Student Loans – Mostly Nondischargable

as printed in the Sun Times:

Students and loans: ‘Til death do us part

May 6, 2007

BY DAVE NEWBART Staff Reporter dnewbart@suntimes.com

They liken it to a financial death sentence.

They can’t get a car loan, a home mortgage or any other type of loan. They’ve lost jobs and even spouses over it.

They are so humiliated they don’t want any of their friends or family to know.

And for most, there is no way out.

They are former students trapped under the weight of student loans. The same vehicle that allowed them to get a college education has left many graduates buried in debt with no reasonable way to climb out.

Some students who never graduate are stuck paying off loans without the earning power of a degree — an estimated additional $1 million in lifetime earnings.

And some students who finish can’t afford the monthly payments. Others lose jobs and can’t catch back up. Then they get turned down by employers who increasingly check credit records before hiring.

Some say they would make small monthly payments to show good faith — only to see their balances continue to grow and to receive harassing phone calls from collectors.

To be sure, most borrowers pay on time; default rates are at an all-time low.

But for those who run into trouble, changes in federal laws — including many in the last decade — have made student loans among the hardest debts to discharge. They’ve also made the loans among the most lucrative for private lenders, who face little risk — because the government backs the loans — but reap the benefits when balances balloon.

Some borrowers say they accept reasonable interest, but they believe the fees and penalties — which over time can double or triple the loan balances — are unfair.

Interest rate over 18%
Many of the students awash in debt say that they were blinded by the promise a college degree holds and unprepared to take on high levels of debt at such a young age.

Connie Martin’s son signed up for cooking school in Chicago in 2002 at age 25. To pay for it, he borrowed $73,000, mostly in private loans from Sallie Mae, the largest student lender, at 18?250-134?/’ percent interest.

“He didn’t know what the interest rate was. … He just wanted to go to school,” said Martin, of Sycamore.

His first payment was $1,100 a month, his entire monthly salary at a downtown eatery where he went to work after graduation.

“I don’t understand how they can lend a kid that kind of money with no credit history, who never owned anything, with no co-signers,” said his mother, who only learned of the situation after the bills started to pile up.

Sallie Mae officials said they no longer offer such high-interest loans, and have offered students a chance to refinance at a lower rate if certain conditions are met. “We recognize it’s high,” spokeswoman Martha Holler said.

Martin’s son declined to comment. His balance has since grown to $98,000.

‘It’s like indentured servitude’
Greg Treece, of Downstate Mattoon, now wishes he never enrolled in Washington University’s Occupational Therapy program. “Choosing an expensive private school and borrowing the money to go there is the single greatest mistake I have ever made,” he said.

Treece took out $84,000 in loans. Six months after he got out of the St. Louis school, his monthly payment was more than half his take-home pay for his first job in Chicago. He later lost his job. With compounding interest, his loan quickly skyrocketed. At times he seriously wished he could go to jail in exchange for wiping out the debt.

With a new job, he’s managed to pay $60,000, but his balance remains at $111,000 because of fees, penalties and interest. “It’s like indentured servitude,” he said.

For those who default, lenders can truly play hardball, often employing no-scruples private collection firms that call borrowers as often as 10 times a day.

Shirley, an Ivy League-educated lawyer, lost her job in Chicago in the late 1980s. She pleaded for reduced payments from a collector working for the Illinois Student Assistance Commission — but was denied.

“I said you are driving me to bankruptcy,” she recalled. “They wouldn’t budge.”

In bankruptcy court ISAC claimed she owed $78,000, which included $13,000 for collection costs, 20 percent of the total debt. Nearly all of the debt was eventually erased, according to court records.

Because that was before the recent law changes, she should have been clear.

Loan chief admits ‘mistakes’
But several years later, the collectors began calling again — first from ISAC and then from the U.S. Education Department. They claimed the bill was now over $100,000.

“It was as though they were above the law,” she said. She eventually went to court again and proved she no longer owed the money, but her husband left her in the process. She asked that her real name not be used out of fear of retaliation.

ISAC and the Education Department say they have several programs that allow students to delay payments in hard times or make lower ones based on income. Officials say they try to help borrowers in default get back into good standing, a process known as rehabilitation. Last year, ISAC rehabbed $30 million in defaulted loans, up from $4.4 million in 2002.

Agency director Andy Davis says the agency has to strike a balance between helping borrowers repay and making sure taxpayers aren’t left in the lurch.

But he acknowledges his workers “make mistakes” and said he is looking to make changes in some of the outsourcing of collections.

Then there are those with hard luck, who make bad decisions or just simply can’t get a break.

Richard and Sheila Friese both have degrees from Southern Illinois University, financed in part on student loans. They were also both discharged from the Navy after suffering injuries while serving stateside. Richard is learning disabled.

They have never been able to find high-paying jobs; now they both use wheelchairs to get around and suffer from ailments including arthritis, constant abdominal pain and chronic fatigue. They’re currently fighting with the Veterans Administration over benefits; they also are wrangling with the Social Security Administration.

Collector: ‘We will never go away’
They currently have no income to pay off their combined $141,000 loan balance. ISAC has seized $3,200 in tax refunds from Sheila, 37. Richard, 49, avoids the phone after constantly being called by collectors for Sallie Mae — one of whom he claims called him a “low-life, S.O.B.” Holler said Sallie Mae’s collectors are trained in fair debt collection practices. “That should not happen,” she said.

If this were virtually any other debt, experts say, the couple would be able to discharge some or all of it through bankruptcy. But the Frieses, of Mundelein, are stuck. “Our life has hit a brick wall,” Richard said.

Davis said it might make sense for the federal government to “write off” debt if borrowers — particularly vets — have no hope of paying.

Pam, 58, of Dolton, graduated from Downstate SIU-Edwardsville in 1984, but spent time on welfare. She eventually defaulted on her loan after a dispute over the amount of the balance and monthly payments. Her $12,500 in loans has grown to $28,000. Experts say borrowers should continue to make payments during a dispute so the loan doesn’t get out of control.

She has gone underground, blocking collectors’ calls and running her own business so her wages can’t be garnisheed. But when collectors do get through, they have a harsh message. “When they call they say, ‘We will never go away until you are dead.'”

UP, UP AND AWAY

Percent of students with loans
1993: less than 50 percent
2004: 66 percent

Average debt for graduating seniors
1993: $9,250
2004: $19,200

Number of graduating seniors with debt over $40,000
1993: 7,000
2004: 78,000

SOURCE: Project on Student Debt

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Terrance Leeders

Chicago Bankruptcy Attorney, husband, father, Cubs fan.

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