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The Debt Resisters’ Operations Manual

Chapter Four

Student Debt: Foreclosing on the Future

In the not-too-distant past, high school graduates in the United States seeking a meaningful college education could likely have received one from an in-state or city university at little to no cost. And it would have been reasonable for them to assume that the degree they earned would significantly increase life opportunities. Though that era was relatively short-lived here, many other countries have made access to free or low-cost higher education an enduring priority, insisting on it being a basic right and a good that benefits society as a whole.

These days though, back here in the United States, higher education has sadly become one of the biggest debt traps of all—turning many of us into lifelong debtors. Even in the midst of the Great Recession, college costs have continued to skyrocket. Funding for our once robust and affordable state university system—a symbol of a collective commitment to broadening opportunity and shared prosperity—has been whittled away over time, with the burden of education costs shifted onto students and their families in the form of severe tuition and fee hikes. The story at private schools is equally grim, with already out-of-reach average tuition nearly tripling in cost since 1980. And though it’s become common knowledge that a college degree is a prerequisite for obtaining a decent job, we are increasingly being told that we need an expensive master’s degree too, with few grants available to those scrambling to enroll.

In the absence of free or low-cost options, students are taking on life-altering debts to cover astronomically high tuition, fees, and living costs, coerced through fears of an uncertain financial future and false promises of stable careers. Lenders, loan servicers, Wall Street investors, school administrators, predatory for-profit colleges, and even the government are raking in profits at students’ expense. As a result, in 2012, the total amount of student debt owed in the United States surpassed the $1 trillion mark—higher than credit card debt or any other kind of consumer debt with the exception of mortgage debt.

Two-thirds of U.S. students are leaving college with an average of $27,000 in debt, with the burden falling disproportionately on Native Americans, Blacks, and Latino/as. And with too few jobs on the horizon, it’s no surprise that defaults are now occurring at the astonishing rate of one million per year. Almost one in six borrowers is in default, with many others on the brink. Of the class of 2005, 41% are already delinquent or in default. Experienced on a personal level, this combination of chronic underemployment and massive indebtedness has given many the sense that their futures have been foreclosed upon, leading them into depression and some even to suicide.

Given the enormous sticker price for college, students often don’t even qualify for enough crushing loans to pay the full cost. As such, parents are increasingly taking out or cosigning loans on their children’s behalf and facing the same repayment problems as their offspring. It’s no wonder then that seniors are now the fastest growing population of student debtors. At the same time, unemployment for people under twenty-five is almost twice the national average, meaning that young people are being forced to depend on their parents for longer periods of time after graduating. As a result, many parents are putting off retirement in order to continue to provide for their families while struggling to cover the added expense of student loan repayment.

The Federal Reserve Bank of New York reported that, in 2012, seniors owed around $36 billion in student loans, or about 4.2% of total U.S. student loan debt. For the sizable number of those who are in default, their Social Security benefits are subject to seizure. This growing predicament piles layers of guilt on top of the fear and depression experienced by younger debtors when they realize that not only are they unable to assist their parents through their retirement years, they are also a direct cause of their parents’ added economic burden.

Given this grim picture, some analysts argue that there is a student debt “bubble” about to burst. Unlike the housing bubble, a mass devaluation of outstanding student loans might not be a bad thing for debtors. After all, the creditors can’t repossess your degree or your brain—or at least not yet! But there are harsh penalties for defaulting, making any bet that your debt-burden will someday be reduced a risky one at best.

This chapter explains how student debt was created, who profits from it and how you can survive as a debtor. Above all, you should know that you are not alone if you are facing default. There are ways of resisting, especially by acting together.

How It Got So Bad

Going to public college used to be pretty affordable, especially for those on the GI Bill, or those who went to public colleges like the City University of New York or the University of California. Alarmed at the rise of student activism and guided by simplistic free-market ideals of “personal responsibility,” conservatives took advantage of the fiscal crises in the mid-1970s to clamp down on free tuition and open admissions policies. A temporary season of austerity measures turned into an enduring epoch as cuts by state lawmakers continued throughout the 1980s and down to this day. Neoliberal policy-making, aimed at privatizing public responsibilities, has increasingly transferred the financial burden from the state onto individual students. As an example of the results, in 1976, a student at the University of California paid only $647 in annual fees; by 2012, the bill had reached $13,181.When these are the most “affordable” options, students from low-income homes regularly end up owing a third, half or even more of their family’s annual earnings for a year of tuition.

