How well do Americans know what collection actions can be taken to collect on student loans? Or whether bankruptcy can write them off?
We finish this series of blog posts on student loans with an admission of ignorance.
People making good choices about whether to take out student loans to fund a college education—both the students and their parents—ought to know about both the costs and benefits of those loans.
The broader public needs to have a good basic understanding about student loans as policy choices are being made by them. Ten years ago, less than one-eighth of all U.S. non-housing household debt consisted of student loans, way less than half the amount of either credit card or vehicle loan debts. Then after increasing every year, in early 2010 student loan debt caught up with and quickly surpassed both credit card and vehicle loan debt. Now the amount of student loans is much larger than vehicle loans and almost twice as large as credit cards. The skyrocketing volume of student loans is one of the most important economic challenges confronting our nation.
But the public in general, and even student loan borrowers themselves, do not have a clue about some of the most basic aspects about student loans.
What We Don’t Know About Student Loan Collections
The Federal Reserve Bank of New York conducts a national study called the Survey of Consumer Expectations. This last year their economists added questions designed “to gauge the extent to which U.S. household heads understand the dangers of failing to repay student debt.”
Jumping ahead, their conclusion:
[O]ur analysis reveals that U.S. households have a poor understanding of the implications of being delinquent on student loans. As expected, the level of student loan literacy is higher for individuals with a college degree and those who themselves have taken out a student loan, but even among these groups less than half of the respondents understand all of the consequences of failing to repay a student loan.
How Would You Answer These Questions?
The survey respondents were asked the following:
If a borrower is unable to repay her federal student loan, what steps can the government take to collect the debt?
A. Report that the student debt is past due to the credit bureaus.
B. Garnish wages until the debt, plus any interest and fees, is repaid.
C. Retain tax refunds and Social Security payments until the debt, plus any interest and fees, is repaid.
The federal government, and the various private collection agencies to which it outsources the collection of student loans that are in default, can take any and all of these collection actions.
Only 28% of heads of U.S. households got this question right. So, only a little more than one-fourth of heads of households know how student loans can be collected.
How Much Smarter Are the College-Educated? Those with Student Loans?
One would certainly hope that people with a college degree, regardless whether they needed to take out college loans themselves, would be more literate about student loans. And they are, somewhat.
About 38% of those with a degree answered this question accurately.
And among those with student loans themselves? About 48% were accurate.
This still means that less than half of student loan borrowers know what actions their student loan creditors and collectors could take against them.
How About a Bankruptcy Twist?
How would you answer this one? On a scale of 1 to 5, how likely is it that a student loan borrower could write off student loan debt in a bankruptcy, where 1 indicates “extremely unlikely” and 5 “extremely likely”?
The present (unfair?!) reality is that both federally guaranteed and private student loans can only be written off in bankruptcy if the borrower can prove “undue hardship,” which the courts have interpreted into a very high standard. So the right answer to this question is “1”: it’s extremely unlikely that a student loan could be written off in bankruptcy.
Only 37% of heads of households gave that correct answer.
A near-majority—45%—chose either 3, 4, or 5, indicating that they thought that getting out of a student loan in bankruptcy was more likely than unlikely. People clearly underestimate how difficult it is for borrowers can get out of their student loans.
And people don’t adequately know what can be done against student loan borrowers when they can’t and don’t pay their loans.