The Secretary of Education has notified defaulted debtors; their loan payments are due May 5. Linda McMahon has sent four messages in one:
- Students are responsible for their loan. Pay now or set up a plan.
- There is no loan forgiveness (write-offs) coming.
- Involuntary collections will begin if you do not pay.
- Stop efforts to write off loan balances with novel plans.
The impact of this collection effort will echo for years. 5.3 million students are in default; many have not paid for 5 years. This number is expected to expand to over 10 million in 2025. Student loans age into the default status after being delinquent or suspended for review. Using the term “forgiveness” is sophistry, it is a write-off of an asset on the federal balance sheet.
A student loan default initiates a Treasury offset action. This prompts a 15 percent garnishment of wages, Social Security, and other federal benefits. The administration ended involuntary collections in 2020 as a counter to wage losses during covid. Trump extended it once and Biden extended it six times. Garnishment alerts employers and banks to unpaid bills.
Student loan promises and extralegal programs came from the White House and encouraged delaying repayment. From the Wall Street Journal to Mother Jones, and all alphabet Media panel discussions, student debt was a topic. Debtors received notices by mail and email. Universities notified students. Any excuses for debtors not knowing their obligations for these loans are less believable than pleading “my dog ate my homework.”
The Income-Based Repayment (IBR) plan in 2009 restructured loan terms. Signed by George Bush when student debt was 770 billion, IBRs are the proximate cause for our current trauma. Repayments became soft estimates of what a student could pay versus what is due.
The Department of Education Organization Act of 1979 was signed by Jimmy Carter. Ronald Reagan tried but failed to invalidate it. The Department of Education was cobbled together with both staff, attitudes, and processes from Health and Human services. Transplanted methods integrated with ED’s free university dogma; empathy replaced fiscal responsibility.
The slide to a financial crisis accelerated with Income Dependent Repayment (IDR) plans in 2012. President Obama signed into law the pay-as-you-earn (PAYE) plan. IDRs create a variable payment based on three inputs, two of which change annually. Application of income, poverty wages, and the contract’s percentage of discretionary income create a payment. A broad shorthand explanation and a Wisconsin application example follows.
Regardless of loan amount, all income-dependent plans currently use a poverty wage adjustment factor of 150 percent. Disposable income is the debtor’s reported wages minus the poverty wage adjustment. Disposable income is taxed by the contract’s payment percentage, initially 15 percent. After 240 months any remaining debt was written off.
Starting salaries in Wisconsin for humanities majors are $55,000 ($26.63 hourly). The 2023 poverty wage for one person is $15,550. Poverty wage deduction increases to 24,000 by the 150 percent payment formula. Discretionary income is $55,000 minus $24,000 or $31,000 dollars; 15 percent of this amount is $3,500 dollars or $292 dollars a month.
With Obama’s presidential memorandum, the sample’s discretionary assessment was lowered to 10 percent. This change made monthly payments $264.00.
Two payment plans materialized to restore defaulted loans to the payment stream. On-ramp and Fresh Start were rejected by the courts. The last gasp of the Department of Education’s commitment to free university was the SCOTUS overruled S.A.V.E. plan. Loans would now receive a 5 percent assessment of discretionary income. The new monthly payment, in our example, is $131.00 a month. Interest on the unpaid balance reverts to zero when payments are made.
After boasting about $116 billion in forgiveness, the White House fact sheet disclosed the intent to cut undergraduate student loan payments in half. The Department stated publicly their plan’s goal was avoidance of “the financially devastating effects of default, including having their wages, tax credits, and other benefits seized.” This confession proves intent and actions by our administration. The idea of a loan, with payment obligations, disappeared.
The college value proposition of a societal benefit is sinking rapidly. Society confirms the image of universities has dropped steadily. A July 2024 Gallup survey showed Americans clustering evenly between having little confidence, some confidence, or great confidence in higher education. Confidence in higher education was 57 percent in 2015, now at 36 percent. More headlines about uncollected loans will push the confidence lower.
Employers view recent college graduates dimly. Fifty-eight percent of employers say recent graduates are unprepared for work, 39 percent of employers actively avoid hiring recent college graduates. Half of the candidates have unreasonable expectations for salary at $30,000 dollars higher and struggle with communication skills. Employers are dropping degree requirements and focusing on skills and experience.
Students paint a dim picture of employment. Less than sixty percent of college graduates are employed in their major. Statista reported in August that 40 percent of graduates with a BA 22 to 27 years old are working in jobs that do not require a degree.
In August 2024, WalletHub survey reported 61 percent of students regret taking out student loans. Seven in ten college students in this survey said they were financially overwhelmed. Two in 10 said they have no plan to pay their student loan debt after college. Eleven percent of borrowers default in their first year. In a 2023 Wall Street Journal poll, 42 percent of college graduates said that getting a degree was not worth the cost. 61 percent of graduates would change their major.
Many debt holders are disappointed with the results. Students in default have heard promises of loan forgiveness for 4 years at minimum. They experienced a 22-month taste of loan forgiveness during the covid payment suspension.
This debtor pool will be intransigent to collection efforts. Legal challenges and injunctions will flourish. Forbes called this explosive situation, a “perfect storm…of heavier debt loads, higher payments, and an unforgiving economy.” This will not end with a bang, but a chorus of whimpers.
