By Rebecca Maurer and Mark Huelsman | February 1, 2021
There is a little-discussed type of student debt hanging over the heads of millions of Americans. These debts often come in small amounts. A few hundred here. A few thousand there. These are debts that students and former students owe directly to their schools, for everything from unpaid library fines to unpaid tuition. Unlike federal student loans, these debts do not come with special consumer protections or guaranteed repayment options, and they are not subject to the same current payment freeze. Yet these debts can completely upend a student’s educational aspirations and hang over borrowers’ heads for years, dinging their credit and otherwise causing unnecessary financial pain.
Recent research estimates that there may be as much as $15 billion in these so-called “institutional debts,” even though they are rarely discussed as part of the student debt crisis. In an Issue Brief released today, we argue that Washington must implement ways to provide relief to students burdened by these debts as part of COVID relief in higher education.
If colleges need relief, surely students and borrowers who struggle under the weight of debt to those colleges do too.
As COVID continues to rage, the current and former students who owe these debts find themselves newly vulnerable, especially when compared to the schools collecting these debts. The federal government has provided over $35 billion directly to institutions and students, $20 billion of which could be used for purposes other than emergency grants to students. Congress and the Biden administration are currently contemplating additional relief for schools. As federal dollars go to these schools, we must ensure that students who owe institutional debts do not stay in the shadows. We must prioritize students in the same way we prioritize the institutions to which they owe these often-ignored debts.
Withholding Dreams
Even before COVID, institutional debts caused a brutal Catch-22 for millions of Americans. Schools often place financial holds on the accounts of students who owe institutional debts, preventing them from receiving their official school transcripts. Without the transcript, students are not able to finish their degree or prove that they are qualified for higher-paying jobs. Thus, the bind: students cannot receive their credential without paying off their debt, and they cannot pay off their debt without receiving their credential and getting a better paying job.
Now, in the midst of COVID, the problem is further exacerbated. Already tight family budgets are strained. And millions of students have changed their educational plans, either by attempting to take classes elsewhere or enrolling in a different type of degree or credential than they’d originally planned.
Over the past year, policymakers have attempted to address the broader student debt crisis, including freezing interest and loan payments for many student loan borrowers, and providing emergency aid to students and schools. These have been necessary, if insufficient, to keep the bottom from falling out of American higher education altogether.
But the federal government has done nothing to address the problem of institutional debts, leaving students as vulnerable as ever to the collection practices of schools.
In a new SBPC issue brief released today, we propose ways for federal policymakers to tackle the problem of institutional debts as part of the comprehensive efforts to support students, borrowers, and institutions of higher education through the pandemic. We discuss the pernicious ways in which institutional debts arise, and we survey the budding research discussing how wide-spread these debts are. In particular, we discuss transcript withholding, and how the use of this practice as a debt collection tool is ineffective and deeply harmful to both individuals and our economy as a whole.
A Path Forward
We argue that Congress and the Biden administration should make sure schools that receive additional relief are not burdening students with institutional debts at the same time. The report outlines a series of options for policymakers to choose from:
- Because COVID is exacerbating the existing issues with institutional debts, the simplest and most compelling option is wiping institutional debts off school balance sheets as a condition of receiving COVID stimulus dollars. Clearing the debt will help millions of Americans and will have little impact on school budgets;
- In addition to wiping away institutional debts, the federal government should follow recent actions by states like California and permanently ban transcript withholding so that students have a chance to re-enroll and finish their degree; or
- At a minimum policymakers must temporarily ban transcript withholding and halt all collections actions for the duration of the pandemic. Courts and jurisdictions all over the country have halted collecting on debts. Transcript withholding is, ultimately, a form of debt collection, and should not be allowed for the duration of the COVID-19 crisis.
Solving the problem of institutional debts is the right thing to do for schools, it is the right thing to do for the economy, and, most importantly, it is the right thing to do for millions of Americans. If colleges need relief, surely students and borrowers who struggle under the weight of debt to those colleges do too.
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Rebecca Maurer is Counsel and Program Manager of the Student Loan Law Initiative at the SBPC. She previously worked as a legal aid attorney in Cleveland, Ohio, focusing on housing and consumer law, and Clerked for the Honorable Judge James Gwin of the Northern District of Ohio.
Mark Huelsman is a Student Loan Justice Fellow at SBPC. Previously, Mark served as the Associate Director of Policy & Research at Demos, where he led the organization’s policy work on college affordability, student debt, and racial equity in higher education, and contributed to the organization’s work on the racial wealth gap and structural democracy reform. He previously worked as a research analyst at the Institute for Higher Education Policy, a policy analyst at New America, and a legislative assistant at the Brookings Institution.