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Schools sue graduates amid record defaults on federal loans

FILE - In this April 4, 2012, file photo, Scott Richards of Saint Anselm College looks over possible jobs during a career fair for college students in Manchester, N.H. With college enrollment growing, student debt has stretched to a record number of U.S. households — nearly 1 in 5 — with the biggest burdens falling on the young and poor, according to a study based on the Survey of Consumer Finances released Wednesday, Sept. 26, 2012. Because of the sluggish economy, fewer college students than before are able to settle into full-time careers immediately upon graduation, contributing to a jump in debt among lower-income households as the young adults take on part-time jobs or attend graduate school. (AP Photo/Jim Cole, File)

FILE - In this April 4, 2012, file photo, Scott Richards of Saint Anselm College looks over possible jobs during a career fair for college students in Manchester, N.H. With college enrollment growing, student debt has stretched to a record number of U.S. households — nearly 1 in 5 — with the biggest burdens falling on the young and poor, according to a study based on the Survey of Consumer Finances released Wednesday, Sept. 26, 2012. Because of the sluggish economy, fewer college students than before are able to settle into full-time careers immediately upon graduation, contributing to a jump in debt among lower-income households as the young adults take on part-time jobs or attend graduate school. (AP Photo/Jim Cole, File)

Needy United States borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale and the University of Pennsylvania with little choice except to sue their graduates.

The record defaults on federal Perkins loans may jeopardize the prospects of current students since they are part of a revolving fund that colleges give to students who show extraordinary financial hardship.

Yale, Penn and George Washington University have all sued former students over nonpayment, court records show. While no one tracks the number of lawsuits, students defaulted on $964 million in Perkins loans in the year ended June 2011, 20 percent more than five years earlier, government data show. Unlike most student loans – distributed and collected by the federal government – Perkins loans are administered by colleges, which use repayment money to lend to other poor students.

“If you borrow to go to school, it may not be just the government that ends up coming after you if you can’t pay,” said Deanne Loonin, an attorney with the National Consumer Law Center, a nonprofit advocacy group in Boston. “We offer credit very easily.” If the student doesn’t benefit financially from the education, “the government or the school comes after them very aggressively.”

The increase in the amount of defaulted loans among poor students comes as President Obama says he wants to expand access to college for working-class families and increase funding for the Perkins program. Under his proposal, the pot for Perkins loans would increase to $8.5 billion from about $1 billion. The Education Department would service the loans instead of colleges.

Aaron Graff, a farmer’s son from Denver, graduated from George Washington in 2010 with the help of $62,500 in scholarships over two years, according to his financial-aid award letters. He defaulted on $4,000 in Perkins loans.

Graff, 30, said he’s been unable to find a full-time job. He earns $800 a month from teaching high school equivalency courses and restores basements for extra money. He said he is trying to pay off other student loans first because they were co-signed by his parents.

“I live on the bare minimum,” he said. “It’s not like I’m defaulting on my student loans to live the lavish life. I’m defaulting on my loans because I really don’t have it.”

Repaying Perkins loans may be a lower priority for borrowers with multiple debts, said Nancy Coolidge, associate director of student financial support for the University of California system. They may be more likely to pay back private student loans first because they can carry much higher interest rates, she said.

Perkins loans are given to the most at-risk students, and “they may have the least ability to pay it back,” Coolidge said.

When students don’t repay, colleges say they are obliged to recover the money on behalf of taxpayers.

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