Overall, the costs of a college education have risen by more than 1,100% in the last three decades. With grants and scholarships lagging far behind tuition increases, student loans are the only option for most who want a college education. And in a knowledge economy, where a college degree is considered a passport to a decent livelihood, there’s really not much of a choice but to take on loans, committing large chunks of your future earnings to pay back the debts you got stuck with simply trying to prepare yourself for employability in the first place. This kind of contract is the essence of indenture.

To make matters considerably worse, in 1998 Congress took the extraordinary step of making federally backed loans all but impossible to discharge through bankruptcy. After prolonged pressure from Wall Street creditors, private loans became ineligible in 2005, making student debt virtually the only kind of loan that doesn’t allow debtors the option of bankruptcy. As if that’s not enough, the government also granted enormous collection powers to lenders. Lending agencies can now garnish wages and seize tax returns without even requesting a legal hearing first. Even Social Security and disability wages are subject to garnishment.

The knowledge that students have little choice but to debt-finance their education however high the cost has created some perverse incentives for college and university administrators, warping educational priorities and putting further upward pressure on tuition. In order to make up for financial shortfalls, colleges have increasingly turned to issuing bonds, using tuition as collateral to secure loans from Wall Street. For example, in 2012, the University of California sold almost $1 billion in bonds set to mature over the next hundred years. That means UC students’ tuition dollars will be used to line the pockets of big investors over the next ten decades. To ensure a steady flow of riches, financiers hold colleges hostage by threatening to ruin their credit ratings if tuition does not go up.

Given the cultural shift from a model based more on public funding to one where education is seen largely as a commodity for individual purchase, many administrators have quite logically responded by marketing their schools as luxury goods. They fill their ever-expanding campuses with extravagant dorms and “state-of-the-art” facilities designed by big-name architects, and invest in non-academic “lifestyle” services and perks. They certainly don’t skimp when it comes to their own salaries. Average pay for administrators increased dramatically in recent years, with many private and public school presidents, provosts, and chancellors falling well within the top 1% of income “earners.” And when endowments fail to cover the tab, faculty who do the apparently less important work of actual teaching can always be replaced by adjunct professors who get paid far less and receive little in the way of benefits.

A luxury education might be fun for some, but upon graduation, debtors must quickly learn to walk a treacherously thin tightrope. Student debt can endure for decades, employment prospects are more and more precarious, and wages have been stagnating. But a credit report damaged by even one or two delayed payments can generate additional obstacles to finding work, as employers are now increasingly demanding that potential hires agree to undergo intrusive and unreliable credit checks as part of the application process. Thus debtors tend to put their preferred career paths on hold (and therefore risk abandoning them) until they have finally paid off their loans through employment options that are much less desirable. Ironically, one of the quickest paths to paying off debts for some students is to find work in the finance industry, issuing loans or speculating on derivatives.

Wall Street lenders have made a killing on the debt-financing of education, especially in the decades before federal loans were reorganized in 2010. Sallie Mae, sometimes referred to as the “queen” of student lending, was created in 1972 as a government-sponsored enterprise. But in 1977, as the business of student loans became more and more lucrative, the push to privatize began. By 2004, Sallie Mae was fully publicly traded. The company now has a hand in both federal and private student loans and draws its profits from every aspect of the student loan industry: originating, servicing, and collecting.

Between 1972 and 2010, under the FFELP (Federal Family Education Loan Program) lending system, federal loans originated by financial institutions (including Wall Street banks) were fully guaranteed and subsidized by the government. In 2010, the Obama administration cut out the middlemen, which means that any federal loan taken out now is originated directly by the federal government. However, these government loans are still serviced by a group of select private institutions, including Sallie Mae. That means that the government pays these servicers millions of dollars a year in order to handle the billing and other maintenance of the loan.

