The Default Syndrome : College Grads Who Don’t Repay Loans--More Than Greed Is at Work

Linda Wilson was going nowhere in the secretarial pool of the California Assembly. So in 1978 she went back to college to get a diploma. At first, Wilson worried about meeting her expenses. But the 32-year-old single parent soon discovered that a variety of loans were available. “There was money for everything,” she remembers. “Getting a student loan was as easy as opening a line of credit at Bullock’s.”

In 1980 she left UC Davis with a degree in environmental planning and a debt of $9,000. But she wasn’t worried. “By then I had loan savvy and knew about programs like student-to-student loans and fee deferments.”

Wilson headed for the University of Wisconsin, but that school’s $5,000 loan barely covered out-of-state tuition and expenses. So back she went to California to finish her graduate studies at UCLA. “I couldn’t work with a child at home, so I took advantage of everything,” she says. “When the school provided a National Defense Student Loan worth $10,000, I happily accepted every cent.”

After receiving a masters in city planning from UCLA, Wilson became a highly prized commodity. The Los Angeles County Transportation Commission came after her. So did the City of Montebello.

And so did the U.S. government--but for an entirely different reason.

“They wanted me to start making repayments of $150 a month,” she recalls. “ ‘Please!’ I said. ‘With a monthly rent of $650 and a 10-year-old boy to feed, I simply don’t have the money.’ ”

The Department of Education was not impressed. It declared her delinquent, began assessing interest fees and penalties and turned the debt over to Wachovia Services, an Orwellian-sounding collection agency.

Makes Regular Payments

Today Wilson is director of transportation and planning for the city of Casper, Wyo. Each month she sends checks totaling $150 to Davis and UCLA. But with a debt of $40,000 still outstanding, Wilson admits she’ll probably be paying well into the 21st Century.

“At least I’ll always have someone who cares,” she says with a sigh. “When I’m 95, Wachovia will be writing letters saying, ‘Linda, wait, you can’t die yet.’ ”

Thousands of Americans share Wilson’s little secret. Though they look and behave like yuppies, they are, in fact, classified as “deadbeats” by the U.S. government because of their failure to repay federally guaranteed student loans.

The government, according to Secretary of Education William J. Bennett, faces a default bill of $1.6 billion this year, a 200% increase over 1983, when the total was $531 million. And if present trends continue, it is expected that more than 12% of the 3.25 million students currently borrowing money will never pay it back.

Needless to say, the government takes none of it lightly. “These deadbeats we’re talking about are adults,” says Bruce Carnes, deputy undersecretary for budget planning and evaluation at the Department of Education. “People eligible to vote should be able to distinguish between a grant and a loan. A loan you pay back.”

But in these days of rising school costs and lowered job expectations, nothing is that simple. Today, because of rising tuition costs that average $1,337 at public universities and $5,793 at private four-year colleges (according to the Assn. of American Universities), the amount of borrowing under the GSLP has soared to almost $10 billion a year.

As many as half of the country’s 10-million undergraduates now leave school owing money, the Department of Education says, with individual student debt ranging from $6,500 to $9,000. For MBA and law school graduates, the average debt easily reaches five figures. A medical student can count on starting a practice $30,000 in the red.

In a report released earlier this year, UCLA and the American Council of Education jointly warned that a generation of student debtors is being created.

“Growing student indebtedness has raised questions about the implications of the debt burdens for the national economy, for the economic well-being of borrowers, for equality of access to higher education and even for the educational process itself,” wrote Alexander Astin, the UCLA professor who directed the joint study.

Simple Beginning

When it began in 1969, the Federal Guaranteed Student Loan Program was fairly simple: A certified full-time student at an accredited school or university whose family income did not exceed $30,000 could apply to a bank for a loan guaranteed by the federal government. Because character and credit worthiness were not at issue, defaults occurred but the bad debts did not overly disturb the banks because repayment was guaranteed by Washington.

In California, 265,000 students received loans totaling $746 million this year. The state Student Aid Commission estimates that 17% of them will default, adding to an already staggering accumulated debt of $90 million. The prospect of repayment is especially bleak for students who attend the 105 community colleges and 600 private business and technical academies. The Los Angeles Community College system says its default rate exceeds 31% and soars to more than 56% at its Southwest College campus in Hawthorne.

A recent study of 4,600 student debtors by the UCLA Graduate School of Education found that a large number of students who walk away from their financial obligations are from disadvantaged minority communities.

“Minorities on a Cal State or community college campus invariably have a higher debt burden to income ratio than students graduating from a four-year university,” says Wellford Wilms, a UCLA associate professor specializing in equality of access and job training. “Added to this is the fact that minority students are the ones who can expect discrimination in the labor market.”

Defaults Not Excused

California’s Student Aid Commission doesn’t excuse the defaults, nor does it try to minimize the danger they pose to the entire guaranteed loan system. But it insists a higher than normal percentage of bad debts is to be expected.

“California has a large number of lower-income students, an extensive community college program and hundreds of small business and technical schools,” says Richard Reinhardt, the commission’s deputy director for loans. “As long as we have colleges open to virtually everyone and a system that allows $2,500 loans without collateral or a career goal, we’ll continue to have a high rate of defaults.”

