Defaulted student loans are a cash cow for the federal government

government makes money from defaulted student loansWhile you may be struggling with a student loan, the government is waiting in the wings to earn thousands of dollars should you default. Student loan default has proven to be a profitable asset to the federal government while being a huge liability to consumers.

The federal government is in the position to earn thousands of dollars more in interest every time a student loan goes into default. The longer the default the more money the government will make in interest and fees.

The publisher of FinAid.org, Mark Kantrowitz, said “the government stands to earn $2,010.44 more in interest from a $10,000 loan that defaulted than if it had been paid in full over a 20-year term, and $6,522.00 more than if it had been paid back in 10 years.”

You can run but you cannot hide
Consumers who default on student loans soon realize student loans do not go away. It is just about impossible to discharge student loan debt, even through bankruptcy. The government knows consumers cannot get away from student loan debt and are not too worried about immediately collecting.

Interest, Fees and Penalties
The government can tack on extra interest and penalties. A borrower’s wages can be garnished, along with social security and disability payments.

Tax returns can be withheld to recover defaulted loans and you can even be banned from getting a student loan in the future. Any costs related to collecting the defaulted loan will extend the loan’s terms with very little payment going to reduce the principal.

Cha-ching for the government cash register
Unlike banks, who often recover less than .10 cents on the dollar from defaulted credit cards, the Department of Education expects to recover 85% of defaulted federal loan dollars based on current value according to the Wall Street Journal. This 85% recovery figure is the amount after collection agencies have been paid fees and costs to collect the defaulted loans.

Default adds up for the Feds
Defaulting on student loans is not such a bad thing for the government. According to White House budget figures for fiscal 2011 ending in September, the federal government expects gross recovery between $1.10 and $1.22 for every dollar of defaulted student loans.

An estimated $49.9 billion of Federal Family Education Loan and Federal Direct Lending Program loans are in default, out of a total $713.4 billion outstanding, as of September 30. Those amounts include only principal balances, not interest.

Government addresses for-profit student loan defaults
The federal government seeks to regulate for-profit student loans but remains silent on not-for- profit student loans. The government says for-profit graduates default on student loans at a higher rate and cost taxpayers too much money while learning little in class. Justin Hamilton, a spokesman for the Education Department, said…“students are left with the debt and questionable job prospects, and it’s financed with taxpayer dollars.” According to the Education Department, 46% of dollars lent to for-profit college students will ultimately default, compared with an average of 16% across all schools.

Recovery rate is high
Hearings to evaluate the value of for-profit colleges are being conducted by the Senate Committee on Health, Education, Labor and Pensions. But the government may not need to protect taxpayers as their rate of recovery is high. Mark Kantrowitz, publisher of financial aid website FinAid.org, said “Even at 85%, the government’s not losing all that much money.” Alan Collinge, founder of borrowers’ rights advocacy Student Loan Justice, said the high recovery rates provide a “perverted incentive” for the government to allow loans to go into default.



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