Which Colleges Are Suing Students Over Delinquent Student Loans?
January 13, 2014

Colleges are getting aggressive over Perkins Loans – a type of federal student loan that is administered by the schools themselves. While Pell Grants and subsidized student loans go to those with financial need, Perkins Loans go to those with “exceptional” financial need – meaning they help fund the college education of the poorest students. The government gives money to the schools and the schools kick in a little to go with it and this makes up the pool of funds to lend.

The most recently published Perkins Loan default rates are through 2011. Total Perkins debt tallied by Department of Education is more than $1.039 billion and the default rate averages a little more than 11%, but varies widely by institution. Some schools have millions to lend and relatively low default rates while other schools have much smaller allotments of just a couple of thousand dollars and default rates closer to 30%. 

Why Are Colleges Being So Aggressive Over Perkins Loans?

Regular federal loans are managed by the government, their loan servicers and collection agents, but Perkins Loans are replenished by repayments and overseen by the colleges. If a college loans funds from the pool and it’s not repaid, it limits who they can loan to in the future. This aspect makes it more understandable that colleges would want to seek repayment where possible, but where it doesn’t make sense is when they aggressively pursue repayment where it’s clearly not possible.

Which Colleges Are Suing Over Perkins Loans?

Currently, Gorge Washington University, Yale University, University of Pennsylvania and Temple University have all pursued litigation against former students in an attempt to collect past-due Perkins Loans. The US Department of Education requires schools that lend Perkins funds to collect on loan balances with due diligence, but most schools do not take the extraordinary step of litigating.

Is There an Alternative to Suing Former Students?

One of the ways to look at this is colleges with huge endowments versus financially strapped ex-students (many of whom never even graduated). It is easy to blame the debtor and make them feel guilty by saying they are preventing other needy students from getting loans by not making their payments, but these are people that largely cannot afford to pay back the loan.

Surely colleges could enact a forgiveness initiative for those who cannot pay back the loans, whose financial circumstances are dire and whose financial future is not anticipated to improve. What also may need adjusted is how the college defines “impoverished” or the standard of living below which a borrower is deemed unable to pay back their debt. 

Why Not Expand IBR and PAYE to Perkins Loans?

What could help is if Income Based Repayment or Pay As You Earn repayment plans were extended to Perkins Loans. Since the bulk of Perkins’ funds come from the federal government, extending a federal repayment plan makes sense. The only sticking point is that funds paid in replenish the pool. So how would they be replaced? That could be divvied up between the feds and the university. The bottom line is that a loan program offered to the lowest income students should have an income sensitive safety net. 

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