for about five years. "My experience has been the only things students really have is a job," says Mullen. "We concentrate on giving someone the opportunity to pay the darn thing, without immediately garnishing their salary."
That the government has become more aggressive in chasing student debtors is no surprise, considering the billions in loans it has floated, says Richard Fossey, co-editor of the 1998 book, Condemning Students to Debt. "Debt has been collected from easy targets: people who are established and/or who failed to repay their loans years ago," says Fossey. "What we are going to see is the government get to the level of people who have borrowed so much, they can't pay."
New York State has followed the federal government's lead. In 1997, the Higher Education Services Corporation which is responsible for managing student loans began employing outside agencies to work alongside its own collections department to recover late payments. Reducing student default rates is within the best interest of the state because federal aid programs drop from their rolls schools whose students consistently fail to repay. Moreover, states are punished by the federal government, which will only compensate 98 cents per each defaulted dollar. But many borrowers charge that HESC and their hired private collectors harassed them, regularly threatening lawsuits and home repossession, and accusing them of laziness.
Marcie Warhol* claims HESC treated her like "scum" when she had difficulties repaying a $12,000 loan she incurred while earning a master's of education from the State University of New York at Cortland. Having successfully repaid similar loans as an undergraduate, Warhol returned to school in her thirties, and describes her latest experience as "student-loan hell."
"They're heartless," says Warhol, who graduated in 1991 at the height of the economic crisis in upstate New York. "When I tried to explain that for every one teaching job there were 100 applicants, I was told I should try harder or I should have chosen a different major."
Without a lucrative job Warhol says she was only able to secure a part-time, $10-an-hour counseling position making regular payments was impossible. "They would not negotiate. I was denied a review of my situation on several occasions," she says.
Her problems only escalated. "They offered just one solution: capitalizing the interest on my loan," says Warhol. With little choice, she agreed and, within three years, her principal jumped to $16,000. Finally, by 1997, Warhol had improved her financial situation and came to an agreement with HESC to make monthly payments of $216. But, within weeks, she was slapped with a default notice and a "collection cost" of almost $3000. "For years they threatened a default judgment, and it never happened. After two payments, they blindsided me. My credit is ruined, my original $12,000 loan is now more than $19,000. I have been routinely treated like a criminal."
"People do not get to walk away from their financial obligations," counters Marc Carey, the spokesman for HESC. "We do not treat people in a hostile manner, but you do not get to ignore a major financial responsibility for five years," he says of accusations of misconduct. "We do everything under the sun to avoid sending a loan to default, including early intervention."
HESC begins calling a borrower 90 days after a missed installment and, by law, can send a loan to default after 180 days. Options offered to troubled borrowers, such as sliding-scale payments increasing payments as income grows have been successful. HESC also allows deferment and consolidation with other debt. In addition, the organization launched an advocacy unit last month to inform borrowers of their payment alternatives and provide advice on how to avoid credit-threatening situations.
Despite HESC efforts, some are convinced that use of aggressive tactics has become commonplace. Using caller ID, Eddie Cappy* goes out of his way to avoid Nationwide Credit Corp, which has been hired by HESC to collect his loan. Cappy, who believed his father had been repaying his loan regularly until his death in 1996, was unaware that he had stopped making payments. Soon after receiving a call from HESC claiming his loan was $1200 overdue and a $110 payment was needed, the former New York University student says he sent them the required amount. Six weeks later, he was notified that his payment hadn't been received. Within a week, he was contacted by Nationwide, which threatened to sue if he did not pay the $10,000 loan in full.
"Basically, they would take any money they could from me, but would always stress the $10,000. As soon as I sent in a payment for the agreed amount, I would get another phone call asking for more money," says Cappy.
While Nationwide refused to comment on this specific case because Cappy wishes to remain anonymous, Senior Vice President Kevin Henry says, the company "has a policy of not engaging in or tolerating harassment of consumers." They also say each complaint is thoroughly investigated. According to HESC, Nationwide is in good standing and has never had a complaint lodged against it.
But for Cappy, avoiding the agency is easier than putting up with its treatment. "I don't want to be in this trouble, but I am. And I don't have to be told every day I'm a loser."
Recent studies show that students who now leave school with an average debt of $13,000 aren't prepared for the burden. In recent years, student-loan debt has increased four times faster than personal income. "We are in a quiet crisis," says Fossey. "Government has shifted aid from grants to loans, forcing students to borrow more, all the while passing punitive measures against those who have difficulty repaying."
In the 20-year period from 1977 to 1997, tuition increased by 304 percent, student-loan borrowing by 704 percent, while the level of grants and financial aid remained stagnant. In 1992, the federal government extended its loan programs and began offering unsubsidized loans which now account for one-third of total student debt.
Meanwhile, the government has passed stringent regulations preventing borrowers from filing for bankruptcy for seven years after their first installment is paid. It has also done away with the statute of limitations under which debtors can be sued. And the Clinton administration is proposing that the Education Department sell off student loans to private banks effectively destroying locked-in interest rates.
But, as Fossey notes, the higher-education community is not complaining. "Colleges and universities have certainly benefited from the student-loan program," he writes. "Student loans are a major reason that institutions have been able to raise tuition in recent years at twice the rate of inflation."
*Names have been changed.
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