Top Universities Suing Students Over Uncollected Loans

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University 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.

Bloomberg reports 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.”

Perkins Pot

The increase in the amount of defaulted loans among poor students comes as President Barack 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 hasn’t been able 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.”

Multiple Debts

George Washington’s financial-aid office e-mailed Graff at least twice since last February, warning him of the delinquency and offering to work out a repayment plan. It filed a lawsuit in May 2012 in District of Columbia Superior Court. Graff lost a default judgment in December for $5,050 including interest and attorney fees because he didn’t attend the hearing, according to court records.

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. Schools including George Washington say they first try to work with delinquent students to repay the loans, then warn them they may be sued, and only then turn to debt collectors and the courts.

Unpaid Perkins

She defaulted in September 2010, leaving a combined principal balance of $6,455 plus $2,880 in collection fees, according to the filing. In an e-mail, Triggs declined to comment.

Federal law requires that Yale attempt to collect unpaid Perkins money, Tom Conroy, a university spokesman, said in an e-mail. Accounts must be at least 120 days past due before being referred to a collection agency, he said.

“Litigation is a last resort collection effort for all of our student-loan borrowers,” he said.

Yale, in New Haven, Connecticut, stopped offering Perkins loans to undergraduates in the 2008-2009 academic year when it increased other types of financial aid and eliminated loans, Conroy said. Yale, the second-wealthiest U.S. college, following Harvard University, has an endowment valued at $19.3 billion as of June 2012. Penn, with an endowment of $6.8 billion, is the 11th-richest.

Students who take out Perkins loans aren’t eligible for government income-based repayment plans when they run into financial trouble, unlike borrowers from the more popular Stafford loan program used by many middle-income families. Such repayment plans let students with high debt relative to their paychecks make smaller payments over time. Colleges can work with Perkins students to develop individual plans.


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