Student Loan Default Still Haunts Borrower President Obama recently announced a plan to provide relief to federal student loan borrowers by limiting their payments to 10% of their monthly discretionary income starting next year. After 20 years of payments, any remaining debt would be forgiven. The Obama plan will help an estimated 1.6 million Americans.

But there are millions more borrowers who are already in default on federal loans and who won't qualify for the plan. At the end of fiscal 2008, more than $39 billion in federal student loans were in default. Among borrowers who started repaying their loans in that year alone, about 14% percent have already defaulted -- more than 450,000 people, according to the Department of Education.

What does life look like down the road for those who default? Casey Zimmerman Thompson, 42, is a cautionary tale. She originally borrowed about $7,100 to attend school.

Over the years, her loans have gone in and out of default. Since 1987, Thompson, a self-employed airbrush artist who lives in rural Maryland, has paid more than $13,400 toward the debt, according to 2010 Department of Education documents examined by DailyFinance. Thompson says she paid another $1,600 last April when her tax refund was garnished, and another $3,000 in the 1990s that wasn't included in the Department documents, for a total of $18,000 -- or two and a half times the amount she borrowed.

Despite that, her outstanding balance is more than $9,800.

Why? Interest snowballs while the loans go unpaid and is added to the principal. Then penalties and fees -- including collection agency charges -- are rolled in. Under federal law, any "partial or installment payments" that Thompson makes are applied "first to outstanding penalties, second to administrative charges, third to interest and last to principal," according to Federal Claims Collections Standards.

Thompson's household income is less than $30,000 a year, and the mother of four teens qualifies for the Earned Income Tax Credit. But every April, the government garnishes her refund. "They tell me it's going to nothing but interest and not a single penny to the principal," Thompson says. "I'm at my wits' end because every year, no matter what's paid, my balance is still more than $9,000. I'm constantly getting calls from collection agencies. I don't know how I will ever have the ability to pay it off."

A Hopeful Start Meets Hard Luck


Her story begins in 1987, when Thompson's parents dropped their 18-year-old daughter off at the now-defunct American College of the Applied Arts in Atlanta. They told her they had saved a college fund of $20,000. But when Thompson went to register for classes, the school informed her nothing had been paid. She borrowed $500 and attended for just one trimester. Her parents divorced shortly thereafter, following years of money-related marital strife.

Thompson returned to Pennsylvania and got a scholarship to attend the Moore College of Art & Design in Philadelphia, but dropped out after a year. "I couldn't even afford the art supplies I needed on regular basis," she recalls. She took out a student loan for $6,640 to complete a certificate program at a Head Hunters Academy, a cosmetology school that has since failed. She got her state license and a job training stylists for a hair product manufacturer.

Thompson later developed a tremor that ended her hair styling career and quit working to raise her kids. In the late 1990s, her husband grew violent and was diagnosed with bipolar disorder. She ended up living in a shelter with an order of protection. They divorced. Three years ago in Florida, he committed suicide.

Thompson hasn't made a voluntary student loan payment since 2003, when her ex-husband stopped paying child support. Although Pennsylvania law hits deadbeat parents with jail time, fines and bank account seizures, Thompson's ex-husband was never charged with contempt. She was told her county's courts were backlogged with cases. Money she might have used to pay the student loans went to feed her kids. When her ex died, he was nearly $26,700 in arrears.

"The state let me down -- there was a written law that was supposed to protect me and no one enforced it," Thompson says. "If I had had that $26,000 my student loans would have been paid."

Thompson's congressman, Rep. Roscoe Bartlett, contacted the Department of Education on her behalf in 2010. In a response obtained by DailyFinance, the Department wrote: "The legislation for the loan program administered by the Department does not provide for a borrower to receive cancellation or reduction of his or her loan because of financial hardship."

