Decades Later, 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.

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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."