Image credit: The poster was used at the Tea Party demonstration on Tax Day 2010 in Washington, D.C. Public Domain / Smithsonian National Museum of American History

Although 43 million Americans (fully 26 percent of the labor force) are being billed for $1.9 trillion in accumulated student debt, we know little about the composition of the debt: how much is principal, how much is interest, and how much is accounted for by negative amortization of capitalized penalties. This last category, draconian penalties imposed on untold thousands of student loan debtors, is particularly important. Because of these penalties, a very large cohort of borrowers have paid off their loans, sometimes twice over. Yet they still owe double or triple the amount they originally borrowed.

Congressional testimony is full of stories like Maryland social worker Deborah Harburger, who was wrongly denied Public Service Loan Forgiveness due to her servicer’s mismanagement of her account. “In 2017, after completing 10 years of public service,” she testified:

I was stunned to receive a denial, informing me that, while my payments had been on-time and my employment qualified, my particular federal, student loans were not eligible. Furthermore, my loan servicers and the Department of Education never once informed me of this problem. Instead, I was now told I could move my loans into a different program and re-start the 10-year and 120-payment clocks.

Deborah Harburger

Borrowers like Deborah Harburger are far from alone, but American college students and their families never borrowed $1.9 trillion. Rather, that amount accumulated because the Department of Education allows unregulated, profit-hungry student loan originators and servicers like Naviant, Sallie Mae, and NelNet to impose penalties, fees, and carrying charges at their own discretion. Those penalties and fees are capitalized, which means that they are added to the principal of the loan, and borrowers’ balances grow.

Currently, the best estimates from The Center for Responsible Lending and Student Loan Justice suggest that if late fees, interest penalties, and other predatory charges were simply wiped out, at least half of all student loan debtors, around 20 million or so, would be debt free. 

Yet if all those predatory fees were simply erased, we would still have two groups of student borrowers who have suffered serious economic harm because both Congress and the Department of Education protected the loan servicers rather than the students, a classic example of what economists call “regulatory capture.” This is because—since the 1980s—lenders have had unchecked power to collect. In five states, among those powers is the right to have state or federal licenses revoked due to unpaid student loan balances, and before 2019, there were at least thirteen states where student loan debt could trigger loss of professional licensure. 

Today, in some states you can even lose your driver’s license due to unpaid student debt. Senior citizens on Social Security can have their monthly checks garnished by student loan debt collectors without a court order, an authority that is unique. Other borrowers have had wages, alimony, or IRS tax refunds confiscated by student lenders. 

What do we know about this group? Almost nothing. But surely this information is somewhere. The people harmed could be found, and some form of restitution might be made.

This still leaves millions of other borrowers whose lenders or servicers put them into Income Based Repayment (IBR) plans or Public Service Forgiveness (PSF) only to actually deny them the forgiveness they were due. Under these plans, loan balances were to be canceled after a stated number of years of consistent payment. But because the Department of Education has failed to rein in servicer abuses, 98 percent of people enrolled in IBR or PSF have not only been denied the forgiveness they were promised and are entitled to—but in the case of loans in IBR—more interest accrued.

Megan Bailey, of Montana, is a social worker and has never missed a payment. But was still denied PSF.“ I have never made more than $45,000 a year working in community behavioral health,” she said:

I owed $177, 526.06 in student loans in 2016, I have worked the whole of my adult life, including having served in the military, and live a very modest life. I worry about the pipeline into the health and behavioral health professions and whether today’s high school students will continue to choose careers in mental health and behavioral healthcare, with such exorbitant tuition, low salaries, and difficult working conditions. I cannot imagine encouraging my children to follow in my footsteps.

Megan Bailey

The good news is that the Biden Department of Education is preparing sweeping changes to both these programs that will allow borrowers who were improperly denied IBR or PSF, allowing them to refile for forgiveness. This change is long-awaited but may fail to account for the thousands of dollars in payments made while Bailey’s servicer failed to follow the law.

Until the Biden administration, Secretaries of Education have been unwilling to release the data needed to unwind the student debt crisis. Absent this data it’s impossible to develop equitable processes for resolving the many faces of the student loan crisis, other than simply forgiving portions of it, as Joe Biden recently did. Here is a list of never released information—undoubtedly partial—that would be essential to helping borrowers across the board, particularly those victimized by predatory loan servicers. 

(1) The amounts that students originally signed for, and the total of all payments made on all loans. We know how much is currently owed, but neither policymakers nor the public know the aggregate principal of the original loans. In other words, how much of the $1.9 trillion was actually borrowed—and how much of that sum is due to unchecked predatory lending and loan servicing practices? The best “guestimate” from Student Loan Justice and The Center for Responsible Lending is that at least half of the $1.9 trillion owed is made up of late fees and other servicing and capitalization charges. We also do not know how much of the billions in payments to lenders and servicers were applied to principal, and how much to interest fees, late charges, and default costs. Those numbers should be broken out too.

(2) What are the actual default rates on student loans? The Department of Education claims that only around 15 percent of accounts are in deferment or forbearance. In contrast, CNBC reported in April 2022 that “Roughly a quarter of student loan borrowers—or 10 million people—were estimated to be in delinquency or default.” 

In either case, the size of the cohort in danger of default is concerning—but not to loan servicers, who are rewarded with public dollars when borrowers default. According to Alan Collinge of Student Loan Justice: 

The loan servicers (who typically also own collection companies) would love to see a mass-default event. There is a 16 percent commission waiting for them when they compel defaulted borrowers to “rehabilitate” their loans into good standing. For a loan that defaults, and is inflated to, say, $100,000 with collection costs added in, these companies stand to make an instant, $16,000 payday from the taxpayer when the loan is rehabilitated. These “rehabilitated” loans will default again around 75 percent of the time, but the collection companies don’t care, they get paid regardless.

Alan Collinge

Clearly, taxpayer dollars have already gone into the pockets of the student loan servicing industry, but a mass default would increase the cost to the public dramatically. Congress must order the Department of Education to turn over this information as well. But if Congress won’t do that, the information could still be obtained through a Freedom of Information Act request, followed up with a lawsuit should that request be denied. There is a precedent for this. In August 2009, Bloomberg won its lawsuit against the Federal Reserve to find out what the Fed did with $13 trillion in Troubled Assets Relief Program (TARP) funds.

Most importantly, if this information was public, it would not be difficult to figure out how much each borrower owes after eliminating all penalties, fees, and late charges; estimating and applying an average interest rate based on the Treasury Rate over the period of the loan; and then subtracting what they have already paid. If they have overpaid this reality-based repayment amount, they would get a refund. 

At that point how many of the 43 million borrowers would be left? Who knows? But the Department of Education should help us find out. 

Susan F. Feiner recently retired from the University of Southern Maine, where she was a Professor of Economics & Women’s Studies.