If You Can’t Pay Off Your Student Loans, Your College May Sue You

A new trend is taking shape in higher education.
Students across the country are already saddled with student debt. If their colleges sue them, they can add legal fees and some extra worry onto the pile. (Photo: Getty Images)
Feb 11, 2013· 2 MIN READ
Suzi Parker is a regular contributor to TakePart. Her work also appears in The Christian Science Monitor and Reuters.

Every night thousands of people go to bed stressed about their student loan debt.

A recent report by the Federal Reserve Bank of New York shows that outstanding student loan debt in the United States stands at $956 billion. It also states that more student loan borrowers are currently falling behind on their payments.

Now there's one more worry to throw into the mix.

Some colleges and universities—Yale, the University of Pennsylvania, and George Washington University—are suing former students for less than $10,000 because they have defaulted on Perkins loans.

Bloomberg reports that students defaulted on $964 million in Perkins loans in the year that ended June 2011. Currently, about 80 percent of student loans are guaranteed by the government.

According to the Department of Education website, the Federal Perkins Loan Program “provides low interest loans to help needy students finance the costs of postsecondary education.” About 1,000 postsecondary institutions offer them.

Universities, like Yale and Penn, that have multibillion-dollar endowments, are generating bad will by attempting to collect what are, effectively, pennies from students...

The loan program is funded by ongoing activities, "such as collections by the school on outstanding Perkins loans made by the school," the website states. Students often receive these loans in addition to other student loans and scholarships. They must sign a promissory note in order to receive a Perkins loan, which has an interest rate of about five percent—considerably lower than other student loans.

But still, interest builds and defaults occur—and so do the lawsuits.

"Suing students is a bad idea," Joann Weiner, an economics professor at George Washington University, says. "Universities, like Yale and Penn, that have multibillion-dollar endowments, are generating bad will by attempting to collect what are, effectively, pennies from students who don't have the financial means to repay their student loans."

Student loans are as risky as house loans, but students, eager for a higher education, will often apply for them with very little knowledge of the long-term consequences or consideration. They may not know, for instance, that student loans cannot be wiped away by filing bankruptcy.

According to the website FindLaw, the Department of Education can take many measures in order to collect on a student loan, including:

  • Take tax refunds
  • Garnish paychecks
  • Take federal benefits (Social Security retirement benefits and Social Security disability benefits)
  • Revoke a professional license (attorneys, medical professionals, teachers, and state officers)
  • File a lawsuit

"Because a statute of limitations is inapplicable, the agency has no time limitations on collecting the debt," the website states. "The Department can collect from assets such as bank accounts, valuable property, and can place a lien on the borrower's real property. As the result of such a lien, the borrower may not sell the property until the lien is removed."

The Perkins Loan, although self-sustaining through student loan collections, once received about $65 million a year from the federal government. That stopped in 2008.

Litigation for these loans, however, is only indicative of the long-needed overhaul for the student loan system.

The Institute of Higher Education Policy (IHEP) released a study in January about student aid reform. It recommended 13 federal policy recommendations to improve fiscal aid, including maintaining the Pell Grant program as the centerpiece of need-based aid, and making it an entitlement; tying campus-based aid to student debt repayment levels and degrees awarded; and making income-based repayment the default option for student loan repayment.

The reform is much needed since lawsuits with decades of consequences are likely to continue unless reform happens.

"At a time when the cost of education at these private universities exceeds the median family income, it doesn't make sense to try to collect funds from former students who don't have the means to repay," Weiner says. "Students likely don't default without considering the long-term implications—this action could prevent them from getting any kind of financial assistance and perhaps even a job."