Even more recently, under the thin guise of easing the burden of debtors, Congress and the president did away with the unjustifiably high 6.8% interest rate on federal loans, replacing it with a temporarily lower adjustable rate tied to returns on ten-year treasury notes—creating a time bomb that will explode in students’ faces once treasury rates go up again, as they surely will. But don’t worry! The rate for loans is capped at 8.25%. Now don’t you feel better?

As if all that weren’t bad enough, Federal loans rarely meet the full cost of education, leaving many students with no choice but to take out private loans to make up the difference. Even though only 20% of all current student loans are private, at the current rate of issuance their overall volume will have surpassed that of federal loans in ten to fifteen years. These private student loans are subject to different terms and have much higher interest rates.

Many college financial aid officials are in cahoots with private lenders. A 2006 investigation by the New York State Attorney General’s Office concluded that the business relationship between lenders and university officials amounted to an “unholy alliance.” Lenders paid kickbacks to universities based on the loan volume that financial aid offices steered their way; they also gave all-expenses-paid Caribbean vacations to financial aid administrators and even put them on their payroll. In addition, lenders set up funds and credit lines for schools in exchange for being placed on preferred-lender lists. In spite of these scandals, and despite the NYS Attorney General’s recommendation that bankruptcy protections be restored to student lenders, nothing really changed. The student loan racket was just too profitable to be reined in by a few grandstanding regulators.

The lack of protection for consumers has made default quite profitable for lenders. On average, 120% of the principal on a defaulted loan is ultimately collected. In fact, in 2003 Sallie Mae disclosed that its record-breaking profits were due in significant part to collections on defaulted loans. Two years earlier, the company was caught declaring loans to be in default before even trying to collect the debt. This rapacious conduct is the norm in some quarters of the student lending industry (Collinge 2009).

As in the subprime mortgage market, many private loans are securitized—packaged and sold to the highest bidder as Student Loan Asset-Backed Securities (SLABS). These SLABS account for almost a quarter—$234.2 billion—of the aggregate $1 trillion debt. Since SLABS are often bundled with other kinds of loans and traded on secondary debt markets, investors are not only speculating on the risk status of student loans but also profiting from resale of the loans though collateralized derivatives.

The uneven social impact

The human toll of all this is becoming increasingly visible. For a host of disturbing accounts of student debt, it’s well worth reading Alan Collinge’s book Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back. And it’s certainly not hard to find student debt horror stories all over the internet, especially in the wake of Occupy Wall Street, which inspired many debtors to “come out” online. A military veteran reports that he has paid $18,000 on a $2,500 loan and Sallie Mae claims the man still owes $5,000; the bankrupt husband of a social worker, bedridden after a botched surgery, tells of a $13,000 college loan balance from the 1980s that ballooned to $70,000; a grandmother subsisting on Social Security has her payments garnished to pay off a $20,000 loan balance from a ten-year-old $3,500 student loan she took out before undergoing brain surgery. Loans like these grow rapidly due to a combination of compounding interest and forbearance programs. In fact, only 37% of student loans are in repayment at any given time. The other 63% are accruing interest, adding fees and becoming more and more likely to add to the six million student loans already in default.

While the single largest debt loads are racked up by students from middle-income families seeking a private university degree, the overall impact of debt is magnified among low-income families. Of those who have earned bachelor’s degrees, about 81% of Black students and 67% of Latino/a students leave school with debt, compared to 64% of White students. As a result of the home equity losses suffered since 2008, Black people lost a huge portion of the economic gains they had made in the post–civil rights era. Reflecting those losses, Black students have had to borrow more for education than Whites, and the racial inequity of the employment landscape means they are twice as likely to be unemployed on graduation. Also, students of color are much more likely to enroll in for-profit schools, which have high non-completion rates and account for nearly half of student loan defaults. These proprietary colleges (we should call them “Wall Street’s colleges”) engage in reverse redlining, explicitly targeting students of color for recruitment, loading them with debt in return for a dubious educational experience. It’s no surprise then that the default rate for Black people is four times that of Whites.

