For those that can’t afford to pay their student loans, a default can result in garnishment. Default occurs when you fail to make payments for nine months (270 days). Once your loans go into default, serious consequences can occur. First, your loans come due in full. Second, your state and federal tax refunds can be withheld to apply against your balance. Third, lots of interest, fees and penalties will pile up, increasing your balance due. As a last resort, collection agents will pursue wage garnishment and take up to 15% of your pay. This can be catastrophic if you’re already financially strapped. But Utah is throwing up some barriers with new legislation.
The most current student loan default statistics published by the government indicate that nearly 15% of student loans end up in default within three years of graduation. This means that millions of borrowers are likely at risk for wage garnishment. But a new law in Utah would decrease the amount that student loan collectors can take from your take-home pay.
Utah State Bill 170 Educational Loan Amendments (SB 170) would limit garnishment to “10% of the individual’s disposable earnings for that pay period on an educational loan.” What’s interesting is that the proposed law completely bars garnishment for any loan that is “unconscionable.” The law goes on to describe characteristics of an unconscionable educational loan including:
• Exorbitant tuition and fees
• Poor preparation for graduates to enter the job market
• Minimal prerequisites to enroll in the training or education program
• Paying recruiters high commission to enroll students in the school
• Misrepresentation by recruiters of the caliber of the program, graduation expectations, etc.
• Lack of concern for the prospects of the student to be able to use their education
• Fraud or inducement to secure enrollments
• Low graduation rates, low job placement rates post-graduation, high loan default rates
• Loan agreements that are worded to prohibit class action suits, mandate arbitration, mispresent that the loans may be dischargeable in bankruptcy, offer high fixed or adjustable interest rates significantly higher than federal student loan rates and lend to students with poor credit.
• Issuing loans they never expect to be repaid
• Higher than normal loan default rates
• Loans with interest rates and fees that exceed 20% annually
• Valuing corporate profits over student well-being
• Collections firms are owned by the lender/school and pay “aggressive commissions” to debt collectors, capitalize collections costs and fees to increase loan balances
It’s the latter portion of the law with this list of caveats that is most interesting because it’s obviously directed at trade and vocational schools and private colleges that charge high rates and make outrageous loans knowing the debt will likely end up in collections. The bill’s sponsor, State Senator Peter Knudson, says, “In this economy education is very, very important, but one wonders if the indebtedness associated with the education is worth it.” He expects that lenders will fight back on the legislation.
California has proposed similar legislation – AB 233 – that would ban completely any private student loan garnishment. This legislation is still under consideration. Hopefully these two proposed laws mark a trend in states pushing back against predatory private and trade schools and lenders that are targeting consumers with punishing loan terms and degrees that are essentially worthless. We’ll keep you updated on these and any other state legislation that can impact how student loan collections are managed.