What Happens If You Don't Pay Off Your Student Loans?

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Debt Dodgers: Meet the Americans Who Moved to Europe and Went AWOL on Their Student Loans

By Alexander Coggin

January 17, 2016

It's difficult to overstate how crushing America's student loan debt situation is. The amount of money adults in the US owe due to educations is over $1.3 trillion and jumps up by more than $2,000 every second. The average borrower owes $28,000, though some owe much more than that. Many former students, trapped between low wages and the high cost of education, can barely afford to keep up with interest payments, let alone start paying off the principal.

Some people are put in so desperate a spot they have attempted to bail on their loans by fleeing the country and hiding out from the banks and collection agencies that will inevitably start looking for them.

It sounds slightly unbelievable, not to mention probably a bad idea from a long-term personal finance point of view, but these debt dodgers are real. I've met these Americans in Berlin, my adopted city. I haven't been able to find any statistics on how many of them there are, but I'm not the only one who's noticed the people fleeing US because of their student loans.

"It's a phenomenon that I'm quite familiar with actually," says student loan lawyer and author Adam S. Minsky. "In my experience, people leave because there's a sense of hopelessness and they see greater opportunities overseas, usually through a combination of higher pay and lower living expenses. They think they'll be better positioned to either pay their loans in real time, from abroad, or to save up and be in a better place to address the loans a couple of years from now."

Many of the students I talked to fear the possible consequences of this strategy, but so far none of them have faced any repercussions. And according to some experts, they may never.

Joshua R. I. Cohen, who calls himself The Student Loan Lawyer, tells me that this plan could work for some people, albeit only if the debt dodgers plan to never live in the US again. Students who move to a foreign country and stop paying off their loan debt "will only feel consequences if they're working for a US company on foreign soil," Cohen says.

If you're living abroad, earning a living from a foreign company, not paying US taxes, and not collecting social security, then loan companies can't touch you, nor will the government chase you after you move abroad.

"The federal government doesn't have really strong tools for collecting debt from people who move overseas," says Mark Kantrowitz, another expert on student loans who serves on the board of the Journal of Student Financial Aid. "In theory, you could live the rest of your life in another country."

Of course, if your family co-signed your loan with you and remain in America, they'll still be on the hook. And this strategy relies on you not wanting to go home again. If these former students ever decide to come back to the US, "the debt will still be there—it never goes away," says Cohen. "All they're doing is putting off what could happen if they come back to the US."

To get more insight about debt dodging, I spoke to several Americans who moved to Berlin and stopped paying their loans. All names have been changed.

Brian, 29

$40,000 in debt

I took out loans when I went to school in California. I received enough scholarship money at the time to cover half of the tuition and the loans covered the remainder. I did not have a plan for paying them off, nor did I consider how I would make it work once I graduated. I needed to go to school and it was the only solution at the time.

When I decided to move abroad, I think in the back of my head I thought that it would save me from having to pay them off. I saw the interest rise and my deferral period lapse and the anxiety just kept rising. I'm sure that Germany and America have some sort of reciprocity when it comes to this kind of stuff, just like they do with taxes, but I try not to think about it.

The loans are about to default, and I'm worried about the consequences. I've blocked the loan company's emails from my inbox. I'm sure they will go after my parents soon, but that won't do much because they don't have any money either.

I think at this point I owe about $40,000. I really, truly, honestly don't want to pay it back. Sure, I realize the responsibility I took on when I signed the papers and agreed to take out the loans, but I should have never had to do it in the first place. I feel some sort of civic duty not to pay them back, as if my small protest will make any kind of difference.

I think I know two friends that have completely paid off their loans and have received an awesome amount of confidence because of it. I am very proud of them, but I don't think I'm one of those people. I would rather spend my money on things that I need like food and shelter than to give it back for a service that should have been provided for me.

Vanessa, 29

$45,000 in debt

I got my associate's degree and then transferred to a private university in New York. They didn't accept all of my credits, so I had to do about three years of study. I think it was $53,000 a year at the time. My mom and I applied for a loan through a private bank called Sallie Mae, among others. Every American knows that bank, the name Sallie Mae sounds so friendly; she's just your cute aunt making soup.