One of the worst examples of debt-financing in the for-profit sector stems from the introduction of the new GI Bill, introduced by Congress in 2008 to help veterans of the wars in Iraq and Afghanistan enter the higher education system. Almost a third of the GI Bill monies have ended up in the coffers of for-profit colleges. These colleges have exploited a legislative loophole that allows them to count GI Bill money as part of the 10% of revenue they are required to raise from non-public sources in order to be eligible to receive federal student loans, which account for the other 90% of their revenue. The result has been an aggressive recruitment of ex-soldiers—some were so brain-damaged from their injuries they had no idea what they were signing—with an inevitable impact upon veterans of color, who serve disproportionately in the armed services. Excluded from most of the homeownership and education benefits of the original GI Bill, Native Americans, Blacks, and Latino/as are being preyed upon and debt-burdened by the latest bill.

Avoiding Default

Your loan becomes delinquent the first day after you miss a payment. The delinquency will continue until all back payments are made. Loan servicers report delinquencies of at least 90 days (and in some cases as early as 30 days) to the three major credit bureaus. As we’ve seen in Chapter One, a negative credit report may make it difficult for you to meet your basic needs.

Student loans are generally considered to be in default when you fail to make a payment for 270 days for a federal loan or 120 days for a private loan, though the industry standard for private loans is 180 days. Though the consequences of delinquency can be hard to bear, the penalties for default are of a much greater magnitude. If you can’t avoid delinquency but want to avoid default, try to make at least one payment every 120 (private) or 270 (federal) days.

If you haven’t defaulted but are alarmed about not being able to pay your student loans, do not panic. If you just graduated, many loans provide an automatic six-month deferment period. And if you have federal loans, you can extend this period on an annual basis either through deferment or forbearance programs. Deferment on certain loans halts interest during periods of unemployment, economic hardship or temporary disability, or while the debtor is in school. Forbearance—granted by a loan servicer to borrowers who don’t qualify for deferment—does not stop interest from accruing, but it does allow for some breathing room. But keep in mind that forbearance will cause the amount that you owe to increase. Typically, the interest is compounding annually, which means that at the end of a year it will be added to the principal and you will have to pay interest on that too. This can cause loans to mushroom, so check to see if you qualify for deferment before entering into forbearance.

It may also be helpful to consolidate all of your loans into one. To learn about requirements for loan consolidation, you can visit studentaid.ed.gov/repay-loans/consolidation. The application for Direct Loan Consolidation is available at loanconsolidation.ed.gov.

There are a couple of newer programs that may also be helpful to those with federal loans: the Income-Based Repayment Plan (IBR) and Public Service Loan Forgiveness (PSLF). Income-based repayment allows you to adjust payment to meet your income by capping payment at 15% of income based on family size. A single individual with no children making under $20,000 would pay 2.4% of income toward student debt whereas a family of four making under $100,000 would pay 9.9% of their income toward student debt. After twenty-five years, any remaining student loan debt would be forgiven. But there is a major caveat with this type of loan forgiveness. The government taxes loans that are written off, including IBR student loans, as earned income. This means that, after twenty-five years, the remainder of that loan is written off, but you will now owe what may be a significant amount in taxes, whether or not you can pay it.

Public Service Loan Forgiveness (PSLF) provides forgiveness of federal student loan debt after ten years of continuous employment by any nonprofit, tax-exempt 501(c)(3) organization, a federal, state, local, or tribal government agency including the military, public schools, and colleges, or while serving in AmeriCorps or the Peace Corps. You may also be eligible if your employer is not a religious, union, or partisan political organization and provides public services. Loans forgiven through PSLF, unlike IBR, do not get taxed as earned income.

Being in default

If you are about to default on a student loan, remember that you are not alone. There are approximately six million other Americans that have already done so. While default can be a political act (especially when done collectively), any such decision should be made with full knowledge of the following possible consequences:

