Student loan defaults can lead to nightmare scenarios
Lawyers drained Linda Brice’s bank account and seized a quarter of her take-home pay, or more than $900 a month. Brice, a first-grade teacher and Coast Guard veteran, begged for mercy, saying she couldn’t afford food, gas or utilities.
Brice’s transgression: she defaulted on $3,100 she had borrowed more than 30 years ago to pay for college. The chief federal judge in Los Angeles took her side, ruling that Brice should pay only $25 a month. The law firm of Goldsmith & Hull — representing the federal government — then withdrew $2,496 from her bank account.
“I am at the end of my rope,” Brice wrote in a May 2009 court filing. “I apologize for taking the court’s time, but I simply do not know what to do.”
Brice’s case shows how tough the government can be when it comes to collecting its share of student-loan debt, which totals $1 trillion, surpassing the amount owed on credit cards. Students who borrow as teenagers and whose degrees don’t pay off confront some of the harshest treatment and fewest chances for a fresh start of any debtors, except those owing child support.
When the Education Department fails to get repaid, the agency can turn borrowers’ names over to federal prosecutors. In turn, U.S. attorneys are hiring private law firms to retrieve money for taxpayers — after the firms keep a cut for themselves.
Lawyers representing federal prosecutors have told borrowers to turn over their cars and cancel their health insurance, debtors said in interviews and court filings. Attorneys have insisted on steep wage garnishments while turning down offers that would have satisfied their obligations over several years.
Borrowers have almost no way out. Because of a 1998 change in federal law, student loans can rarely be discharged through bankruptcy. Unlike most consumer debt, there has been no statute of limitations on collections since 1991.
Brice, 58, said she had no idea that she could be pursued for debts from the 1970s.
“If you are a person who gave to your country, who does the kind of work I do, or is a police officer or firefighter — anyone who gives back to their community — I think the government needs to give you a break,” Brice said in an interview at a Burbank, Calif., coffee shop, after a day of teaching in the Los Angeles school system.
William Goldsmith, an attorney with Goldsmith & Hull, the firm that pursued Brice, referred questions to the Justice Department, which declined to discuss details of borrowers’ cases.
The government’s aggressive collections efforts contrast with President Barack Obama’s recent speeches on student debt that stress his administration’s offers of leniency for strapped borrowers.
During a June 7 speech at the University of Nevada, Las Vegas, Obama promoted his executive order making it easier for students to sign up for a program that lets borrowers tie loan payments to their incomes. The loans could be forgiven in 20 years.
Even as Obama makes those statements, student-loan borrowers who default are being pursued and punished more severely than just about any other kind of debtor, said Deanne Loonin, an attorney with the National Consumer Law Center, a nonprofit advocacy group in Boston.
“It’s a huge contradiction,” Loonin said in a telephone interview. “It’s misleading to say you’re being more flexible when you’re being so aggressive with people who are already in default.”
The Education Department turns to lawsuits as a last resort, said Justin Hamilton, a spokesman.
Former students must stop making payments for at least four years before they are sued, Hamilton said. The Justice Department gives borrowers a chance to settle their debts before filing a lawsuit, Allison Price, a spokeswoman, said in an email.
Along with the income-based program that Obama cited, the government lets borrowers defer payments if they lose their jobs, Hamilton said. Borrowers in public-service careers, including teachers, can be eligible for loan forgiveness after 10 years of making regular, reduced payments. Brice didn’t qualify because she was in default and had a legal judgment against her.
“We go out of our way to help folks,” Hamilton said in a telephone interview. “It is a very long road to go from default to litigation. For the vast majority of people, we’re able to work with them and get them back into a payment plan.”
More than 5 million borrowers are in default, generally meaning they have stopped making payment for 270 days or more. As of September, they owed $67 billion.
In the year ended Sept. 30, the federal government filed 4,841 lawsuits to recover money from student-loan borrowers, almost three times the number a year before, according to the Justice Department. Private lawyers filed about 90 percent of the suits. The Justice Department returned $9.4 million to taxpayers, after paying private lawyers and other expenses.
Since 2008, the federal litigation returned $37 million to the Education Department. The private lawyers received $8 million in contingency fees, about 30 percent of the amount that their suits collected, according to data released by the agency.
Before heading to court, the Education Department has powerful collection tools.
Without a court order, it can seize part of borrowers’ paychecks, tax refunds and Social Security payments.
Private debt collectors — working directly for the federal government and for state agencies — earned $1 billion in commissions chasing down debtors in the year ended Sept. 30, according to a review of Education Department data.
Using all its collection powers, the Education Department last year retrieved $11.3 billion. The government projects in budget documents that it will recover almost every dollar of federal student loans that default, a forecast no private lender could make. Even after factoring in collection costs and the time-value of money, the agency said it expects to collect 85 cents of every dollar that defaults.
To chase student loans and other debts worth $100,000 or less, the Justice Department started using private lawyers in 1986, during the Reagan administration. Congress had passed legislation authorizing the approach as a way to recover taxpayer money without the expense of tying up prosecutors.
The Education Department selects the cases it sends to U.S. attorneys based on whether the government can expect to recover money and has lawyers to pursue debtors. That means borrowers with smaller balances are sued more often in the 19 of 94 court districts that hire private lawyers.
Central California, eastern Michigan and southern Texas — all with longstanding private-lawyer programs — accounted for half of all federal lawsuits against student-loan debtors since 2007, according to Syracuse University’s Transactional Records Access Clearinghouse, which collects federal records.
“Someone was working hard in this hot Texas sun, so the government could lend out this money and give someone else an education,” said M.H. “Butch” Cersonsky, who said his five- attorney Houston firm has collected as much as $1 million from student debtors in its best year. “They need to pay it back.”