Within 48 hours I had $30,000 in my bank account. It was shocking because I had never had that much money in my bank account before. I remember that after paying my student stuff it was just gone, as if I never even had it. And I didn't live on it. I had a part-time job my entire education.

I moved to Berlin the day of my graduation. I got my loans deferred for one year and then my parents deferred it for a bit because you have a short grace period, usually six months to a year. When we tried to consolidate them we met a lot of resistance because they were from so many different banks. But I've never paid back the federal loans. My parents didn't co-sign on them. The only reason that I've ever worried about the debt from the private lenders is because it affects my parents. I don't give a shit about the loans in my name.

A year ago, I was working at a fancy restaurant in Berlin and made a lot of money in tips. For about ten months, I was paying some of the loans, but I don't have that job anymore so I had to stop.

Debt collectors haven't badgered me in Berlin. They haven't found me in Germany. But when I go home, my phone rings non-stop. I always think it's an old friend trying to hang out with me, but it's really Sallie Mae. It rings like every hour.

I have this shame on the part of my parents because I really did not want this for them. When I thought about going to college, this is not what I had in mind. I really thought that they were going to be so proud of me. I was the first child in my family between my parents to graduate college. But then I realized that we weren't thinking about the debt when we were signing up for school. And sometimes I think living in New York City and going to a private university maybe wasn't the best idea. I could have gone somewhere else and gotten a political science or history degree and only been in $50,000 dollars worth of debt. But I'm happy that I got that education. It's the education I wanted.

If I don't have the money, then I don't have the money to pay for loans. I need to eat and live and not be a slave to this debt. But I'm scared. When I look back, I wonder what I could have done differently.

Mario, 34

$160,000-plus in debt

I wasn't even meant to go to college. It was never my intention. And then all this shit happened where I took a year off, and I realized, Fuck, I don't think I can work overnights at a Target stocking shelves for the rest of my life. So I ended up finding this film school in California.

I couldn't afford this private school, so I told my parents I really wanted to do this and they co-signed the loans for me. I wanna say it was like $30,000 each year. It's a ridiculous amount of money.

I was, for sure, intending to pay the loans back. Our mentors and teachers told us that we would pay this education off for a long time, but everyone in America is doing it so it's almost like eating breakfast. That's how Americans are raised.

This idea that you can't afford college so you just make loan payments when you get out of school is crazy. I started to question how could you start something when you're starting in a hole?

Debt is not the main reason I moved to Europe. I moved for my career, but in the back of my mind it was a way to start a clean slate. At the same time, I could never really escape because my parents were co-signers. My parents own a home and were planning on leaving it to us as inheritance. They were nervous about having their house taken away from them because of me not paying student loans, and subsequently signed the house over to my sister so they wouldn't own anything the bank could come after.

To be honest, I just don't see myself living in America again—for reasons outside of student debt. My parents are moving back to El Salvador, where they're from, and then I'll have no ties to America. I don't really like America or the direction it's heading. For now, I don't need to care about going back there.

I encourage whoever I can to study abroad. It's so much cheaper. Starting your life with even $30,000 or $50,000 in the hole is not a good hole to start in.

Zoe, 31

$35,000 in debt

I got a full ride to college and I didn't have to take out loans until the end of my freshman year. I got a D in a class and I lost half of my scholarship. So I could have had no loans. My biggest mistake in life was messing up that one year in college.

When I left, I had maybe $24,000 in loans. My intention was to get forbearance for like a year and then start paying the loans. And I knew I would be paying the loans until at least my late 30s. My brother, who is six years older than me, was still paying his loans at the time, and even my dad was paying his loans then—he got his master's degree when we were kids.

After school, I went through my grace period and forbearance application and started paying the loans off. I was working and had a really good job. I think I was paying like $100 or $150 a month. I decided my senior year that I would move abroad after graduation. The last six months in the States I wanted to get all of my loans in order because I knew I wasn't going to be paying them when I moved to Europe.

