Done With College But No Degree If You Default
May 9, 2013

Student loan default rates for college-administered loans have risen by 20% over the last five years and many schools are getting very aggressive about collections. To some extent, it’s understandable because repaid Perkins loans go back into a limited pool to be loaned out again. Perkins loans go to financially strapped students, so defaults may limit funding to current students if the government slashes funding. One of the paths that schools are taking is suing former students and now graduates may effectively “lose” their degrees. Here’s how…

For many grads, access to their transcripts is critical. Without your transcripts, your access to advanced education is limited and if you are asked to provide them to a prospective employer and cannot, that’s a big problem. Is it fair to withhold your transcripts (effectively proof of your degree) when you’ve paid the lion’s share of your educational costs? A recent survey showed nearly 38% of employers asked for transcripts when the job required a degree.

Perkins loans are limited to $5,500 per year as of 2013. That’s not enough to cover the cost of anything but a community college (and barely that). This means that money is being paid in alongside any Perkins borrowing including federal or private student loans, out-of-pocket cash and parent contributions. With many schools costing $20,000 per year or more, this means students faced with transcript suspension have paid for (or otherwise financed) 75% or more of their schooling costs.

Though no law on student loans requires that universities withhold transcripts, most take this tact. But in many cases, having access to transcripts helps defaulted students get jobs so ultimately they can pay back the loans. Seems like creating a roadblock to employment is self-defeating and will only exacerbate the repayment issues. The same holds true for grads who strike out in the job market and need an advanced degree to be employable – lack of transcripts stops them short as well…

The US Department of Education has issued directions to colleges on dealing with Perkins loan defaults and says:

“As a result of a borrower’s default in the Title IV Student Loan Programs, the Department of Education encourages the withholding of academic transcripts. The withholding of academic transcripts is solely an institutional decision, but has resulted in numerous loan repayments.”

Clearly the government is actively endorsing withholding transcripts. When this was passed back in 1994, some at the Department of Education protested saying, “Withholding the official academic transcript is in violation of the Family Educational Rights and Privacy Act (FERPA), regardless of whether the borrower has signed such a provision in his or her promissory note. Such a provision may not be included in the promissory note.”

The department skirted FERPA by saying schools had to provide unofficial transcripts upon request (but just one) and directly to the student or family, not to third parties such as another school or a potential employer. Universities may have been granted the legal justification to withhold transcripts (i.e. your degree) but that doesn’t mean it’s the best or most reasonable solution. With unemployment rates for recent grads soaring and increasing numbers of grads in minimum wage jobs that prevent them from paying loans, this is aggravating rather than solving problems!

If you owe student loans, check out Tuition.io’s free student loan tool today! You can see all of your loan balances, check out repayment plans and contact your lenders. Optimizing your student loan debt has never been easier! And when it comes to changes that desperately need to be made in our student loan system, perhaps a full scale protest – complete with the emotional work of protest artists – is the catalyst we need to advance the conversation!

Also, please check out our other recent blogs on related topics:

Hardest Hit By Student Loans: Women and Minorities

Would You Like Fries With That Bachelor’s Degree?

4 Student Loan Repayment Reform Models to Consider

In a Cash Crunch? Affordable Repayment Plans for Federal Student Loans

Finally Some Relief for Stresses Student Loan Borrowers