Personal Finance: Easing the pain of debt by students

If the federal government would stop relying on bill collectors to go after people defaulting on student loans and, instead, focus borrowers on getting on a path to pay over time, both the borrowers and the government might end up better.

That's a conclusion of a survey of people who have defaulted on student loans.

In the survey by the National Consumer Law Center, researchers found that many who are missing federal student-loan payments "have no idea they are in default and no idea what a default means," said Deanne Loonin, director of the advocacy group's Student Loan Borrower Assistance Project. And the borrowers can't pay what's demanded by bill collectors because they don't have the money.

Consequently, she said, borrowers are destined for years of financial trouble, including everything from a lousy credit score to having the government hold onto their tax refunds and confiscate their pay. And the government pays collection agencies that too often lean on people rather than focus them on payments they could handle.

Communication issues. The survey did not use scientific methodology, but its sample of borrowers in default showed that about 24 percent didn't realize they were in default. About 65 percent did not recall communication about their options for solving loan problems.

If people contact their lenders before defaulting on student loans, they can get temporary relief and get their feet on the ground. That allows them to avoid defaulting and keeps the government from as seizing their pay.

Borrowers told researchers doing the survey that they ended up behind on their student loans because of economic difficulties and a lack of employment. But some had chosen weak educational institutions and had either left school without graduating or were not prepared for a job.

About 47 percent didn't believe they should have to pay their student-loan debt, often because they said they'd received a weak education. About 90 percent of those balking at payments had attended for-profit schools - colleges criticized by the government for awful graduation rates and weak job outcomes.

"We must attempt to avoid defaults by holding schools more accountable for poor outcomes, and providing better information to students" on the quality of schools and outcomes, Loonin said.

The survey found that defaults are most likely for low-income students. "There is no safety net for many," Loonin said. About 69 percent of people who were in default had a parent who had not completed higher education.

Default worries. With about $1 trillion in student loans outstanding, there has been growing concern that defaults will grow and leave the federal government at risk.

Some studies have shown that when individuals are counseled about student-loan responsibilities as they leave college, the default rate improves. Other studies suggest differently. Often counseling sessions come at graduation, after students have already run up extraordinary debts.

When students are delinquent on loans, they can get help if they call their lenders, but bill collectors often fail to tell students they are eligible for relief while there is still time. After someone goes into default, getting back onto a stable path is difficult. Borrowers can't even escape student-loan debt in bankruptcy.

"We must rethink the Draconian collection policies that leave vulnerable students with nowhere to turn," Loonin said. She said firms hired to collect student loans end up with financial incentives to push borrowers to make massive payments they cannot continue to handle.

Bill collectors should be telling borrowers that the government offers help. It will allow deferments, or relief from payments, until they are on more solid footing. If their income is low, monthly payments are reduced, with the extra amount is tacked onto the end of their loan for payment later.

For help, visit Studentloan borrowerassistance.org.