PHILADELPHIA – Lakisha Johnson figured all she needed was her 2016 tax refund to get her and her daughter out of a homeless shelter and back into a place of their own.

The U.S. Department of Education had other plans.

Johnson, a home health aide, and 12-year-old Aijiah were forced to move out of their West Philadelphia apartment just before Thanksgiving last year, after the landlord jacked up the rent from $675 to $875. Soon, they were living on a bunk bed in the shelter a few blocks from Aijiah’s school. The girl was petrified that a classmate would see her using the secured entrance of the crowded, noisy shelter.

With the $13 an hour she earns caring for her elderly charges, Johnson planned to stay at the shelter — or with anyone who would let the two sleep on a floor, a couch or a spare mattress — until April. In past years, that’s when she received her federal Earned Income Credit tax refund.

The check never came.

On the phone, an Internal Revenue Service agent told her the Department of Education (DOE) was “holding back” the $8,220 refund to recoup some of her student loan debt. It would probably do the same next year, the agent told her, to recover the rest of the nearly $17,000 she owed.

Johnson was confused. The two student loans she took out in 2006 in hopes of becoming a medical assistant amounted to only $6,625. Whenever she fell behind on her payments, she would be enrolled in one of the forbearance plans promoted in a continuous stream of emails she received from Navient Corp, the largest loan servicer working under contract for the DOE. An Oct. 4, 2011, email, for example, stated: “You may be able to qualify for a deferment or forbearance, which can postpone your loan payments and keep your loan from going into default.”

She was learning only now that those plans, while allowing her to stall payments, didn’t stop her debt from ballooning as interest and fees piled up. And she was now in default, prompting the DOE to move to collect.

That was only the half of it. Until contacted by Reuters, Johnson didn’t realize that she could have avoided the entire ordeal by enrolling in one of the government’s income-based repayment plans — an option she said Navient never discussed with her. Most of these plans allow for monthly payments as low as zero and forgive any remaining debt after 20 years.

“I didn’t think it was going to double up or stack up, or cause me to lose the money I had worked for this whole time,” she says. “This is a big hit. They’ve put me in a deep situation.”

It’s a situation Johnson shares with many of the 8 million borrowers in the United States who are in default on a combined $137.4 billion in government-held or government-backed student loans.

Today, 11 percent of the $1.325 trillion of federal student loans outstanding is severely delinquent or in default, higher than the mortgage default rate at the peak of the foreclosure crisis in 2010, according to data from the Federal Reserve Bank of New York.

Some of these debtors are deadbeats, of course, unwilling to make payments they can afford. But many are borrowers of limited means who ended up in default unnecessarily, after Navient and the DOE’s other servicers steered them away from affordable repayment plans and into options that reduce the servicers’ costs, according to state and federal investigators and regulators, consumer advocates and a growing number of lawsuits and complaints filed against loan servicers.

The defaulted borrowers then become targets of the DOE’s debt collectors. These firms, some of them owned by the loan servicers, wield the federal government’s broad powers to garnish the wages of borrowers, as well as parents and grandparents who co-signed the loans. When wages are insufficient to garnish, the DOE can have the Treasury Department withhold tax refunds and reduce Social Security payments.

Since the summer of 2015, student loan servicers and private debt collectors have garnished about $3 billion in wages, a Reuters review of federal data shows. And last year, the DOE’s collections through “Treasury offsets” — tax refund seizures and Social Security benefit reductions — totaled $2.6 billion, up from $2.2 billion in 2015. Since 2009, the government has used the tools at its disposal to claw back at least $15.2 billion.





CATASTROPHIC EFFECTS

Default, which usually occurs when a borrower hasn’t made a payment for 270 days or more, can make it only harder for a debtor to regain financial stability. It can trash credit scores, scaring off potential employers. It can disqualify debtors for auto loans, apartment rentals, utilities and even cellphone contracts. In about 20 states, student loan borrowers who default can lose their driver’s and professional licenses.

“We treat struggling student loan borrowers the same as deadbeat parents and tax cheats,” said Seth Frotman, the student loan ombudsman of the federal Consumer Financial Protection Bureau (CFPB). “Even gambling addicts have more protections.”

