A Brief History of Student Loans and Prison
Heidelberg University operated the student prison established in the 1780s until 1914. In modern times it’s one of the most popular sightseeing attractions of Heidelberg, Germany.
From 1823 to 1914, the university jailed students for such crimes as night-time carousing or other offenses against the public. The university had autonomous jurisdiction over students for the first five hundred years. Beginning in 1886, the government ended this right to make judgments against students. Since then, the government has restricted the university’s jurisdiction to internal matters.
The US federal government banned debtors’ prisons in 1833. (Debtors’ prisons still live on in other ways in the United States, however.)
Modern Times in the USA
Deputy US Marshalls picked up a Houston man in 2016; the headlines flew fast and furious. Paul Aker said that he had been arrested for not paying a $1,500 student loan going back to 1987. It was taking us back to the days of debtor’s prison, many claimed.
That’s not the whole story, though. Yes, Aker did owe a student loan. But the arrest wasn’t for not paying the loan but for not complying with a court order.
Court documents show that Aker borrowed $1500 from Chase Manhattan Bank in 1987, and the Department of Education had guaranteed that loan. The bank judged him to be in default of his obligation in 1989; at the time, he had only paid $61.91 of the principal. When Chase wasn’t able to collect, it transferred the debt to the Department of Education. The Department of Education tried to obtain an additional $350.31 in Department of Treasury offsets.
The Department of Education sued Aker over the loan’s remaining balance (USA v. Winford P. Aker). After not answering a complaint served on him, a default judgment was entered in favor of the government. Aker still didn’t pay. Five years later, to get the money, the government asked Aker to explain why he had not complied with an order to pay the remainder or submit his financial records as requested. The court ordered Aker to appear at a deposition to do that. The court specifically wrote in an order that “If Winford Aker fails to appear, the Court will have him arrested.”
The police served the arrest warrant on Aker in 2016, and it wasn’t without trouble. The authorities said Aker claimed that he wouldn’t comply and said that he had a gun. The two US Marshals serving the arrest warrant called on him, and eventually, Aker was arrested.
Aker’s total student loan debt has grown significantly since he initially defaulted. Besides the student loan balance, which has swelled to $3,800 including interest, Aker must pay the US Marshal $1,258.60 for his arrest, bringing the total owed to more than $5,000.
Even though the story isn’t as sensational as we initially believed (You don’t go to jail for failing to pay your loans), there are lessons here. Pay your student loans; they won’t go away. There is no statute of limitations for federal loans; the feds can try to collect indefinitely.
What Are the Repercussions of Not Paying Student Loan Debt?
The consequences of defaulting on a student loan depend on if you default on federal loans, which can’t be dismissed under bankruptcy, or private loans, which can.
When defaults on federal student loans happen, the Department of Education loan servicer will first send your loans to the Debt Management/Default Resolution Group.
From there, the DRG will assign it to a collection agency.
The collection agency is authorized to:
- send a wage garnishment order to your work
- offset your tax refund (which means they get their money before you get yours) and
- send a garnishment order to offset your Social Security benefits (again meaning they get their money first)
Consequences of Defaulting on Private Student Loans
The consequences for defaulting on private student loans are less severe.
Private student loan lenders don’t have the same powers as the Department of Education does
When you default on a private student loan, private lenders can’t automatically garnish your wages or garnish your bank account without going to court, getting a judgment against you, and having a court order. Instead, the only things they can do to collect the outstanding debt without spending money on legal action is:
- demand you pay your debt
- report your late student loan payments and default to the Big-3 credit bureaus and
- sue you for your unpaid debt
In my experience, private lenders usually wait until the statute of limitations is ready to run out before they sue.
So if you’re thinking of defaulting on a student loan, you shouldn’t worry about a lawsuit for a few years.
What if Your Student Loans Are in Default
You have four repayment options for federal student loans:
- Arrange a federal student loan settlement
- Start the loan consolidation process.
- Get into the loan rehabilitation program and
- Get into a voluntary repayment plan.
The only way to get out of default with private loans is to bring your loan current, enter third-party non-binding arbitration, or by declaring bankruptcy. Sometimes you can request a deferment/forbearance.
Debt collectors are forbidden by law, the Fair Debt Collection Practices Act (FDCPA), from making harassing phone calls. Threatening you with jail time during a phone call is also harassment.
If this happens to you, you can report the collector to:
- the Consumer Financial Protection Bureau
- the Federal Trade Commission
- your State Attorney General
You can hire a lawyer to sue the debt collector. The FDCPA lets the debt collector pay your attorney’s fees if you win.
What to Do if You Can’t Pay a Student Loan?
When bills are growing, student loan repayment might be the last thing you think about.
Even though it’s tempting to steer clear of student loan repayment altogether, it’s important to continue handling your student loans. You shouldn’t default on federal loans — doing that can have serious consequences.
If you fall in arrears on payments, the government can garnish your wages and withhold federal payments and tax refunds. You could even be blocked from buying or selling some assets, and of course, you could be sued.
You may end up owing collection fees if you default on your federal student loans.
If you find yourself unable to pay your student loans because of hard economic times, here are a few student loan repayment alternatives to consider.
1. Contact Your Loan Servicer to Discuss Your Alternatives
Instead of letting your federal or private loans fall into trouble, consider contacting your loan servicer immediately if you can’t pay your student loan.
Your loan servicer can talk with you about options and help you stay in good shape with your loans, so you can take measures to avoid student loan default.
2. Change Your Payment Plan
If you’re having difficulty keeping up with your federal student loans, another thing you might do is change your repayment plan.
Most federal student loans are eligible for income-driven plans, which set a limit to your monthly payments at 10% to 20% of your discretionary income.
Before Switching Your Repayment Plan
If you’re pondering about applying for an income-based repayment plan, it’s important to assess your potential payments using an official repayment estimator before. In some cases, your payments could be bigger than with a standard repayment plan.
Choosing an income-driven plan can help lower your payments and make them more manageable. You’ll likely pay more interest over time under one of these plans — but it could be a blessing if you’re having trouble making payments.
3. Look Into Consolidation
If you’re struggling to keep your payments up with multiple loans, you may want to consider consolidation. Federal student loan recipients can apply for a direct consolidation loan, combines them into one loan from a single source and one payment.
There’s no fee to apply, and most federal student loans are qualified for consolidation. Private student loan holders aren’t entitled to a direct consolidation loan.
Consolidation can offer you up to 30 years to pay off your loans; your new payment could be lower than your old payments. The downside? You’ll likely pay more in interest.
4. Deferment or Forbearance
If you’re unable to pay your student loans because you’re experiencing hardship or are having trouble finding work, you can sometimes defer your federal loans for up to three years.
If you aren’t suitable for deferment, you may be allowed forbearance, which can postpone or reduce your payments for up to one year. For cases of medical expenses and fiscal hardship, your lender will decide whether to approve you for general forbearance. In other situations, you may be qualified for mandatory forbearance if you meet specific eligibility requirements.
5. Loan Forgiveness
Another option you may want to think about is loan forgiveness.
There’s the Public Service Loan Forgiveness Program for federal student loan borrowers who work in public service at a qualifying nonprofit or government agency. Loans can be forgiven after ten years of qualifying monthly installments.
Student loan repayment can a hassle, but there are chances for help if you’re having a rough time.
If you can’t pay your loans right now, the best thing to do is contact your loan servicer to talk about your options. Taking no action could lead to default.