Teacher's Wages Garnished as U.S. Goes After Loan Default

http://www.bloomberg.com/news/2012-07-02/teacher-s-wages-garnished-as-u-s-goes-after-loan-default.html

Lawyers drained Linda Brice’s bank account and seized a quarter of her take-home pay, or more than $900 a month. Brice, a first-grade teacher and Coast Guard veteran, begged for mercy, saying she couldn’t afford food, gas or utilities.

Brice’s transgression: she defaulted on $3,100 she had borrowed more than 30 years ago to pay for college. The chief federal judge in Los Angeles took her side, ruling that Brice should pay only $25 a month. The law firm of Goldsmith & Hull -- representing the federal government -- then withdrew $2,496 from her bank account.

Brice’s case shows how tough the government can be when it comes to collecting its share of student-loan debt, which totals $1 trillion, surpassing the amount owed on credit cards. Students who borrow as teenagers and whose degrees don’t pay off confront some of the harshest treatment and fewest chances for a fresh start of any debtors, except those owing child support.

When the U.S. Education Department fails to get repaid, the agency can turn borrowers’ names over to federal prosecutors. In turn, U.S. attorneys are hiring private law firms to retrieve money for taxpayers -- after the firms keep a cut for themselves.

Lawyers representing federal prosecutors have told borrowers to turn over their cars and cancel their health insurance, debtors said in interviews and court filings. Attorneys have insisted on steep wage garnishments while turning down offers that would have satisfied their obligations over several years.

More than five million borrowers are in default, generally meaning they have stopped making payment for 270 days or more. As of September, they owed $67 billion.

In the year ended Sept. 30, the federal government filed 4,841 lawsuits to recover money from student-loan borrowers, almost three times the number a year before, according to the Justice Department. Private lawyers filed about 90 percent of the suits. The Justice Department returned $9.4 million to taxpayers, after paying private lawyers and other expenses.

Since 2008, the federal litigation returned $37 million to the Education Department. The private lawyers received $8 million in contingency fees, about 30 percent of the amount that their suits collected, according to data released by the agency.