Stacy Jorgensen fought her way through pancreatic cancer. But her struggle was just beginning.
By NATALIE KITROEFF
The New York Times
Before she became ill, Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”
The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.
“The mere possibility of recurrence is not enough,” a lawyer representing the agency said.
“Survival rates for younger patients tend to be higher,” another wrote, citing a study presented in court.
There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery. Congress, faced with troubling default rates in the past, has made it especially hard for borrowers to get bankruptcy relief for student loans, so only hundreds try every year.
Although there has been attention to aggressive student debt collectors hired by the federal government, the organization pursuing Jorgensen does something else: It brings legal challenges to those few who are desperate enough to seek bankruptcy relief.
That organization is Educational Credit Management Corp., which, since its founding in Minnesota nearly two decades ago, has been the main private entity hired by the U.S. Department of Education fighting student debtors who file for bankruptcy on federal loans.
Founded in 1994, just after the largest agency backstopping federal student loans collapsed, Educational Credit is now facing concerns that its tactics have grown ruthless. A review of hundreds of pages of court documents as well as interviews with consumer advocates, experts and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has veered more than occasionally into dubious terrain.
A panel of bankruptcy appeal judges in 2012 reprimanded what it called Educational Credit’s “waste of judicial resources” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”
Rep. Steve Cohen, a Tennessee Democrat who has introduced a bill to limit predatory tactics, said: “The government should hold its agents to the highest standards, and I don’t know that we’ve been doing that.”
Supporters of the agency’s tactics say they are necessary to hold borrowers accountable.
“For every dollar that the aggressive debt collection firm fails to recoup, that’s a dollar that someone else is going to have to pay,” said G. Marcus Cole, a law professor at Stanford University.
Cole added that if it were easy to discharge student loans in bankruptcy, lenders would simply not lend money to students without clear assets or prospects.
“We need a standard like that to be able to allow students who can’t afford an education to be able to borrow,” he said.
Educational Credit is the product of a scandal that almost brought down the government’s student loan program two decades ago. In 1990, the Higher Education Assistance Foundation, the nation’s largest student loan guarantee agency for federal loans, announced that it had become insolvent, evidence that no one was paying very close attention to where student loans went and whether they ever came back.
“The high default rates had a particularly high impact with the press,” said Frank Holleman, deputy secretary of education at the time.
Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security and appropriate their tax rebates.
The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.
But critics of Educational Credit said it has stepped over a line between legitimate efforts to collect on defaulted loans and legal harassment.
“We thought we were doing God’s work,” said David Longanecker, a former Department of Education official, referring to efforts to strengthen collection. “We didn’t realize the full extent to which our actions would lead to some activities that would be unfair to borrowers.”