I got all of them up to date, and right before I left I told the loan companies I was moving and gave them an email address. Once I moved abroad, though, I just stopped paying. Once you move abroad, you just kind of turn off that whole part of your life off. They can't touch you; you're elusive. But they started calling my parents, my grandparents, my past employers. And I was just living my life in Europe, kind of oblivious to it.

It wasn't until about six months ago that I started paying my loans again. I realized that I'm 30 and I just can't dip out on my loans forever. And maybe I'll want to move back to America at some point. I don't want to have this burden if I do.

The past two years I've been banking on this rumored Obama loan forgiveness bill that still hasn't really been passed. I guess I'll continue at this rate until they go away? I don't mean until I pay them off. I mean until the government's like, "You don't have to pay those loans anymore, you millennial! We know you're not good for it."

For more of Alexander's work, visit his website.

Americans are flooding the government with appeals to have their student loans forgiven on the grounds that schools deceived them with false promises of a well-paying career—part of a growing protest against years of surging college costs.

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In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year. The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.

 

The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.

The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job. Federal law prohibits student debt from being discharged in bankruptcy, except in rare circumstances, and the Supreme Court last week declined to hear a case that could have expanded bankruptcy options.

The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud. Last week, the department began a monthslong negotiation with representatives of students, schools and lenders to set clear rules, including when the department can go after institutions to claw back tuition money funded by student loans. 

Education Department officials say they are still trying to grasp the potential bill that will be footed by taxpayers. They say the cost of forgiveness could ultimately be in the billions of dollars.

“We just don’t know” the potential scope, said Ted Mitchell, the Education Department’s undersecretary. “This is new territory for us.”

Mr. Mitchell added that borrowers are entitled to forgiveness—as well as potential reimbursement of repaid loans—if they have been defrauded, regardless of the taxpayer cost. “The law is clear about giving students redress when they’ve been defrauded,” he said.

Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges. 

“It gets much more difficult when students say, ‘Well, I was told this would improve my job prospects.… I don’t have a job, and I’m mad about it, and I think I’m defrauded,’” Mr. Kelly said.

The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.

The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.

So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools. Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education Management Corp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.

An Art Institutes spokesman declined to comment. Corinthian Colleges was liquidated in bankruptcy last year; the company denied allegations of illegal recruiting tactics.

ITT said it wants “to assist students with a legitimate grievance.” But it added that it believes the company has been unfairly targeted by the Obama administration in what it characterized as a broad campaign against for-profit colleges.

In letters to the Education Department, borrowers speak of frayed lives after taking on huge debts to attend schools that they say provided inept instructors and failed to land them the industry jobs they promised.

“I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”

Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.

Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”

The school had also promised to help him land an industry job, he said. But when he graduated in 2011, the school placed him in an $8-an-hour job working behind the counter at a local Office Depot. He said they did the same for his girlfriend, another graduate of the school.

Mr. Andrade and his girlfriend moved to Austin, Texas, where he now makes $44,000 a year working in technical support for a major media company, outside his desired field. “They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.

The Art Institutes spokesman, Bob Greenlee, declined to comment.

The case of Mr. Andrade, who is trying to document the school’s actions, points to tough decisions facing the Education Department. Many students say recruiters verbally made misleading promises and cited fraudulent job-placement data, but the students often lack documentation to prove it. Moreover, consumer-protection laws vary by state, and a recruiting practice might be legal in one state but illegal in another. The Education Department has hired a special master to sort through existing claims as it drafts permanent rules.

Read  More:http://www.wsj.com/articles/thousands-apply-to-u-s-to-forgive-their-student-loans-saying-schools-defrauded-them-1453285800?mod=e2tw

Student loan debt in the US has topped $1.3 trillion, growing $2000 per second

Total student loan debt in the US has topped $1.3 trillion.

It's not just an issue for people holding six figures' worth of loans — it's become a policy issue as well. 

In September, the Obama administration announced a series of changes to the Free Application For Federal Student Aid (FAFSA), the go-to form for prospective college students applying for federal student aid.

