Behind on your student loans? Some want the government to keep you from working
Falling behind on student loan payments after hitting a rough spot is one of the most stressful situations a person can face. Given the many debt-collection tools lenders can employ, well-meaning borrowers usually attempt to catch up as quickly as possible. But some states have actually passed laws that can make it harder to repay student loans after an initial default.
According to a recent report by The New York Times, 19 states have laws on the books allowing them to suspend professional and occupational licenses for borrowers who default on student loan debt. The types of licenses affected include those for nurses, teachers, lawyers, massage therapists, barbers, and real estate brokers.
While ensuring on-time loan payments is an important goal, these laws can hurt upstanding, well-intentioned citizens who never could have imagined themselves facing default. Consider Shannon Otto from Tennessee, whose story was highlighted by the Times. After successfully accomplishing her dream of becoming a nurse — which required her to take out thousands of dollars in student loans — she started suffering from epileptic seizures. She was no longer able to care for herself or work. She defaulted on her loans, and Tennessee’s Board of Nursing suspended her license.
Once Shannon was able to manage her seizures, she couldn’t get her license back. To do so, she would have had to pay more than $1,500 in fees — money she didn’t have. “I absolutely loved my job, and it seems unbelievable that I can’t do it anymore,” she told the Times.
Shannon’s story shows how stripping occupational licenses as punishment for student loan defaults can be both self-defeating and harmful. It creates a vicious cycle: Take away the ability of defaulters to work in the profession they know best, and they no longer can earn money – money that they need to pay their loans. Some states have claimed that threatening the loss of a license is an effective mechanism for getting people to quickly repay. But what they don’t reveal is that many people may be taking out more debt, such as credit card debt, in a desperate attempt to regain their license and source of income.
Even more self-defeating, denying people their livelihood can conflict with some of the traditional debt-collection tools lenders and governments already employ. For example, it’s hard to use tools like wage garnishments when a borrower is no longer earning any wages.
Most of the loans affected by these state laws are pre-2010 Federal Family Education Loans, which were issued by third-party lenders and guaranteed by the federal government. To be sure, rising student loan debt and default rates are legitimate concerns that policymakers and lawmakers are understandably interested in addressing. But, as noted, there are already a bevy of debt-collection tools available to go after defaulters, from garnishing wages and Social Security checks to employing liens. And right-leaning policymakers have suggested interesting options, like income-share agreements, as alternatives to the traditional student loan repayment model.
It’s a problem in itself that many occupations mandate extensive educational requirements in order to qualify for a license. Onerous occupational-licensing schemes have become a rampant issue in the United States – estimates suggest that one in four Americans need a government license to pursue their occupation. Many licenses require years of expensive education and high fees to obtain. These barriers hurt lower-income individuals the most by icing them out of the workforce, all the while insulating incumbent businesses from additional competition.
And because many of the professions affected by licensing appeal to low- and middle-income populations, those seeking to enter such fields often must take out student loans for the very purpose of receiving a license. Cosmetology school, as one example, can cost tens of thousands of dollars, saddling aspiring cosmetologists with significant debt as they enter the workplace.
Policy wonks and lawmakers on the Left and Right acknowledge that problems exist with both student loans and occupational licensing, and thus it makes little less sense to tether them together like these laws do. Many forms of occupational licensure should be done away with completely, and weaponizing licensing in this way merely doubles down on its punitive nature. And as mentioned, it also can potentially exacerbate student loan debt by stripping people of the income they need to catch up on their loans.
This issue has attracted bipartisan criticism. The left-leaning American Federation of Teachers has supported efforts to repeal these laws in various states, and the right-leaning Pacific Legal Foundation’s Caleb Trotter has denounced the policy: “This shocking policy kicks people while they are down and is an abuse of the government’s licensing authority.” Pacific Legal’s Anastasia Boden has also chimed in: “Keeping people out [of] work for failing to pay is not only counterproductive, it’s heartless.”
Fortunately, some legislators are acknowledging the problem and putting a stop to it. Several states have recently repealed or reformed laws allowing licenses to be revoked for people behind on student loans. For instance, in 2015, a bipartisan group came together to repeal Montana’s version of such a law. The repeal bill was co-sponsored by libertarian-leaning Rep. Daniel Zolnikov, R-Mont., and his Democratic colleague in the state Legislature.
“It’s like shooting yourself in the foot, to take away the only way for these people to get back on track,” Zolnikov told the Times. “The free market has a solution to this already. What is the state doing with this hammer?”
We also spoke with Zolnikov, and to him, the issue is straightforward. “This was a very easy reform that overwhelmingly passed a legislature with a Republican majority and was signed into law by a Democratic governor,” he said. “Montana easily reformed this antiquated rule, and I hope that the rest of the states can follow our lead.”
Although this issue is predominantly a state-level issue, the federal government played an assisting role early on by encouraging states to adopt these laws. A 1990 handbook issued by the Department of Education urged states to enact legislation that would “[d]eny professional licenses to defaulters until they take steps to repayment,” and numerous states followed this advice
The department should revisit the recommendations made in its 1990 handbook. After all, those recommendations were issued by a previous administration and the current administration may not even hold the same views. But most critically, states should step up and repeal these laws. States like Montana have shown the way, and it’s time others follow suit.
Finding ways to ensure borrowers pay back their students loans is a worthwhile goal. But stripping them of their livelihood is the wrong way to do it.
Image credit: zimmytws
