Students and former students face a $15-billion debt crisis — potentially holding them back from graduating

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Students and former students face a $15-billion debt crisis — potentially holding them back from graduating


As the COVID-19 pandemic has wreaked financial havoc on colleges, their students and student-loan borrowers, the government has stepped in to provide billions of dollars of relief. But at least one group of students is still being left out. 

Some federal student loans have been paused for millions of borrowers and Congress has sent colleges billions in funding to help them shore up their coffers and distribute emergency aid to students, but many students remain in the red.

It’s likely that the pandemic put more students at risk of owing money to schools they left, said Rebecca Maurer, counsel and program manager at the organization. 

“It just caused upheaval,” Maurer said of the pandemic, particularly its early weeks when students may have left school unexpectedly as the country shut down. “And what we know is that upheaval especially for low-income folks going to community colleges…that upheaval is likely to result in institutional debt.”  

Sometimes that’s an unpaid library or parking fine. In other cases, a college may hold a student liable for federal financial-aid funds, including grants, if they withdraw at the wrong time.

Now, one advocacy group is calling on lawmakers to include these former students in future pandemic relief. 

“We are under-appreciating the true scope of the student-debt crisis in terms of the type of loans and type of debt, and the sheer number of people affected,” said Seth Frotman, the executive director of the Student Borrower Protection Center.

Frotman’s organization released a brief Monday, urging lawmakers to consider these former students as they think through future relief packages.  

“Until we truly understand the ways in which the larger issue of student debt is impacting individuals and their families we’re never truly going to solve it,” said Frotman, the former student-loan ombudsman at the Consumer Financial Protection Bureau. 

These debts, though often small, can be pernicious. In some cases, colleges will use traditional debt-collection tactics to recoup the funds, referring them to collection agencies.

In other scenarios, they will withhold students’ transcripts, throwing up a major obstacle for students looking to continue their education and earn a degree that would help them pay off the loan. 

Roughly 6.6 million students and former students are on the hook for an estimated $15 billion in institutional debt — or funds they owe to their school, according to a report published last year by Ithaka S+R, a non profit focused on educational research.

“They can’t get their old credits and so they kind of have to start over,” said Catharine Bond Hill, managing director at Ithaka S+R and one of the authors of the organization’s report released last year. “Any investment they made up until that point is essentially lost.” 

One of the most insurmountable types of debt owed to schools that students encounter has to do with an obscure federal financial-aid regulation.

The rule, known as Return to Title IV, requires that if a student using federal financial aid drops out before completing 60% of a term, any portion of the aid they haven’t technically “earned” from attending the school must be returned to the federal government.

Often schools will simply return the aid back to the government on behalf of a student, typically because the aid went directly from the government to the school initially.

The school will then hold the student liable for those funds, even if they came from a Pell grant, the money the government provides for free to low-income students to attend college.

Congress looks into helping former students

Despite these tactics, colleges and universities rarely recoup much of the funds. For example, the University of California system estimated that it would lose $10 million to $12 million in annual revenue — out of a $39 billion budget — if they couldn’t collect on the debts, according to data cited by SBPC. 

Now, SBPC is calling on Congress to find ways to include these former students in future relief initiatives. They propose that lawmakers require colleges to wipe out institutional debt as a condition for receiving more relief.

Short of that, they’re calling on the state and federal government to ban transcript withholding — a step some states have already taken. 

Finally, at a minimum, they’re asking the federal government to insist that colleges pause collections on institutional debt at least for the same period as the student-loan payment and collections freeze as a condition for receiving any relief. 

Mark Huelsman, a fellow at SPBC, said that if the student-loan payment pause was premised on the assumption that borrowers shouldn’t have to pay their student loans to stay afloat in the current economy, “having this debt out there and collecting on this debt is particularly inhumane is counterproductive.” 

“Federal and state policymakers should be taking a hard look at the ways that these debts are hanging over students’ heads and addressing them, cancelling them,” he said.  



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