A Student Loan Is Like a Reverse Mortgage: The Borrower Decides Whether to Pay It Back

 Tom Selleck has been hawking reverse mortgages for years. As he patiently explains in television ads, a reverse mortgage is just a loan, except the borrower decides how to pay it back. 

All true, of course. Nevertheless, reverse mortgages can have drawbacks. The biggest drawback is that homeowners can lose all the equity in their homes, leaving less money for their heirs.

Thanks to the COVID pandemic, student loans have become much like reverse mortgages. President Trump put a pause on student-loan payments in 2020, allowing millions of borrowers to skip their monthly loan payments without accruing any interest or penalties. 

President Biden extended the pause several times so borrowers could avoid making loan payments for almost three years. The latest delay lasts until the end of December.

In August, President Biden issued an executive order forgiving $10,000 in student-loan debt to everyone with a student loan balance whose income is less than $125,000.

I think the Biden Administration hoped $10,000 in student-loan forgiveness would placate college borrowers who will have to resume making their monthly loan payments in about seven weeks.

Unfortunately for President Biden, the Eighth Circuit Court of Appeals enjoined him from implementing his loan-forgiveness plan. In addition, a federal court in Texas ruled that the program is unlawful.

This setback has prompted student-debtor advocates to call for Biden to extend the loan-payment pause until the legality of his loan-forgiveness scheme is settled in the courts. As Persis Yu, a spokesperson for the Student Borrower Protection Center, explained, "Until the administration can deliver on debt cancellation, it really cannot turn on payments."

Cody Hounanian, executive director of the Student Debt Crisis Center, argues that students should not be forced to begin repaying their student loans until the student-loan program is fixed. 

To restart student loan payments with all this disruption, without borrowers being put back into a system that's stable and settled, to me, is just another obstacle that borrowers really experienced and understand more than anyone else.

The legality of Biden's student-loan forgiveness scheme won't be resolved by the federal courts for months--perhaps years. In fact, the dispute may require a ruling by the U.S. Supreme Court.

Suppose Biden succumbs to arguments that borrowers should be allowed to skip payments until the loan forgiveness litigation is concluded. In that case, millions of borrowers will likely go five years without making any payments on their student loans.

And when the payment moratorium finally ends, student debtors can sign up for a generous income-based repayment plan that will allow them to make token loan payments so small that they will never pay off their loan balances.

Thus, as I said, federal student loans will essentially become reverse mortgages. The Department of Education will lend billions of dollars to millions of Americans, and the borrowers may never be required to pay it back. 

Student borrowers can skip their monthly loan payments- maybe for a long time.

Department of Education pauses collection efforts against student-loan debtors: Guaranty agencies garnish wages anyway

In response to the COVID pandemic, the Department of Education allowed student-loan debtors to skip their monthly loan payments without penalty until September 30, 2021.  That pause was recently extended to January 30, 2022. 

Thanks to the Department's forbearance, millions of college-loan borrowers are enjoying a respite from making loan payments, knowing that DOE will not charge interest and penalties during this grace period and that their wages will not be garnished due to nonpayment. 

But guess what? Loan guaranty agencies continued garnishing the wages of student-loan borrowers despite the federal moratorium.  According to the Student Borrower Protection Center, the guarantee agencies garnished $27.2 million in May 2021 and $12.9 million in June 2021.

Will student borrowers recover these lost wages? Probably. But it will probably take a long time. After all, the Department of Education didn't forgive all student loans taken out by people who were defrauded by ITT Tech until five years after the for-profit college filed for bankruptcy.

The federal student loan program has enormous problems, and some of them will be difficult to fix. But surely, the Department of Education can require the loan guarantee agencies to abide by Department policy and the law.

But apparently, the guaranty agencies think they are above the law. In 2016, Educational Credit Management was assessed punitive damages for repeatedly garnishing the wages of a bankrupt student debtor in violation of the Bankruptcy Code. 

In an earlier case, ECMC was sanctioned for violating the Bankruptcy Code by collecting on a debt discharged in bankruptcy. 

Perhaps, you might conclude, the guaranty agencies inadvertently violate the law because they don't have the financial resources they need to keep track of their legal obligations. But that conclusion would be incorrect. According to a report issued by the New Century Foundation in 2016, Educational Credit Management, a nonprofit corporation, had more than $1 billion in nonrestricted assets.

Congress has a lot to do to clean up the student-loan mess, but it might start by holding hearings to examine the practices of the guaranty agencies.  Congress might begin by asking why some of the guaranty agencies are so rich. It might also inquire into the agencies' attorney fees the agencies run up chasing distressed student-loan debtors into the bankruptcy courts. 

Finally, Congress might look into how much the guaranty agencies are paying their senior management.  More than ten years ago, Bloomberg reported that the current CEO of ECMC was making more than $1 million a year.  What do you think ECMC's current CEO makes?  My guess--somewhere in the high seven figures. 

We don't need no stinkin' pause on student-loan collections.