Universities Sue Students Over Defaulted Loans
In the same week that two studies have reported how high student loan debtload is dragging down the U.S. economy and harming the future prospects of today’s students, a number of U.S. universities have begun taking legal action against former students who have defaulted on their Perkins student loans.
Yale University, George Washington University, and the University of Pennsylvania have all filed lawsuits against former students in an effort to recoup some of the $1 billion owed on defaulted Perkins loans. Perkins loans, which are themselves reserved for low-income students and, unlike many students loans, are owed to colleges and universities themselves and not the federal government. Money paid back through these loans is then used for lending to new students, so if a former student defaults, it results in a net-loss for both the college and potential recipients of these loans in the future. According to the universities behind the lawsuits, it’s for this reason that they are seeking litigation against their former students.
“Perkins loans are issued from a revolving fund, so any monies recovered through litigation increase universities’ ability to help other students with education costs,” said Candace Smith, a spokeswoman for George Washington University.
This call for accountability on part of the recipients of the loans has been echoed by numerous conservative politicians and organizations, including Neal McCluskey, an associate director of the Cato Institute, a libertarian think-tank.
“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,” McCluskey said. “It seems like basic responsibility to me.”
But according to the students affected, such as George Washington graduate Aaron Graff, the reason behind the defaulting of the loans has less to do with personal financial responsibility, and more to do with the harsh economic climate for job-seeking graduates. Graff, who received $62,500 in scholarships alone during his college career, defaulted on $4,000 from Perkins loans after being unable to find a full-time job. He currently makes $800 a month from teaching high-school equivalency courses while restoring basements on the side for additional income.
“I live on the bare minimum,” Graff said. “It’s not like I’m defaulting on my student loans to live the lavish life. I’m defaulting on my loans because I really don’t have it.”
After receiving two emails warning him of delinquent payments on his loans after Febraury, 2012, George Washington filed a lawsuit against Graff in May. When Graff failed to attend court in December, he lost a default judgement of $5,050 for interest and attorney fees.
Following a nine-month grace period in which repayment is deferred, federal law states that the loans may be sent to debt collection after 120 days of delinquency, regardless of “subsequent employment or lack thereof.” Additionally, law allows for substantially larger collection fees on Perkins loans when compared to Stafford loans, up to 40% of the principal cost of the loan.
Yale, which stopped supplying Perkins loans during the 2008-2009 school year in favor of other financial aid programs, is currently only topped by Harvard University in terms of wealth, touting an endowment of $19.3 billion when last reported in June, 2012, while the University of Pennsylvania is the 11th most affluent institution with an endowment of $6.8 billion.
Other colleges, such as the University of California system, tend to place a lower priority on delinquent Perkins loans due to the relatively low balances and the fact that the costs of litigation itself tend to negate any net income from a potential verdict in their favor, and prefer to use in-house personnel to work with their former students to a greater extent before attempting to use legal means.
“It’s not that we wouldn’t do it,” said Nancy Coolidge, associate director of student financial support for the University of California. “It’s not that practical.”
Perkins loans have also recently gained attention as President Obama recently announced plans to increase the funding for the program from around $1 billion to approximately $8.5 billion in an attempt to grant students from working-class backgrounds greater access to higher education, while also shifting responsibility for the loans from individual institutions to the Education Department.