In December, the administration announced the Revised Pay As You Earn (REPAYE) plan, which lets select federal student loan borrowers cap their monthly loan payments at 10% of their discretionary income.

These measures have been taken to make the burden of student loans more manageable. The Associated Press found that Generation X, people ages 35-50, owe about as much money on their loans as new graduates even after years of payments, and that student loan payments are surpassing groceries as the biggest monthly expense for many households.

Writing for TIME, leading student financial aid expert Mark Kantrowitz estimates that more than 25% of borrowers are graduating with "excessive" debt. He explains that this debt load significantly influences how many borrowers live their lives. 

Kantrowitz writes:

I also found that students who graduate with excessive debt are about 10% more likely to say that it caused delays in major life events, such a buying a home, getting married, or having children. They are also about 20% more likely to say that their debt influenced their employment plans, causing them to take a job outside their field, to work more than they desired, or to work more than one job.

Things aren't getting better. Marketwatch estimates that America's total student loan debt grows over $2,000 every second. It's no wonder the government has taken notice.

Obama Student Loan Forgiveness Program: Do I Qualify?

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I’ve been paying my student loans for the past six and a half years since I graduated college.

If I stick with the minimum payments, it will take me 15 years to pay off my private student loans, and 30 years for my consolidated federal government loans. No, thank you.

With the new Obama Student Loan Forgiveness Program, and the new Student Loan Repayment Options, I figured I would take a look and see if any of them could help me out.

Previously, federal student loan repayment options limited payments to 15 percent of a borrower’s income and offered forgiveness after 25 years of payments.

The new version of the income-based federal student loan repayment program will cap monthly payments to 10 percent of discretionary income, and have their loans forgiven after 20 years.

Do I Qualify for the Obama Student Loan Forgiveness Program?

In order to qualify for the income-based repayment program, borrowers federal loans cannot have been taken out any earlier than October 1, 2007 and must have received at least one disbursement after October of 2011. Meaning this program is most suited for recent college graduates.

Because I graduated in 2006, all my loans were taken out before October 2007, so I do not qualify for this program.

However, if you were a college student as early as 2007, and you also received a federal loan disbursement after October of 2011, you would qualify for this program IF (there’s always an ‘if’, right?) you also qualify for partial financial hardship based on the portion of your income standard repayments would cost.

It’s believed that 1.6 million borrowers could participate in this program based on their student loans and income-to-debt ratio.

Again, this program only applies to certain direct federal loans and not private loans from banks and other non-federal lenders.

Revised Pay As You Earn Plan

Are you in the same situation as I am, being an earlier graduate? That’s okay. The revised Pay As You Earn plan can help.

It was designed to bridge the gap between those who were ineligible for the PAYE plan, as there’s no graduation year requirement.

You’re eligible for this plan as long as you have eligible student loans, which include the most common student loans. When this plan was rolled out in 2015, it was estimated that it would help 5 million borrowers become eligible for income-based repayment plans.

The Good and the Bad on Income-Based Repayment

There are good and bad aspects of an Income-Based Repayment plan.

The good aspects include that your payments could be lower based on the amount of income you earn. Your payments will never be more than 10% of your income. All your loans will also be forgiven after a twenty-year period.

The bad aspects of the income-based repayment program are that you may wind up paying more in interest over the life of the loan, and you may wind up paying taxes on the amount of the loan forgiven at the end of the repayment period.

If your loans are absolutely debilitating to quality of life, it may be worth looking into an income-based repayment option. However, don’t rely on them too much. If your financial situation improves and you can afford to pay more than the minimum, you might want to consider that as an option.

Do you work in public service?

If you work in public service, a portion of this program may work even better in your favor.
Full-time employees who work in public service must make 120 on-time, full, scheduled monthly payments on their direct loans. After 120 payments, the remainder of the loans may be forgiven. Only payments made after October 1, 2007 qualify.

For this program, only loans received under the William D. Ford Federal Direct Loan Program are eligible. All other loans, including FFEL and Perkins, are not eligible for this program unless they have been consolidated into a Direct Consolidation Loan