A Life Without Credit, and Without Options


Short of a lottery win, for student loan borrowers like Thompson, there is literally no way out. The government can garnish the income tax refunds and eventually the Social Security checks of defaulters. Changes to bankruptcy law in 1984 and 2005 mean borrowers can't charge off their obligations the way they can escape mortgage, credit card and even gambling debt when they file -- unless they can prove "undue hardship." But just 29 of the 72,000 student loan debtors in bankruptcy in 2008 were able to do so, according to Mark Kantrowitz, founder of the student aid website Finaid.org.

Thompson's student debt has curtailed her economic life. She has never owned a home, and buys cars at "buy here pay here" lots that offer their own financing (and quick repossession if payments are missed). Kantrowitz contends that the growing student loan default problem will have a "cascading effect" on household finances, and ultimately the U.S. economy over the next decade.

Thompson takes whatever work she can find, airbrushing motorcycles and cars, and painting at carnivals and festivals. Her 14-year-old son comes along to help with airbrush tattoos while Thompson does face painting and T-shirts. Her twin daughters are sophomores and her oldest son is 19. He's been working in restaurants since high school, and wants to go to culinary school in New York -- and take out student loans to help pay for the program.

"With all the knowledge I've gained from my situation, I've told him he can't do it," says Thompson, who is encouraging him to get the skills he needs on the job or attend a local school where he can save up and pay cash for an associate's degree. "I have lived my entire adult life without any credit because of these loans. I don't want my children in the same position."

Increase your money and finance knowledge from home

How to Buy a Car

How to get the best deal and buy a car with confidence.

View Course »

How to Avoid Financial Scams

Avoid getting duped by financial scams.

View Course »

Add a Comment

*0 / 3000 Character Maximum

84 Comments

Filter by:
Will

First off, people are getting loans too easy for education for things that are worthless including Psychology (unless you have something connected to it as a Masters). Yes it's nice to do what you love, but think about if what you love will be available to work and if that job will have good enough pay to improve your life and pay the loan at the same time.

Also think about going to school abroad, where you will pay far FAR less and you will be on a four year vacation. I have read somewhere you can get a student loan to study overseas. Most cases you will have the same or better quality education. For example Philippines Universities typically cost $1000-$2000 a year while your rent for a decent place is $200-$400 a month.

To me the USA is just too expensive to even think about going to school, especially after interest. I don't want to live the same or worse lifestyle after going to school to make my life a little better. That's just IMHO.

August 21 2012 at 2:32 AM Report abuse rate up rate down Reply
Superman4justice

Ignore those cold-blooded people comments! What's important is you've learned your lessons. And the lessons will pass down to your children. They'll never get conned by student loans and schools again. They know that student loan is not dischargeable via bankruptcy unlike credit card or medical debts which the Dept. of Education and schools failed to disclose this fact upfront to unsuspecting students who are taking out student loans. Later on they drop out of school, or can't find jobs to survive, that's the time they find out it's a big mistake taking out student loan.

Millions and millions of people in your position and made mistake like you...including me. But my child will never make that mistake! A great quote i read few weeks ago, " I am strong because I know my weaknesses. I am alive because I'm a fighter. I am wise because I've been foolish. I laugh because I've know sadness. I succeed because I've failed." Continue with you upbeat attitude. Remember you're not alone!

August 08 2012 at 12:59 PM Report abuse rate up rate down Reply
Maria

i have a 1000 loan taken out in 1977. i paid it off over the years, and even had my wages garnished. i thought it was completely paid off 10 years ago. but again, i get a notice saying that there was a $110 balance and now they're telling me i owe another 4,520. why didn't they get in touch with me in the past 10 years? who the hell knows. i'm not hard to find. my payments to date on this 1000 loan? $5,125. WTF!

