Punishing the Poor: Yale, Other Colleges Suing Students over Student Loans
March 14, 2013

If you owe student loans and feel a little pain when you write that sizable check each month or watch a chunk of your salary get debited by your lender, it no doubt stings. But if you are one of the many in serious financial straits, student loan debt can be the tipping point that pushes you from barely getting by to completely bereft. And now, if that wasn’t bad enough, many colleges are taking a more aggressive stance on student loan collection.

Of the roughly $1 trillion in student loan debt outstanding and growing every day, nearly $1 billion is in default because the borrowers are simply too poor to pay. As a result, Yale, University of Pennsylvania and George Washington University are suing former students over student loan nonpayment – specifically over defaulted Perkins loans.

For students with loans of different types, if their funds are tight, Perkins loans may be the last to be paid because interest rates are low. Private student loans have higher interest rates and often get paid before public loans. What’s more, Perkins loans are typically handed out to students colleges know are poorer and high-risk, so it’s not necessarily a surprise when defaults happen.

You have to sympathize with grads that are struggling to get by, can’t find full time work and simply can’t pay loans. But one of the particular challenges of Perkins loans is that they come from a revolving fund, so when one graduate defaults, another current or prospective student can be denied funds they desperately need to matriculate. There’s no easy answer to this Catch-22 lending dilemma, but President Obama has suggested a change.

As one of his proposals to increase access to education, the President says he will add $7.5 billion to the annual Perkins budget taking it from $1 billion up to $8.5 billion. The Perkins program was slated to be eliminated in 2014, but Obama’s pledge to infuse cash and have the federal government take over administration from schools has breathed new life into it. These changes will bring helpful funds to more than three million students.

As great as many of Obama’s recent pledges about affordability and access to education are, they don’t help the millions of people struggling (and often failing) to meet their student loan obligations. This is a serious gap in the administration’s education policy. Because these students are no longer in school – whether they graduated or just couldn’t continue, it seems they are the great forgotten – except by debt collectors and school attorneys…

Neal McLuskey, an associate director at the Cato Institute, is less than sympathetic when it comes to the plight of Perkins’ loan holders saying, “You could take a job at Subway or wherever to pay the bills and that’s something you need to do if you have agreed in taking a loan to pay it back. It seems like basic responsibility to me.” This is a simplistic – and antagonistic – over simplification of a complex and serious debt situation that McLuskey obviously doesn’t care to take the time to understand.

For students who are still in college or preparing to begin their post-high school education, options should be explored. Costly colleges may not be the best choice for many students (see our recent article on colleges with low return on investment) and a four year degree may not be the best path for you. Consider the case of the Gnomon School of Visual Effects – a specialized school for those who want to work in computer graphics in the entertainment industry. If you want to work at Pixar one day, this school may be a great alternative to a four year university that isn’t as focused.

For those already out of school, if you have a Perkins loan in default, be on the lookout for threats of a lawsuit from your college. While it may be easier to focus on higher interest private loans, the specter of a lawsuit and ensuing judgment may have you rethinking how you prioritize your loans. Fingers crossed that your school isn’t as aggressive as Yale or GWU in this respect if you aren’t able to pay your loans.

For those students and alumni dealing with student loan debt, try Tuition.io’s free loan optimization and management tool to master your educational debt today.