  • Your loans may be turned over to a collection agency.
  • You will be liable for the costs associated with collecting your loan, including court costs and attorney fees.
  • You can be sued for the entire amount of your loan.
  • Your wages may be garnished. Federal law limits the amount that may be garnished to 15% of the borrower’s take-home or “disposable” pay—the amount of income left after deducting any amounts required by law to be deducted. The wage garnishment amount is also subject to a ceiling that requires the borrower to be left with weekly earnings after the garnishment of at least thirty times the federal minimum wage.
  • Your federal and state income tax refunds may be intercepted.
  • The federal government may withhold part of your Social Security benefit payments. The U.S. Supreme Court upheld the government’s ability to collect defaulted student loans in this manner without a statute of limitations in Lockhart v. United States (December 2005).
  • Your defaulted loans will appear on your credit history for up to seven years after the default claim is paid, making it difficult for you to obtain an auto loan, mortgage, or even credit cards. A bad credit record can also harm your ability to find a job. The U.S. Department of Education reports defaulted loans to TransUnion, Equifax, and Experian (see Chapter One).
  • You won’t receive any more federal financial aid until you repay the loan in full or make arrangements to repay the overdue amount and make at least six consecutive, on-time monthly payments. You will also be ineligible for assistance under most federal benefit programs.
  • You will be ineligible for deferments.
  • Subsidized interest benefits will be denied.
  • You may not be able to renew a professional license you hold.
  • If you had a cosigner on your loan (this is usually a parent or grandparent), they will be held legally responsible to pay back your loans. The penalties that apply to the person who took out the loan are also applied to cosigners who default.

These measures are harsh, but you can continue to fight as an individual. Unfortunately, bankruptcy is not an option for student debtors, except occasionally in cases of permanent disability or “undue hardship.” Although it is difficult to get credit reporting agencies (CRAs) to remove defaulted student debt from reports, it is not impossible. You can use the strategies and resources outlined in Chapter Nine to demand that CRAs and debt collectors prove that the amount of your debt is fully verifiable. This will require a concerted letter-writing campaign, but you may be pleasantly surprised by the results. Often, recordkeeping is poor and the collector will not have access to any records that actually tie you to a debt, especially if your student loan was securitized into a SLAB. Although a court judgment is not required before your paycheck, bank account, or tax return is garnished, you are entitled to an administrative hearing if you request one.

If you want to get out of default, you can often rehabilitate your loan by entering into an agreement to make twelve consecutive on-time payments to the original lender or the guarantee agency in exchange for the removal of the prior delinquency history from your credit report. Be sure to get this agreement in writing and to be clear about how this will be entered on your credit report, since amnesty agreements like this are technically noncompliant with the Fair Credit Reporting Act.

Know your loans

As the number of middle-people standing between you and your original loan continues to increase, it can be hard to ascertain exactly who guarantees, originates, services, and collects your loans. To find out this information about your federal loans, visit the national student loan database at nslds.ed.gov/nslds_SA. The Neighborhood Economic Development Advocacy Project also offers a step-by-step guide at nedap.org/resources/studentloanguide.php. Things are a little more complicated when dealing with private loans. FinAid is a great first resource for understanding the variety of institutions involved: finaid.org/loans/studentloans.phtml. It’s important to fully understand your own situation, since the laws apply unevenly to different kinds of financial institutions. For example, state guarantee agencies are exempt from the Fair Debt Collection Practices Act, but any private collection agency hunting you down must comply with this law. Be aware of their illegal practices and know your rights. This FinAid page about defaulting on student loans is a good place to start: finaid.org/loans/default.phtml. Abusive debt collection behavior is also highlighted in Chapter Nine of this book. We recommend you read it carefully.

Collective Action Toward Change

If we fight this system alone, the best we can hope for is to keep our heads above water. Collective action is the only true solution. There’s plenty of inspiration to be found outside of the United States, where powerful movements fighting to reclaim education as a basic right seem to be popping up everywhere. A wave of governments under the sway of neoliberal ideologues have been doing their best to undermine once well-funded university systems in hopes of imposing U.S.-style debt-financing on their students. But the immense suffering that system has created is no secret, and students across the globe have begun to draw lines in the sand, staging massive protests, strikes, and direct actions to resist.

In 2010, when the British government announced plans to cut funding and drastically raise tuition fees, students across the United Kingdom erupted in a series of massive protests. In London alone, fifty thousand students took to the streets on one day, many of them surrounding and occupying the Conservative Party headquarters. Starting in 2011 in Chile, where access to higher education has long been pitifully unequal, hundreds of thousands of students have filled the streets over and over again, paralyzing the education system and weakening government resolve to implement debt-financing and privatization. And in 2012, over three hundred thousand students went on strike in Québec, mobilizing mass popular support and virtually shutting down the university system in their struggle to resist tuition hikes. And the struggles continue.