Since 2011, tens of thousands of borrowers and co-signers have filed complaints against Navient with the CFPB and other government and regulatory agencies.

In January, the CFPB filed a lawsuit against Navient in Pennsylvania federal court, alleging that the company systematically cheated customers by not fully informing them of their repayment options and instead guided them into forbearance or deferment programs that benefited the company. Setting up an income-based repayment plan requires paperwork and person-to-person interactions that are more costly for the servicer than forbearance, which typically requires only a phone call.

The same month, state attorneys general in Washington and Illinois filed similar lawsuits against the company.

The CFPB said it found that by putting 1.5 million borrowers in consecutive forbearances, Navient added $4 billion to outstanding student loan debt.

Part of the problem is that the “the DOE is doing business with (the loan servicers) as partners, not as overseers,” said Rohit Chopra, a former official with the DOE and the CFPB who is now a senior fellow with the Consumer Federation of America, an association of consumer watchdog groups.

Education Department Press Secretary Liz Hill agreed that the current student loan system is “a mess” and that “income driven repayment plans are confusing.” She added that the department is working to enhance its “oversight capacity.”

Responding to the CFPB lawsuit, Navient, in a court submission that made headlines, said: “There is no expectation that the servicer will act in the interest of the consumer.” The company’s job, it said, was to collect payments.

Navient Chief Executive Officer Jack Remondi, in an interview with Reuters, disputed the allegations. He said borrowers serviced by Navient are 31 percent less likely to default than borrowers serviced by others. Of those who default, he said, 90 percent never respond to “any attempts” to reach them to discuss repayment options. Publicly listed Navient was spun off in 2014 from the loan-servicing arm of Sallie Mae, a major provider of federal student loans until the Obama administration made the DOE the sole originator of such loans.

Remondi blamed rising student loan defaults on “the front end of the process,” such as the government policy of lending to borrowers regardless of their credit standing and without consideration of “whether the investment they are making is reasonable.”

Navient, which services more than $300 billion in federal and private student loans, attracts the most attention among loan servicers. But according to CFPB reports and documents, the widespread problems borrowers encounter involve all of the largest student loan servicers.

“There is no expectation that the servicer will act in the interest of the consumer.”

In May, a CFPB data analysis found that from 2012 through 2015, ninety percent of the highest-risk student loan borrowers were not enrolled in any of the government’s affordable repayment plans by the borrowers’ loan servicers.

“There is an uncanny resemblance between the foreclosure crisis and our student default dilemma,” said Chopra, the Consumer Federation senior fellow.

He and others said that in both instances, loan servicers did not act in the best interest of borrowers, directing them into more expensive payment options, providing them with misleading information and mishandling paperwork — all with the aim of driving up borrowers’ costs and the servicers’ own income.

Consumer advocates complain that the administration of President Donald Trump is making things harder for student borrowers. For example, it has eliminated a 2015 Obama administration guideline that prevented debt collectors from charging high interest rates — some as high as 16 percent — on borrowers in default who quickly resume payments.

DOE Press Secretary Hall countered that Education Secretary Betsy DeVos is taking actions “which will lead to significant reductions in the usage of forbearances, while also allowing borrowers to more effectively manage their debt.” Among those actions: reducing to one from five the number of income-based repayment plans and changing the fee schedule to give servicers an incentive to place borrowers in income-driven plans.

In May, DeVos announced that the department will replace the nine student loan servicers it now uses with a single contractor. Under the new contract, the servicer will no longer be required to provide borrowers with a breakdown of repayment options, but it will have to apply payments in a way that “automatically maximizes the benefit of each overpayment and underpayment for the borrower.”

Among the three finalists to obtain the single-servicer contract: Navient. The company’s shares have rallied 14 percent since DeVos’s announcement.

GOOGLING “SUICIDAL”

One day in 2015, Brandon Palmer sat down in his room at his grandmother’s house in Hoover, Alabama, and typed in a Google search: “how many people are suicidal over their student loans?”

