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An undeserved debt [Commentary]

How competent is your 18-year old? Do you trust him or her with your credit card? How about the brand new family car? Better yet, do you think he is competent enough to take out several thousands of dollars of debt with a few pen strokes?

Education has long enjoyed a prominent status as the keystone in the archway to American success. What supports this idea is the concept that the barriers to higher education are surmountable, and that people who cannot afford to pay for school out of pocket can borrow money as an investment toward their future. The process of borrowing and repaying sounds effective in theory, and when it fails, we tend to mistakenly assume that the borrower did not hold up his or her end of the bargain — that he or she did not try hard enough to "make it" in school or that some people are just not good learners.

What if your 18-year-old sunk those thousands into an education that was completely worthless or never really existed? Student loan borrowers in Baltimore and beyond may face this reality if they attended a for-profit trade school in the late 1980s and 1990s. The climate was ripe then for institutions that targeted the low-income poor. A common model went as follows: Sign up the student, take out the maximum amount in federal Pell grants and Stafford loans, provide little meaningful educational experience, and fold or get shut down by a federal enforcement agency, pocketing the profits while already-impoverished students are stuck degreeless and holding the bag of unpaid student loans.

There are many examples of these schools nationwide and in Baltimore. One school, PSI Institute, had a physical location near Lexington Market and recruited students from the local foot traffic. Another, USA Training Academy, involved a door-to-door salesperson who targeted poor Baltimore neighborhoods to enroll students in a bogus home study program. Both programs came under federal scrutiny for fraudulent practices, both schools closed in the early 1990s, and both left students with loans that they could not repay for an education that they never received. Many low-income Baltimore residents are still struggling to repay these debts.

Sound unfair? Rigid federal laws ensure that student loan debts never expire. These loans cannot be discharged in bankruptcy (unless the former student can prove an almost impossible to meet undue hardship standard) and remain collectible forever. These laws are so tight that even if a debt existed before these tough laws were enacted, federal courts generally allow them to be collected anyway. To make matters worse, a collection agency does not even need to inform people that the debt is still out there, and can stop and start collection activity at any time, waiting years to take collection action while interest and late fees accumulate.

But lo! There is a way out. A student may be eligible for a discharge if he fits into a narrow administrative box. These include: undue financial hardship, false certification of one of the loan documents, and not having an ability to benefit. In each case, the burden to prove that the school committed fraud or that a student never should have been enrolled is always on the student.

In the event that a student cannot pay, but makes too much to fall under the hardship category, the debt collector can proceed with administrative wage garnishments and tax offsets, and can even take the Earned Income Tax Credit and garnish Social Security. This is hitting consumers where it hurts the most, as most low-income families are struggling to make ends meet and cannot withstand any hits to their income.

The student loan system is drastically different from any other form of debt collection. Mortgage loans, credit cards and auto loans all require that due process is followed before individuals are deprived of their hard-earned wages and tax refunds. Students who did not receive a quality education in exchange for burdensome and inextinguishable federal loans should have the right to challenge these debts before a judge. Borrowers should be allowed to avail themselves of the state court process. In addition, we need federal policy proposals that would impose a statute of limitations on federal student debt and also allow for realistic discharge options in bankruptcy. This should be the case when the underlying institutions ripped off the students, and especially when the debts went uncollected for years because the students were too poor to matter to the collectors. It matters now, and as student debt rises as the number one form of consumer debt, finding avenues for student debt relief is about to matter a whole lot more.

Kat Hyland is associate general counsel at Civil Justice, Inc. and a board member of the Maryland Consumer Rights Coalition. Her email is khyland@civiljusticenetwork.org.

To respond to this commentary, send an email to talkback@baltimoresun.com. Please include your name and contact information.

Copyright © 2015, The Baltimore Sun
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