May 02 2012 at 10:47 AM Report abuse rate up rate down Reply
nch24

There is an unholy alliance between the Gov't and Higher Education.
Nobody but the very rich can afford college anymore, except if they borrow money.
The Federal Gov't has taken over all student loans, Charging higher rates than it cost to borrow,
Colleges keep raising tuition, The Gov't gets more interest, It's nothing more than back door taxes
But not to worry, Social security is saved, there will be so many garnishments that the fund will be saved
and Seniors will live in Poverty. What's next? Why don't we start turning away poor folks at the emergency room if they have Student Dept? The deadbeats deserve to die. But Romney rides his Automobile Elevator
If this continues America is Doomed

May 02 2012 at 10:29 AM Report abuse rate up rate down Reply
Payday Loans

That’s really nice to know.Good post as provide good information.I liked the post.
http://www.instantloansneed.co.uk/payday-loans/

December 05 2011 at 5:31 AM Report abuse rate up rate down Reply
cupoftea509

I agree that people are so quick to judge and criticize. Often they don't have all the facts, and even if they do- what happened to empathy?
There does seem something wrong with the fact that no monies are going towards paying down the principal. Work out a deal with the woman to help her get back on her feet-- mortgage companies and other creditors often do that.

November 30 2011 at 11:55 PM Report abuse rate up rate down Reply
bradmraimer

I cant beleive this. reading this article, saying that she is a deadbeat, a loser. you guys should be glad you are more fortunate. I am her youngest son.. We are making the best of what we can, and so far, it is not that bad. This is an article about her taking a 7200 dollar loan, and paying back 17,000 dollars. WHen you people make comments like this, you dont realize that she cant go back to school with her debt.by the way, that is my mother, and my father, you guys have all said ignorant stuff about. You guys all need to grow up,

November 16 2011 at 3:53 PM Report abuse rate up rate down Reply
airexpress2u

This was a very short article that had to encapsule 20 plus years of my life. Let me add some information for some of you that judge so quicklywith what little your informed of. I have been working over 50 hours a week with at times 2 jobs my entire life. I have supported my 4 children completely on my own income. I have supported my family without using credit cards, I have no debit other than these student loans, I don't think many american's with racked up credit cards have a clue how to do this. I budget and manage my household on my income, and no, the government has never supported me. I have a medical disability that was not mentioned in this article. While I could apply for disability, I NEVER HAVE. I have the ability to work and will always work. I had to leave a prior carreer where travel was involved to care for my kids when they were young, and I left my husband for our safety, but what I did was find a way to support my household and work around my kids with a gift I had. I have paid $17,000,00 towards $7000.00 in loans. I'm not sure why so many of you have made comments about not paying. My twin daughters were born at 24 weeks, they are miracles that they survived after 3 1/2 months in NICU, and needed special care for years into elementary school. I took care of my kids, worked, and met their needs without government help, loans, or credit cards. Its a shame there are so many cynical and jump- down -your -throat people in this world who are so opinionated when they read a short synopsis of someone's life. I just learned my loan is being investigated, to learn why nothing I paid went to principle, and to see if it went into the pockets of agency's hired by the department of ed incorrectly. I am the last person on this earth that is a boohoo me person. I have taken responsibilty for my life and finances and worked my butt off to do so, and continues to do so. Hopefully no one else in younger generations with student loan debt far greater than mine will spend years making payments and not see their balance change! Have a great day everyone, I need to get back to my work! :) Casey

November 16 2011 at 2:50 PM Report abuse rate up rate down Reply
rogerdoger

Wall Street gets a cheap loan, why can't students?

November 14 2011 at 6:37 AM Report abuse rate up rate down Reply
gmydogbud

There are nolonger jobs to be had in this country - Thanks To Mr HOPE & Change & His Government! He knew all about jobs and showed the American People, that he even knew how to spell the word - remember - J - O - B - S -!! One peoblem after having the White House and Both Houses Of Congress For TWO YEARS, - JOBS = ZERO! Oh Well - The New NORMAL!

November 10 2011 at 6:53 PM Report abuse +1 rate up rate down Reply