About a third of distressed borrowers, he figured as he pored over hundreds of their narratives on the website Student Debt Crisis, a nonprofit advocacy group.

reuters investigates More Reuters investigations and long-form narratives

Palmer borrowed $49,533.71 to get an associate’s degree in computer design at Virginia College in Mobile, Alabama. Seven years and hundreds of resumes and inquiries later, he hasn’t been able to get a job in the field. He earns $11 an hour working at electronics store Best Buy, and gets a little extra as a reservist in the Alabama National Guard, to try to meet his monthly student loan payments of more than $600.

It isn’t always enough. The 27-year-old concedes that his loans have bounced in and out of delinquency and default. He has called Great Lakes Higher Education Corp, a Madison, Wisconsin, nonprofit student loan servicer, to help him work out an affordable repayment plan. He said the servicer has never told him he is eligible for any kind of income-based relief and only ever asks him how much he can pay.

“If another nation were to say, ‘Hey, come here, and become a citizen, and we will waive your student loans,’ do you know how fast I would get on that plane?” Palmer said.

Great Lakes did not respond to requests for comment. In February, a borrower filed suit against Great Lakes in federal court in East St. Louis, Illinois, alleging that the servicer steered borrowers away from affordable repayment plans and into costlier options. The plaintiff’s lawyers are seeking class-action status. Great Lakes filed a motion to dismiss.

Palmer’s predicament reflects how the changing economics of higher education have placed many borrowers in a tightening financial vise.

In the 1980s, the U.S. government started to privatize the administration and collection of federally backed student debt. Back then, the sums borrowed were small. Defaults were rare, and they were treated harshly under federal collection guidelines.

The guidelines remain largely untouched, though much else has changed. In 1990, less than half of high-school graduates went on to college. They paid an average annual tuition of $9,340 at a private, four-year college. Today, more than 70 percent of high-school grads go to college, paying an average annual private-school tuition of $35,000.

Graduates of the Class of 2016 owe an average of $37,000 each in student loans. Total student loans outstanding — the $1.325 trillion in federally backed loans, and $115 billion more in private loans — is second only to home mortgages among categories of consumer debt and the major reason Americans’ household debt is now at a record high, surpassing levels during the worst of the Great Recession.

The thinking among policy officials was that graduates would be able to land premium jobs that would enable them to pay off their loans. But as tuition inflation soared, earnings for college graduates stagnated. Many graduates, like Palmer with his computer design degree, simply can’t find work in their chosen field. “They won’t hire you for entry level unless you have experience,” Palmer said.

QUICK TO POUNCE

When borrowers lose the struggle to keep up on their payments, the DOE’s loan servicers don’t hesitate to go after them.

Theresa Colasuonno, a 64-year-old registered nurse in Brooklyn, New York, borrowed $240,000 in the 1990s to send her two children, one of them a Fulbright scholar, to college. For two decades, she made payments, shaving the balance down to $47,000.

Then, in 2015, Colasuonno’s disabled husband suffered a series of heart attacks and was in and out of intensive care. Colasuonno took unpaid leave to care for him. Medical bills, and unopened mail, piled up. “My head wasn’t all on top of everything,” she said.

“I don’t expect anything for nothing, but they are making it impossible.”

That October, back at work, she opened a letter from her loan servicer, the Pennsylvania Higher Education Assistance Agency (PHEAA), stating that it would begin garnishing her wages unless it heard from her by Nov. 21, 2015. She filled out all the paperwork and sent it back to the company. A PHEAA employee acknowledged receipt of the parcel with a company stamp on Nov. 2, 2015, postal records reviewed by Reuters show.

The servicer told Colasuonno it never received anything and refused to acknowledge the mailing. In February 2016, PHEAA began taking $1,100 a month from her paycheck. With late fees and penalties, her debt outstanding has grown to more than $60,000.

PHEAA told her that the only way to escape the garnishment was to pay an additional $1,800 a month for five months — an amount that would swallow more than half her paycheck.

“I don’t expect anything for nothing,” Colasuonno said. “But they are making it impossible.”

Colasuonno’s plan to retire next year and spend more time with her dying husband is on hold: PHEAA has told her it would take 15 percent of her Social Security benefits, too.

