Something similar happens to people who default on their student loans. From the moment their student loans go into default, they are dead in the water.
Bible v. United Student Aid Funds, Inc. illustrates my point. Bryana Bible borrowed $18,000 to finance her college studies. She defaulted in 2012, but she promptly agreed to a rehabilitation agreement that allowed her to make reduced monthly payments of only $50 a month. The interest rate on her rehabilitated loan was set at 6.8 percent.
Although Bible faithfully abided by the terms of the rehabilitation agreement, a loan guarantee agency assessed $4,547.44 in "collection costs" against her, increasing her total indebtedness to more than $22,500. When Bible began making $50 monthly loan payments, the guarantee agency applied the payments to the collection costs, not the loan's principal.
In short, Bryana Bible was dead in the water. It would take her more than seven years just to pay off the collection costs on her debt. In the meantime, her loan balance would be accruing interest at the rate of 6.8 percent!
Bible sued the guarantee agency for fraud and racketeering, alleging she had been told that costs against her were zero. Last August, the Seventh Circuit Court of Appeals ruled that she has a valid cause of action.
The Seventh Circuit's decision is quite long--57 pages including a concurring opinion and a dissent. But it is not necessary to read the court's lengthy legal analysis to understand what happens to people who default on their student loans, even briefly.
People who default on their loans can get slapped with collection fees amounting to 25 percent of their loan balance, and they can be put in repayment plans that cause their loan balances to go up because the payments aren't being applied to the principal of their loans.
Once student-loan debtors fall into the clutches of the loan guarantee agencies, most of them can never get free. Collection costs, accrued interest and various fees get added to their loan balances, and their loan balances go up--not down.
That's why we see distressed student-loan debtors stumbling into the bankruptcy courts owing two or three times the amount they borrowed. And who do they meet when they get to bankruptcy court? Attorneys for the loan guarantee agencies, who argue stridently that these poor souls are not entitled to bankruptcy relief.
Bryana Bible's story would be a shocking even if her circumstances were unique. But there are millions of Americans who are unable to pay off their student loans, and most of them are seeing their loan balances go up with each passing month.
Whether it intended to do so or not, Congress created a federal student loan program that benefits the finance industry and pushes millions of student loan debtors into a financial abyss from which there is no escape. The program has destroyed higher education as a moral enterprise and created a modern-day class of sharecroppers who will be indebted to the government for their entire lives.
It will take courage to fix this problem, but we can't look for courage from Congress or from our higher education leaders. I am convinced the only way to bring down this putrid, sleazy flim-flam game is for distressed student-loan debtors to march into bankruptcy court--with or without lawyers--and cry out for justice.