Department’s New Debt-Management System Leaves Some Students Stuck in Default

Problems with the Education Department's online system for managing student debt have cost taxpayers millions of dollars and left thousands of borrowers in financial limbo, unable to put their defaults behind them.

The department acknowledges the problems and says it's working to fix them.

Under federal law, defaulted borrowers who make nine on-time repayments on their student loans can have their loans restored to good standing and their credit histories cleared. Borrowers with such "rehabilitated" loans are eligible for deferments, forbearances, and income-based repayment rates, and can also receive new federal student aid.

The new debt-management system, which tracks and manages more than $33-billion in defaulted student loans owed by more than three million people, is supposed to rehabilitate borrowers each month. It has not done so since August, and some frustrated debtors have stopped making payments on their loans, risking a second default.

Lori Wagner is among them. She took on a second job to cover the $1,350 monthly payment on her defaulted loan and made her ninth payment in October. But her collection agency told her she has to keep paying until the department issues her a new loan, and it can't tell her when that will be.

Ms. Wagner says can't keep working 60 hours a week—it has left her sick and overtired, she says, and it's jeopardizing her full-time job. At this point, she says, she's prepared to default again and let the government garnish her wages. At least, she says, the monthly payment would be lower. "I kept my end of the agreement," she wrote to the National Consumer Law Center. "I am tired, sick, uncaring, and done with this student-loan crap … just simply done with the whole farce of rehabilitation."

The rehabilitation delay is one of several problems plaguing the department's new debt-collection and management system, which went live in early October. Industry sources report lags in the posting of payments to borrowers' accounts and a lapse in the awarding of defaulted loans to collection agencies.

The department normally distributes defaulted loans twice a quarter, based in large part on how much money each agency recovered in the previous quarter. The latest batch was scheduled to go out in October, but the new system was unable to send them. When the accounts were finally awarded, shortly before Thanksgiving, they contained errors and had to be recalled. The department sent the corrected files last week, but they still included some borrowers who had died, were in bankruptcy, or had received a disability discharge.

Wage-garnishment orders, which are typically sent to employers monthly, aren't going out, either. The orders, which direct employers to deduct up to 15 percent of a defaulted borrower's disposable pay to cover his or her debt, are a tool of last resort for the government.

The system's failure to award new accounts and issue wage-garnishment orders is costing taxpayers millions of dollars in recoveries. Last October, the department recovered $26.7-million through wage garnishment; this past October, it collected only $2.1-million. Treasury offsets, which include money withheld from tax refunds, Social Security, and payments to federal contractors, fell from $14.4-million to zero during that time period, according to data provided by the department. It says the October offsets will appear in the statistics for November.

At least some of the money will be recovered once the system's problems are fixed. But the delay in awarding new accounts could have long-term consequences. The longer a loan languishes in default, the harder it becomes to collect.

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