Lawyers are relentless, borrowers say.
Charles Griffiths, a former auto worker who lives near Detroit, said an attorney representing the federal government told him to sell his only car, which he had driven more than 100,000 miles. Griffiths, 46, owed $50,000 from loans he took out to attend the University of Michigan, the government said in a lawsuit.
In 2005, Griffiths filed for bankruptcy after quitting his job as a political consultant to care for his grandmother, he said. He mistakenly thought the loan had been canceled through the bankruptcy, he said.
“They just want to get the money out of you — get their commission and walk away,” Griffiths said in a telephone interview.
Deborah Winslow, the attorney at Shermeta, Adams & Von Allmen, a Troy, Mich.-based firm collecting on Griffiths’ loan, declined to discuss her fee or his case.
“It’s hard to collect these days — people aren’t working in Michigan,” Winslow said in a telephone interview. “Some people feel they have a right to have their loans forgiven because so much time has passed.”
In California, Brice’s battle with lawyers hired by the government has its roots in the 1970s, when the Los Angeles teacher attended Syracuse University and other schools in New York. After a stint in the Coast Guard, she completed her college education, getting a bachelor’s degree in psychology at California State University, Northridge.
The Education Department said it mailed 90 notices to Brice between 1990 and 1999 that some of her loans were in default. Brice said she never received them.
In 2004, Brice consolidated some of her college debt through an Education Department program that lets students make lower monthly payments. Brice said she didn’t know that $3,100, which was in default, wasn’t included.
Around the beginning of 2009, through a court order, Goldsmith & Hull started taking 25 percent of Brice’s pay, after taxes and certain other items.
Brice said she pleaded with the firm for lower payments, saying she couldn’t afford $918 a month. Supporting her then 24- year-old daughter, she had had maxed out her credit cards. To buy groceries, she borrowed from her then 82-year-old mother, a retired nurse living on a fixed income.
Felicia Falcon, Goldsmith & Hull’s collections-department supervisor, told her to give up her car, which she needed to get to work, Brice said. Over several conversations, Falcon yelled at her and treated her rudely, Brice said.
“You owe us this money,” Brice remembered Falcon saying. “Whatever we need to do, we’re going to go after you to get it. We’re going to go after your bank account. We’re going to go after your salary. We’re going to go after your personal belongings.”
In an email, Falcon referred questions to the Justice Department.
Brice couldn’t afford a lawyer. Representing herself, with help from Public Counsel, a Los Angeles-based nonprofit group, she took her complaints before Audrey Collins, chief judge of U.S. District Court for the Central District of California. In March 2009, Collins ruled that Brice could afford $25 “to meet the necessities of life.”
After the judge issued her order, Goldsmith then seized $2,496 from Brice’s bank account, through another court order. Brice said her paychecks had been deposited in that account. The law firm took another $918 directly from her paycheck, as well, she said.
“I need to know what I can do to stop them and make them conform to the court order???” Brice wrote in an April 2009 email, filed in court.
In a filing, Goldsmith & Hull, based in Northridge, Calif., said it didn’t have time to stop that month’s wage garnishment because of the order’s timing. The firm said it couldn’t give the matter priority because it handles almost 6,000 collection cases for the U.S. Attorney’s office.
Brice, in her interactions with the firm’s staff, “has consistently been highly unreasonable, combative and unprofessional,” Goldsmith & Hull said in the filing.
Siding with Brice, Judge Collins issued a restraining order and demanded that the firm return the money from her bank account. She reprimanded Goldsmith & Hull for its “snippy and discourteous tone” and told the U.S. Attorney’s office to examine the firm’s performance.
Goldsmith & Hull settled for the $3,000 to $4,000 it had taken from her paycheck, around the amount of the principal of her original loan, Brice said.
Brice said she would have been willing to pay back $25 a month for as long as necessary to cover the interest she owed, as well.
“That wasn’t enough for them,” she said of the law firm. “I was really upset. I said to them, ‘You know what, I’m a single parent. What do you want?’ Why should the government go after you with a vengeance, even though you are trying to pay back your loan?”
Judge Collins questioned the tactics of Goldsmith & Hull in another case: its pursuit of Jimi Demmitt, a clerk at a title insurance company who was making about $30,000 a year.
In 2009, through a court order, Goldsmith & Hull started taking 25 percent of Demmitt’s pay, or more than $674 a month. She had defaulted on a $2,375 loan to attend a Los Angeles trade school in the 1990s.
Demmitt, who lives near Los Angeles, told Goldsmith & Hull’s Falcon that she couldn’t afford to pay that much.
Falcon questioned her honesty, and another law firm employee suggested she get rid of her health insurance, Demmitt, who has diabetes, said in a court filing. Negotiating on her behalf, her boyfriend offered $150 a month, which the firm refused, she said.
In an October 2009 order, Judge Collins said Demmitt provided “unrefuted evidence” that the law firm failed to notify her of the judgment against her, contacting her at an address where she had never lived and when she was out of town.
Collins threw out the judgment, ordered a halt to the wage garnishment and said she would consider sanctions against Goldsmith & Hull. She declined to impose sanctions after the firm said it would take steps to prevent “future violations,” Collins said.
The U.S. Attorney’s office in Los Angeles looked into the complaints involving Brice and Demmitt, which were “resolved between private counsels and the debtors,” Price, the Justice Department spokeswoman, said in an email. Collins declined to discuss her orders.
Goldsmith & Hull agreed to settle Demmitt’s case for what it had already taken from her paycheck, almost $7,000, she said.
“They were treating me like a criminal, like someone who wasn’t offering to pay,” Demmitt said. “They were going to get the money, no matter what.”