Revocation of Licenses for Student Loan Default Stirs Controversy

Imagine that as a result of falling behind on your student loan payments, the state where you live revokes your driver’s license and you find yourself walking or taking the bus to get to work. If that sounds harsh, consider that some states also have the legal authority to cancel professional licenses for borrowers who fail to repay related loans. That could make it illegal to work in fields ranging from healthcare and finance to construction and real estate.

What is the basis of this startling student loan controversy?

Lawmakers in both Montana and Iowa are currently working to repeal legislation that gives those states the right to revoke driver’s or professional licenses of people who fall too far behind on their student loan payments. The Montana law, for example, applies to borrowers who have missed their payment by at least 270 days – or approximately nine months.

When state Congressional leaders in Iowa attempted in February to reverse the law in that state that allows revocation of licenses, the initiative failed. So, at least for the time being, consumers there are still potentially at risk if they are delinquent on student loans.

How widespread is this kind of official policy?

But as Bloomberg News reported, the unusual policy is not limited to just Montana and Iowa. There are at least 20 other states that have similar statutes on the books, and some of those laws have been in place for 20 years or more.

The only reason that the issue has not received more media attention or outcry from students is that most states are not aggressively enforcing these rules. They could, though, and some lawmakers feel that they should, to force student loan debtors to get serious about repaying their obligations.

Are drivers really being grounded?

Within the past eight years, Montana has suspended more than 90 driver’s licenses because of student loan defaults, according the state’s Office of the Attorney General. In Iowa, the Attorney General’s office reports that more than 900 licenses had been suspended as of 2012, because of student loan delinquency.

Those suspensions have since been reversed and the licenses reactivated, however, and no new revocations have been issued. But it wasn’t because of Iowa lawmakers. The only reason for the change was that the state’s student aid commission transferred its portfolio of student loans to an agency based in Wisconsin.

What are the arguments for and against these laws?

Those who are in favor of license suspension often say that it is mainly used as a deterrent. They say that usually, before borrowers actually lose their license privileges, they are motivated to enter into some kind of repayment agreement. Once the payments start rolling in again that saves states a great deal of revenue that would otherwise be lost, and sometimes all it takes for borrowers to pay up is for them to receive notice that their license is about to be suspended.

But others say that these policies simply create more hardships for consumers, making it even more difficult for them to repay their loans. In the state of Tennessee, for example, the state’s student loan guaranty agency has suspended more than 1,500 professional licenses because of people defaulting on student loans. Many professional licenses are for people essential to the safety and well-being of their communities, such as nurses, doctors, educators, and law enforcement officers.

Also, particularly in states like Montana that do not have much public transportation infrastructure, losing driving privileges can be a serious barrier to employment. Consumers can lose their jobs, and then have no income to repay debts or to support themselves – actually increasing the tax burden on state government as well as the federal government.

Are there alternative strategies that might work better?

Defaults on loans are nothing new, and systems have been in place for decades to help creditors collect the money that is owed to them. Typically the courts in the United States – and in individual state legal jurisdictions – have a process in place so that outstanding debts can be collected by garnishing the debtor’s wages.

If you owe money for child support or taxes, for example, garnishing will take out money before you receive your paycheck and use that to repay those you owe. That allows the debtor the opportunity to continue working and generating income, which facilitates repayment and does not create new obstacles to gainful employment.