A former orderly at a psychiatric home, Carleton Harris, 34, knew only that he wanted to “get into management” when he began taking LACC marketing courses in 1982. But at the end of two years, the certificate he received did not result in a job. As the months passed, he forgot about the $1,000 loan that had helped him finish school. “That year was a real drag and I just didn’t think about it,” he says. “It was only $1,000. Everybody forgets little things.”

Harris finally landed a telemarketing job in 1985 selling Contour lounge chairs. Not exactly the executive position he had in mind originally. “I went to school to be a manager,” he adds with a sigh, “and ended up just another Joe on the line.”

What really makes Harris bitter, however, is not his abortive attempt at self-improvement but the fact he had to repay his loan. “Why come after me for $1,000,” he asks, “when it’s professionals in the law and medical schools who are stiffing the government for the most money?”

Most Have Little Money

Prestigious schools do suffer loan defaults--4% in the case of Stanford--but the majority of debtors are students with little money and even less financial experience. “It’s hard to explain the responsibilities that come with a debt burden when everything is done through mails and by computer,” Reinhardt says.

Certainly nobody told Deborah Miller to read the fine print on her loan application when she enrolled in Los Angeles Valley College’s nursing program. “I signed a paper and they gave me money.” When those funds were gone her professor told her to sign another paper. “Another check arrived just like before.”

After receiving an Associate of Arts degree, Miller was hired by Humana Hospital in Canoga Park. “I always intended to pay back the $5,000,” she says. “Honest, I would never have been able to become a nurse without those two loans.”

But in 1984, a series of medical misfortunes, including a premature baby who needed five months of neonatal care, left her unable to pay. In 1986 she went back to the hospital, this time for the removal of kidney stones.

Declared Bankruptcy

Miller’s financial problems were compounded by an attorney who advised her to declare bankruptcy. Unable to borrow more money, now that her credit was in tatters, Miller defaulted on her loans--much to the distress of Diversified Collection Services, a San Leandro collection agency that threatened court action last July. “They demanded $2,000 within five days,” Miller remembers. She sent $50.

Married and a working mother of three, Miller now pays off her loan in monthly installments of $25. “I’m no criminal,” she insists. “I think student loans are wonderful.”

Under the Guaranteed Student Loan Program, payments don’t even begin until six months after graduation, and they can be deferred if a student returns to school full time or is unable to find employment. All the student has to do to reschedule the debt is explain the situation to the institution that owns the obligation.

Unfortunately, information vital to a loan evaluation is often misplaced. California Student Aid Commission statistics show that at least half of the loans made in California will have been sold at least once by the time they mature. Within the booming trade between original lenders and secondary institutions like the federal Student Loan Marketing Assn., or Sallie Mae, mistakes can occur.

Many Loans Sold

“A student trying to submit deferments doesn’t always know if the information is forwarded,” says Jose Robledo, 40, director of student financial services for the Los Angeles Community College system. “If a loan’s sold three times it can take half a year for paper work to catch up. By that time a student will have gone into default.”

Students with rescheduled loans who move frequently may court disaster. Just ask Vicki Middleton. A Michigan sociology student who moved to California in 1979, she received three student loans between 1971 and 1980.

When she couldn’t find employment after her graduation in 1981, she filed for an automatic repayment deferment. Over the next two years she changed residences repeatedly, moving around the San Fernando Valley from North Hollywood to Sherman Oaks and on to Reseda. Unfortunately, her student loan from the National Bank of Detroit also was on the move, sold first to the National Bank of Minneapolis and later to Citibank.

Two Obligations Paid Off

When she finally settled permanently in North Hollywood at the end of 1983, she found herself in default despite the fact she already had paid off two loans and correctly requested deferment of the third.

“As I followed my paper trail through the Midwest, I realized I had investigative skills,” Middleton says. A stint in the collection office of Winston Tire Co. led to an assignment chasing debtors for a medical corporation. Gone forever was her interest in sociology. Middleton knew her true calling was debt collection.

“Experience gained trying to resolve my student loan computer error has made me one of the top credit collectors at Great Western Bank,” Middleton, 34, says. “I trace chronic delinquents who’ve skipped out on their loans. I can find anybody. You should see my Rolodex.”

Ironically, Middleton is still unable to resolve her own credit problems. Her tax refunds have been confiscated for the past two years, and according to the computer she still owes $2,501.

“I could pay it off, but you just can’t trust these collection agencies,” she says with admirable equanimity. “My husband and I have learned to live with separate bank accounts,” she adds. “That’s our secret to a stress-free family.”

Many Billing Errors

People like Middleton who can document their efforts to resolve billing errors have nothing to fear, but those purposefully avoiding their financial obligations should prepare for judgment, says Robert Bonner, U.S. Attorney for Central California.

New authority allowing him to confiscate property, garnish wages and withhold tax refunds brought in $1.2 million in defaulted funds last year. An additional $5.6 million could be recovered if the 1,226 students presently under investigation by a special collection department ever pay up.

“We’re after those deadbeats who make Uncle Sam wait while they pay off Visa,” Bonner says. “Some are pretty good at hiding out, but we’ll track ‘em down--hopefully when they least expect it.”