But here in the United States, we’re at a crossroads. After two generations of students and families suffering under punishing burdens of student debt, it seems to have finally become clear to most everyone that we are in a crisis. An insurgency of student debtors is on the rise. But the question remains as to where that momentum will lead us. Politicians—heavily beholden to the finance industry—campaign on promises of reform, offering market-based “solutions” that would further commit students to a debt-driven system where education is first and foremost a profit engine for financiers, asset speculators, and real estate developers.

And some well-meaning groups organizing around student debt seem to be similarly stuck on solutions that continue to treat education as a commodity primarily benefitting individuals who purchase it. A recent grassroots effort put Oregon on the path to a system where the state pays tuition costs at public colleges upfront and students pay it back as a percentage of income for years into the future. However much such a program may increase access to education in the short term, requiring individual students to fund universities out of their paychecks normalizes the idea that education is a personal responsibility and in the long run could accelerate the replacement of publicly funded schools with lifetimes of indebtedness.

Other moderate, pro-capitalist reform proposals—including efforts to restore bankruptcy protection or to receive partial debt “forgiveness”—have produced little in the way of legislative change. While we are of course deeply in favor of building a movement around the debt crisis, any such movement must target the root of the problem, rather than pruning the foliage. In a truly democratic society, nobody would have to go into debt to earn a diploma. The pathway to this outcome does not lie in futile pleas for economic reform, but through a political movement driven by self-empowerment and direct action on the part of debtors.

If you’re a current student, learning about your school’s governance and demanding fiscal transparency and accountability from your administrators and board is a powerful way to fight back. In April of 2013 in New York City, the president and board of directors of one of the very few tuition-free colleges left in the United States—the Cooper Union—announced that they would forsake the school’s 150-year-old mandate to provide free education and begin charging students up to $20,000 a year. Students who had been organizing in coordination with school faculty and staff in anticipation of such a move quickly occupied the office of the president, demanding not just a return to free tuition, but that decisions regarding the management of Cooper be opened up to the entire school community going forward. After sixty-five days, the board agreed to convene a working group composed of students, faculty, alumni, and administrators with the intention of restoring founder Peter Cooper’s vision of education that’s “as free as air and water.” Students also won a seat on the board and a permanent space to continue organizing.

At the time of writing, the fall semester is about to begin and students from colleges and universities across New York City have organized disorientation campaigns, staging events and direct actions and distributing thoroughly researched guides to arm incoming students with the tools they’ll need to continue the struggle against the neoliberalization of our schools. Campaigns like these are spreading to schools across the country. Find out what’s going on in your area. Or start your own disorientation campaign!

The demand for a student debt jubilee was heard often during Occupy Wall Street, and the Occupy Student Debt Campaign (OSDC) that grew out of it did much important work toward articulating a vision of the what true change would look like. Others across the country—including Strike Debt, a direct descendent of OSDC—have begun to converge around a set of interlocking principles that should be central to any movement seeking to restore education as a social good and a right. To begin with, the federal government must make all two- and four-year public colleges tuition-free for all students. Any future student loans from the government should be offered at zero interest. All current student debt should be cancelled as part of a one-time corrective jubilee. And all university institutions must open their books; transparency and accountability to students and their families, as well as to their employees, is essential.

If you think providing free public education sounds like pie in the sky, it would probably cost way less than you think. By our estimates, the total amount of new money necessary is less than $13 billion a year. That’s a lot of money, to be sure, but within the scope of the federal budget it is less than 0.1% of yearly spending—merely a rounding error. For the sake of comparison, U.S. taxpayers are currently subsidizing too-big-to-fail banks at the rate of $83 billion every year. To offer another comparison, tax subsidies to just twelve corporations totaled about $20 billion per year from 2008 to 2010.

Until the conventional debate is opened up to include alternatives that genuinely reflect the needs of students and debtors, Strike Debt believes that the only sensible thing to do is to resist student debt. It is immoral, illegitimate, odious, and a drain on both those who must bear it and the society in which they live. We believe that a true grassroots movement of student debtors—the movement we want to be a part of—will organize a collective refusal to pay. When student debtors realize their collective power in this way, then we may suddenly find ourselves in a world where politicians are forced to treat education as a public good. Momentum is growing. Join the resistance!

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