PHEAA spokesman Keith New said the agency would not comment on Colasuonno’s situation because she had sought legal counsel. He also said the Education Department had asked the agency to refer press inquiries about servicing federal student loans to the department. But in an email to Reuters, the DOE said it “does not speak on behalf of PHEAA. Therefore, the questions addressed for them should be responded to by them.”

In June, the Massachusetts attorney general told PHEAA that it was under investigation for “consumer protection” issues related to federally backed student loans.

Colasuonno and others in her situation don’t have recourse to personal bankruptcy to get out of their fix. Because of the many ways the government provides for repayment, student loans — unlike credit card bills, home mortgages, or even gambling debts — can’t be discharged in personal bankruptcy. The only way to get rid of the debt is to pay it off, or die.

At the same time, the DOE’s debt collectors aren’t subject to some of the federal rules designed to protect consumers from aggressive collection tactics, such as robo-calling borrowers’ employers. They don’t even need a court order or a judge’s signature to reach into bank accounts to claw back funds.

The number of Americans who have had their wages or Social Security benefits garnished or their tax refunds seized jumped 71 percent in the five years ended September 2015, according to the Government Accountability Office. In fiscal 2015 alone, the federal government garnished the Social Security checks of 173,000 borrowers, up from 36,000 in 2002.

“The DOE should be working with students to make sure they are getting the benefit of the programs Congress created, and they simply aren’t,” said Noah Zinner, an Oakland, California, consumer attorney. Among his clients is a wheelchair-bound 70-year-old who is fighting a cut in his disability check to collect his student loan debt.



CHEESECAKE SMOOTHIES

Johnson, the homeless home health aide, worked as a janitor, a hair salon assistant, a used-car salesperson, an office assistant and a sales associate at a Wet Seal clothing store before signing up for classes at Katharine Gibbs School in 2006. Her goal was to get an associate’s degree that would lead to steady work as a medical assistant.

Once in, Johnson heard frequent complaints from other students that the for-profit school didn’t help them find jobs and that it was in financial difficulty. She decided to quit. The next year, the school closed its doors.

By 2011, Navient, then called Sallie Mae, was regularly sending her emails offering her deferment or forbearance. The emails came with an application for “request for forbearance” attached, including an automatic electronic debit authorization form. She continued to receive similar emails in 2012 and 2013.

The company said it called and sent letters to Johnson to inform her of affordable income-based repayment plans. Navient supplied Reuters with copies of four letters, one of which, for example, says in bold print at the beginning: “Protect your credit rating and avoid default” by “making a payment.” Toward the bottom, in fine print, the letter says: “You may be eligible for reduced payments through a different payment plan, such as graduated repaying, income-based repayment or extended repayment.”

Johnson said she didn’t know about the letters until Reuters showed the copies to her. She said they were sent to an obsolete address where she hadn’t lived for years.

In late 2013, Johnson signed paperwork with a new servicer, PHEAA, whose representative on the phone told her that what she was signing would result in forgiveness of her loan if she made just one more $5 payment. Johnson did not read the fine print; she had actually signed an agreement to consolidate her loans, with an income-contingent repayment plan.

After that, she said, she never heard from the servicer again, and assumed that all was well — until that day in April, months after she had already moved out of her apartment and into a shelter to escape rising rent, when the Internal Revenue Service agent told her that her tax refund had been withheld.

A lawyer at a legal-services nonprofit wrote a letter for her to the DOE, asking that the tax refund be released under the department’s policy on hardship claims. In its rejection letter, the DOE said that “extreme financial hardship occurs when a borrower is facing eviction or foreclosure.”

Johnson is still trying to scrounge up the first and last months’ rent, plus security deposit, she needs to lease a new place, though landlords are likely to balk after seeing the default on her credit report. To save money, she didn’t send Aijiah to camp or classes this summer. She has also nixed Aijiah’s favorite treat: the $4.19 cheesecake smoothies from the Wawa convenience store.

On a few nights, Johnson has dug into her savings to spend $69 for a motel room. There, she and her daughter take hot showers, blast the air conditioning and pretend that they are “normal.”

Degrees of Debt By Michelle Conlin Photo editor: Steve McKinley Graphics: Christine Chan Video: Alva French

Design: Jeff Magness Edited by John Blanton