People who leave school with significant student loan debt often struggle with how to handle it. One unorthodox approach: leave the country.
Some borrowers move, figuring that the lender will have trouble collecting outside American borders. However, their loan isn’t forgiven. In the meantime, interest keeps piling up. When they come back to the U.S., debt collection picks up right where it left off.
Fleeing to Berlin
A number of debt-encumbered young Americans have relocated to Berlin, Germany. One woman who talked to VICE found borrowing money for school so easy that, at 29, she’s $45,000 in debt. She tried to consolidate her private loans and pay off a chunk of her debt, but hasn’t paid back her federal loans.
As long as she’s overseas, she doesn’t care if she finishes. There seems to be no point.
“They [debt collectors] haven’t found me in Germany,” she says. “But when I go home, my phone rings nonstop. 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.”
Some former students feel no guilt for ignoring their loans because, they say, higher education should be free. A 29-year-old man with a $40,000 debt believes that, by not repaying, he’s protesting the necessity for student loans.
As he puts it, “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.”
Other borrowers worry about family members who cosigned the loans and are still on the hook for repayment. A 34-year-old expat with more than $160,000 in student loan debt studied filmmaking in California. He moved to Europe to further his career and doesn’t see himself returning to the U.S.
Still, he’s concerned about his parents’ situation.
“They were nervous about having their house taken away from them … and subsequently signed the house over to my sister so they wouldn’t own anything the bank could come after,” he tells VICE.
What happens if you owe money and aren’t ready to pack your bags for Berlin? You could face aggressive loan-collection practices.
Borrowers who took out student loans since the summer of 2009 had to consent to being autodialed. Now, at the Obama administration’s request, the Telephone Consumer Protection Act has been rewritten to allow “robocalling” of all federal student loan borrowers later this year.
The Department of Education justifies the practice, saying that a student loan borrower who’s delinquent or in default may no longer be at their last known address. Autodialing borrowers’ cell phones, the feds say, is the only practical way to get in touch with millions of delinquent borrowers to let them know about repayment plans or refinancing options that can make their monthly payments more manageable.
Although borrowers can apply for these programs on their own, shady debt relief companies have sprung up promising to help student loan borrowers access them.
Complications can also arise when the task of collecting payments on student loans is transferred to a new loan servicer. The Consumer Financial Protection Bureau says that in the last five years, 10 million student loan borrowers have been handed off from one servicer to another.
The switch can be bumpy if payments are mishandled, with borrowers getting hit with late fees and seeing their credit scores dinged. Incentives for making on-time or auto payments may not be honored by the new servicer. Borrowers may have trouble getting to the bottom of these and other problems if they can’t obtain the needed documents or information from their new servicer.
Loan servicers collecting payments on federal direct government student loans now have incentives to prevent borrower defaults. But contracts governing the servicing of older Federal Family Education Loan Program (FFELP) loans originally made by private lenders may not include such incentives.
Landing in court
Failing to repay your student loans can eventually land you in court. Although borrowers are getting behind less often than they did at the peak of the recession, the number of lawsuits filed by private lenders over delinquencies has “increased significantly in the past two years,” the Associated Press reports. Lawsuits by loan servicers collecting payments on government loans are uncommon, the AP said — in part because they don’t need to go to court to garnish your wages.
One reason private lenders may be getting more aggressive about collections is that they’ve bundled up billions of dollars in student loans into securities that are sold to investors, the AP noted. Rating agencies like Moody’s Investors Service are revisiting their assumptions about the performance of some of these securities.
Bloomberg Businessweek has reported that more than 2,100 lawsuits in Connecticut, Indiana, Arizona, and Oklahoma are connected to National Collegiate Student Loan Trust, which sold bonds backed by thousands of student loans purchased from private lenders from 1996 through 2007.
Student loan borrowers aren’t defenseless against loan servicers. Because student loans are classified as consumer loans, the federal Fair Debt Collection Practices Act protects borrowers from unfair collection practices. This regulation limits when and where you can be contacted.
For instance, calls are banned before 8 a.m. and after 9 p.m. If you’re not allowed to receive calls at work, a loan servicer is forbidden from ringing you there.
The Fair Debt Collection Practices Act bans harassment, abuse, lies, threats and misrepresentations. You’re also entitled to a full accounting of what you owe and to whom.
Last year, President Obama announced a “Student Aid Bill of Rights” to rein in abusive loan servicing practices. The Obama administration instructed the Department of Education to create an online complaint service to track issues related to federal student loan lenders, servicers, collections agencies and institutions of higher education.
The president’s mandate put more consumer protections in place for complications due to missed payments, transfers of borrowers between loan servicers, and changes in repayment plans. It set guidelines for servicers handling multiple loans and focused on helping lapsed borrowers get back on track.
Students might also get a break because loan servicers are working with the Department of Education to get borrowers enrolled in income-driven repayment plans that are designed to make monthly payments more manageable. The latest income-driven repayment plan, REPAYE, lets eligible borrowers limit their monthly payments to 10 percent of their discretionary income. For many, this is a much more livable burden — especially those faced with job loss or reduced incomes.
More than 4 million of the 42 million borrowers with federal student loan debt have taken advantage of alternative methods to pay back their loans based on a percentage of their income, the Department of Education said in its most recent financial report to Congress.
Borrowers who choose to stick around and work through their student loan debt just might be seeing light at the end of a very long, dark tunnel.
Anum Yoon is the founder and editor of millennial money blog, Current on Currency.