In the late 1980s, Patricia Gary borrowed $6,600 worth of federal student loans to pay her way through beauty school, a move she thought necessary as computers began to replace typewriters and her job skills didn’t translate.
Over 30 years later, Gary has paid over $22,000 toward the loans, which she defaulted on in the 1990s. She still owes about $4,000.
Gary, who was born in Guyana in South America but has lived much of her life in the Bronx, New York, says being in default has affected all aspects of her life. She’s had to decide whether to to buy medication, and how much food she can afford, since the government has taken some of her Social Security payments through collections.
Unfortunately, she isn’t alone: Millions of borrowers are in default on their student loans, meaning they didn’t make payments on their loans for at least 9 months. Defaulting can have long-lasting consequences, including hurting borrowers’ credit scores and depleting other sources of income through government collections. Yet during the pandemic, borrowers in default had a unique opportunity to escape their predicament. The problem? They didn’t know about.
A little-known provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act passed in could have helped many borrowers exit default completely. But the latest data from the Department of Education shows that of 7.7 million borrowers with federally held loans who were in default when the pandemic started, more than 92% are still in default. In addition to borrowers being unaware of the opportunity, advocates says the process is onerous for people already in extremely precarious financial situations.
A Pandemic Relief Program Offered Struggling Student Loan Borrowers a Lifeline. Most Never Knew About It
“This one-by-one approach of putting it all on borrowers who are in difficult financial circumstances to figure it out themselves has demonstrably not worked,” says Abby Shafroth, a staff attorney at the National Consumer Law Center.
Default has ‘grave consequences’
Lindsey defaulted on her student loans in 2014 after her father’s death spurred an onset of depression and drinking. (Money is only identifying Lindsey by her first name at her request, as she doesn’t want her employer to know the details of her default and personal finances.) She requested forbearance, which allows a borrower to suspend payments for a set period of time, when she lost her job. But by the time she got sober, she didn’t even know who held her loans or where they were – let alone how to pay them off.
“I had no idea what was going on and I wasn’t in a place where I could track them down,” Lindsey says. She was ashamed, too, and afraid of what she’d find out about how much she owed.
Now in her mid-thirties and working payday loans in OK a government job, Lindsey has been out of default since 2018 after setting up a payment plan. But the consequences of her default still follow her: The background check for her current job took more than a year, and she had to provide documentation that she was making her payments on time. She still owes nearly $75,000.
The consequences of default are pretty draconian for borrowers, says Persis Yu, policy director and managing counsel at the Student Borrower Protection Center. Without ever going to court, the government can seizes wages, Social Security benefits, and tax refunds and credits. And it can do this forever; there is no statute of limitations on collections during the borrower’s lifetime. Getting out of default can be the difference between someone being able to pay rent or buy diapers for their kids and not being able to do any of that, Shafroth says.