The government has extraordinary powers at its disposal to collect on federal student debt, including garnishing borrowers’ wages and taking away their tax refunds and Social Security checks. And so the feds rarely resort to suing borrowers over their student loans.
But when they do, the consequences can be devastating, and a new report suggests they’re not distributed equally.
The neighborhoods where borrowers who are sued over their federal student loans live have Hispanic populations double the national average and black populations that are triple the national average, according to a report published Wednesday by the National Consumer Law Center. NCLC’s report is based on an analysis of 1,565 lawsuits filed between January 2016 and June 2018.
The Department of Education, which holds federal student debt, and the Department of Justice, which oversees the lawsuits, don’t publish data on the demographics of borrowers who are sued. But an analysis of the ZIP codes in which these lawsuits were filed provides a window into who the government targets with this tactic. Both agencies didn’t immediately respond to a request for comment on the report.
“We see once again that communities of color are disproportionately targeted by student loan debt and the draconian consequences that flow from it,” said Persis Yu, the director of NCLC’s Student Loan Borrower Assistance Project and a co-author of the report.
Race plays a major role in the experience of student debt
Indeed, the report adds to the growing body of evidence that race plays a major role in the experience of student debt. The gulf in wealth between white and black families means that black students often have fewer resources to draw on when paying for college and they wind up borrowing more. In addition, though Latino and white students borrow at roughly the same rate, both black and Latino borrowers struggle more than white borrowers to repay their loans.
A variety of factors explain this discrepancy, including that borrowers of color may have fewer family resources to draw on while repaying their loans. Additionally, discrimination in the labor market may make it difficult for borrowers of color to find jobs that pay well enough to effectively repay their loans and borrowers of color are more likely to wind up at less-selective or even for-profit colleges with worse outcomes.
But there’s little research on the role student loan collection practices play in the gulf in student loan repayment success between white borrowers and borrowers of color. Given that we already know that troubling collection tactics of all types of debt disproportionately impact borrowers of color, it’s particularly important to investigate the way student loan servicers, debt collectors and the federal government are treating different types of borrowers, Yu said.
“When we talk about systemic racism and the wealth in communities of color, what happens to an individual borrower radiates to the rest of the community,” she said. “Wealth is being taken from these communities.”
A collection method of last resort
Though it’s relatively rare for the government to sue a borrower over a federal student loan, the consequences are severe. When a borrower defaults on their student debt the loan is referred to a debt collector hired by the Department of Education. That company can garnish a borrower’s wages or take their tax refund or Social Security check to repay the debt. But they can also work with a borrower to get out of default. This can affect their credit rating and in turn their ability to get a mortgage or qualify for some jobs.
Suing a borrower is supposed to be the collection method of last resort. If a debt collector decides that’s the appropriate route for getting back the funds, they refer the case to the Department of Justice. Once a borrower has a judgment against them, there’s little they can do to get out of default.
The Department of Justice handles these cases in two ways. In some cases, DOJ attorneys file the suits, but in 85% of the cases reviewed by NCLC, the agency hired a private law firm to sue a defaulted student loan borrower. Lawsuits against defaulted borrowers tended to be concentrated in states where the DOJ contracted with a law firm that filed 50 or more cases per year, NCLC found.
Borrowers living in certain states are more likely to be sued
According to a 2012 manual the Department of Education provided to debt collectors and obtained by NCLC, a borrower has to have just $600 in principal balance for a private law firm to sue them on behalf of the government. However, if a DOJ attorney handles the lawsuit, the borrower needs to have at least $45,000 in debt.
That borrowers are more likely to be sued if they live closer to one of the law firms hired by the Justice Department, “doesn’t seem like a fair way to determine which borrowers we sue and which we don’t,” Yu said.
Given the apparent randomness of these lawsuits and that they appear to disproportionately affect communities of color, Yu suggested the Department of Education be more flexible with borrowers who face these judgments. One step would be to provide them with some kind of route out of default.
In addition, Yu said she’s hopeful that as Congress considers reauthorization of the Higher Education Act, which governs higher education and student loan policy, “we look at ways to ensure that falling behind on one’s student loan debt does not imperil folks’ financial security potentially forever.”
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