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The Default Trap

If there’s one thing worse than shelling out mortgage-sized payments on student loans each month, it’s not shelling them out. 

Here is the story of Casey Zimmerman Thompson, a resident of rural Maryland who borrowed a total of $7100 in student loans in the 1980s.  Zimmerman Thompson claims that she has paid approximately $18000 towards the loans since then.  Despite that, she still owes over $9800.  That’s right, 25 years after she took out her original loans, she still owes more than she borrowed.

The reason?  Due to various economic setbacks throughout her life, including a medical condition that ended a former career and unpaid child support from her abusive ex-husband, Zimmerman Thompson defaulted on her loans several times.  And, as anyone who has ever defaulted on a student loan knows, coming back from such a setback can be nearly impossible.  From the article:

“Short of a lottery win, for student loan borrowers like Thompson, there is literally no way out. The government can garnish the income tax refunds and eventually the Social Security checks of defaulters. Changes to bankruptcy law in 1984 and 2005 mean borrowers can’t charge off their obligations the way they can escape mortgage, credit card and even gambling debt when they file — unless they can prove “undue hardship.” But just 29 of the 72,000 student loan debtors in bankruptcy in 2008 were able to do so, according to Mark Kantrowitz, founder of the student aid website Finaid.org.”

To add irony to injury, many of the programs that are aimed at helping student loan borrowers shut their doors to those already in default.  For example, the new Obama plan, which will limit student loan payments to 10% of discretionary income and forgive remaining loans after 20 years, will be unavailable for those in default.  Likewise for assistance like deferments and forebearances.
While a part of me understands such limits – presumably they encourage student loan borrowers to take advantage of all of the options before them before defaulting – a greater part of me is completely baffled by them.  People go into default for all sorts of reasons and with greater or lesser knowledge in advance that they are about to do so.  And many people go into default because they can’t even make the minimum payments on their loans.  If someone is in such dire straights that they can’t make the minimum payment, isn’t that the kind of person who needs this help the most?
One of my many student loans – a consolidated loan covering my undergraduate years – had a provision in it that said that I could maintain a discounted interest rate so long as I always made my payments on time.  One time, many years ago, I moved, and I forgot to change my address on the loan.  My own fault, sure, but by the time I remembered and paid it, I was about 15 days late – the only time I was ever late on that loan with the exception of an admitted error on the lender’s end several years later.  Those 15 days meant that my discount was gone forever.  FOREVER.  And 15 days late isn’t even considered a default. 
As irritating as that is, at least that was my own fault, and it wasn’t caused by anything more dire than my own forgetfulness.  But the same result would have occurred had I failed to pay the loan on time because I was in a car accident or because I lost my job or because I had a death in the family.  And for people that actually go into default, they lose so much more than an interest rate discount.  They can lose, as Zimmerman Thompson has, their entire economic lives.
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