Lakisha Johnson figured all she needed was her 2016 tax refund to get her and her daughter out of a homeless shelter and back into a place of their own.
The U.S. Department of Education had other plans.
Johnson, a home health aide, and 12-year-old Aijiah were forced to move out of their West Philadelphia apartment just before Thanksgiving last year, after the landlord jacked up the rent from $675 to $875. Soon, they were living on a bunk bed in the shelter a few blocks from Aijiah’s school. The girl was terrified that a classmate would see her using the secured entrance of the crowded, noisy shelter.
With the $13 an hour she earns caring for her elderly charges, Johnson planned to stay at the shelter — or with anyone who would let the two sleep on a floor, a couch or a spare mattress — until April. In past years, that’s when she received her federal Earned Income Credit tax refund.
The check never came.
On the phone, an Internal Revenue Service agent told her the Department of Education (DOE) was “holding back” the $8,220 refund to recoup some of her student-loan debt. It would probably do the same next year, the agent told her, to recover the rest of the nearly $17,000 she owed.
Johnson was confused. The two student loans she took out in 2006 in hopes of becoming a medical assistant amounted to only $6,625. Whenever she fell behind on her payments, she would be enrolled in one of the forbearance plans promoted in a continuous stream of emails she received from Navient Corp, the largest loan servicer working under contract for the DOE. An Oct. 4, 2011, email, for example, stated: “You may be able to qualify for a deferment or forbearance, which can postpone your loan payments and keep your loan from going into default.”
She was learning only now that those plans, while allowing her to stall payments, didn’t stop her debt from ballooning as interest and fees piled up. And she was now in default, prompting the DOE to move to collect.
That was only the half of it. Until contacted by Reuters, Johnson didn’t realize that she could have avoided the entire ordeal by enrolling in one of the government’s income-based repayment plans — an option she said Navient never discussed with her. Most of these plans allow for monthly payments as low as zero and forgive any remaining debt after 20 years.
“I didn’t think it was going to double up or stack up, or cause me to lose the money I had worked for this whole time,” she says. “This is a big hit. They’ve put me in a deep situation.”
It’s a situation Johnson shares with many of the 8 million borrowers in the United States who are in default on a combined $137.4 billion in government-held or government-backed student loans.
Today, 11 percent of the $1.325 trillion of federal student loans outstanding is severely delinquent or, in default, higher than the mortgage default rate at the peak of the foreclosure crisis in 2010, according to data from the Federal Reserve Bank of New York.
Some of these debtors are deadbeats, of course, unwilling to make payments they can afford. But many are borrowers of limited means who ended up in default unnecessarily, after Navient and the DOE’s other servicers steered them away from affordable repayment plans and into options that reduce the servicers’ costs, according to state and federal investigators and regulators, consumer advocates and a growing number of lawsuits and complaints filed against loan servicers.
The defaulted borrowers then become targets of the DOE’s debt collectors. These firms, some of them owned by the loan servicers, wield the federal government’s broad powers to garnish the wages of borrowers, as well as parents and grandparents who co-signed the loans. When wages are insufficient to garnish, the DOE can have the Treasury Department withhold tax refunds and reduce Social Security payments.
Since the summer of 2015, student-loan servicers and private debt collectors have garnished about $3 billion in wages, a Reuters review of federal data shows. And last year, the DOE’s collections through “Treasury offsets” — tax refund seizures and Social Security benefit reductions — totaled $2.6 billion, up from $2.2 billion in 2015. Since 2009, the government has used the tools at its disposal to claw back at least $15.2 billion.
Default, which usually occurs when a borrower hasn’t made a payment for 270 days or more, can make it only harder for a debtor to regain financial stability. It can trash credit scores, scaring off potential employers. It can disqualify debtors for auto loans, apartment rentals, utilities and even cellphone contracts. In about 20 states, student loan borrowers who default can lose their driver’s and professional licenses.
“We treat struggling student-loan borrowers the same as deadbeat parents and tax cheats,” said Seth Frotman, the student-loan ombudsman of the federal Consumer Financial Protection Bureau (CFPB). “Even gambling addicts have more protections.”
Since 2011, tens of thousands of borrowers and co-signers have filed complaints against Navient with the CFPB and other government and regulatory agencies.
In January, the CFPB filed a lawsuit against Navient in Pennsylvania federal court, alleging that the company systematically cheated customers by not fully informing them of their repayment options and instead guided them into forbearance or deferment programs that benefited the company. Setting up an income-based repayment plan requires paperwork and person-to-person interactions that are more costly for the servicer than forbearance, which typically requires only a phone call.
The same month, state attorneys general in Washington and Illinois filed similar lawsuits against the company.
The CFPB said it found that by putting 1.5 million borrowers in consecutive forbearances, Navient added $4 billion to outstanding student-loan debt.
Part of the problem is that the “the DOE is doing business with (the loan servicers) as partners, not as overseers,” said Rohit Chopra, a former official with the DOE and the CFPB who is now a senior fellow with the Consumer Federation of America, an association of consumer watchdog groups.
Education Department Press Secretary Liz Hill agreed that the current student-loan system is “a mess” and that “income driven repayment plans are confusing.” She added that the department is working to enhance its “oversight capacity.”
Responding to the CFPB lawsuit, Navient, in a court submission that made headlines, said, “There is no expectation that the servicer will act in the interest of the consumer.” The company’s job, it said, was to collect payments.
Navient Chief Executive Officer Jack Remondi, in an interview with Reuters, disputed the allegations. He said borrowers serviced by Navient are 31 percent less likely to default than borrowers serviced by others. Of those who default, he said, 90 percent never respond to “any attempts” to reach them to discuss repayment options. Publicly listed Navient was spun off in 2014 from the loan-servicing arm of Sallie Mae, a major provider of federal student loans until the Obama administration made the DOE the sole originator of such loans.
Remondi blamed rising student-loan defaults on “the front end of the process,” such as the government policy of lending to borrowers regardless of their credit standing and without consideration of “whether the investment they are making is reasonable.”
Navient, which services more than $300 billion in federal and private student loans, attracts the most attention among loan servicers. But according to CFPB reports and documents, the widespread problems borrowers encounter involve all of the largest student-loan servicers.