On May 5, for the first time since the onset of the coronavirus pandemic, the US government will resume student loan collections. Since March 2020, the Department of Education has suspended actions to collect on defaulted loans. However, America is now five years removed from the once-in-a-century public health crisis, and the Trump administration thinks it is time to target borrowers so that taxpayers will no longer shoulder the burden.
Student Loan Collections Have Started
Education Secretary Linda McMahon announced on April 21 that her department would restart efforts to pursue unpaid federal student loans. This initiative would affect approximately five million borrowers who have not made a payment in 360 days and have transitioned to default. Another roughly four million borrowers are also in late-stage delinquency, which is between 91 and 180 days.
The department estimates that a quarter of the federal student loan file could be in default, which would represent a massive loss to US taxpayers.
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” McMahon said in a statement. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear.”
The campaign will begin by prompting the Office of Federal Student Aid to restart the Treasury Offset Program. All borrowers have received – or soon will – communications with three requests: Sign up for an income-driven repayment plan, enroll in loan rehabilitation, or begin completing monthly payments. Should individuals choose not to cover their obligations, the federal government will garnish wages, keep income tax refunds, or target Social Security benefits.
Credit scores will also be damaged. According to a March Federal Reserve Bank of New York paper, as many as nine million student loan borrowers could experience sharp cuts to their credit scores in the coming year. So, up to 15% of debtors' disposable income could be confiscated, and credit scores could be eroded.
Financial experts note that students or graduates typically have three avenues to explore: repaying loans in full, consolidating student loans, or asking for loan rehabilitation. Whatever option is selected, borrowers will know one thing: The US government is engaged in no-holds-barred student loan collections.
And, unsurprisingly, many young Americans are unhappy about it.
Oh, Poor Baby
In McMahon's statement last month, she made a point often lost in today's political discourse. “Debt doesn’t go away; it gets transferred to others,” McMahon noted. “If borrowers don’t pay their debts to the government, taxpayers do." However, do not share that information with the scores of Gen Z Americans who have taken to social media to air their grievances over personal responsibility.
Popular political YouTuber Andrew of Don’t Walk, Run! Productions put together a compilation video of various individuals complaining about student loan collections restarting and begging the government to approve a regressive forgiveness policy.
One individual told her TikTok followers that the COVID-19 pandemic is not over and that this is reason enough not to repay her student loans. Another said, in earnest, that she did not owe the federal government because she is an upstanding woman who earned a degree. Several others claimed they could file for bankruptcy to absolve any responsibility for repaying student loans, which is something they will eventually find out has practically a 0% chance of happening.
Most entertaining are the people who compared student loans to the pandemic-era paycheck protection program (PPP). This government loan program was crafted to ensure businesses kept their staff employed during the pandemic and would not have to repay the funds if they followed this provision. As you can tell, both federal programs are vastly different. The funny part is that many of these complainers have proclaimed their intelligence but cannot devise a strategy for repaying their debts.
Reforms Needed
Today, total student loan debt is approximately $1.6 trillion, impacting more than 46 million Americans. Proponents will say this is necessary to generate competent contributors to society. Critics will argue that this is an absurd number and the country is not better off because a 24-year-old kid from Portland, Oregon, earned a four-year degree in lesbian dance theory. The latter would be correct. Tuition inflation has rocketed over the last 25 years, caused by student loans, since universities and colleges receive guaranteed funding. A market-oriented student-loan system, meanwhile, would be a superior alternative as lenders would consider what the borrower is studying, and the bank would be more likely to extend a loan to someone studying medicine or engineering rather than sociology or Shakespeare. A better way to avoid producing a generation of university-educated baristas.
As the White House employs various policy changes, the Department of Education needs to ask: Should a 19-year-old whose brain is still developing and who likely did not study economics or finance in high school have access to $100,000?
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