What is worse, 20 percent of every collection is deducted as a collection fee before the payment is applied to principal and interest. This slows down repayment, Kantrowitz says, making, for example, a 10-year loan into a 19-year loan.
"The government is going to get its money one way or another," he says.
Defaulting on a federal education loan ruins the borrower's credit score — making it almost impossible to get a credit card, auto loan or mortgage, or to even rent, Kantrowitz says. It even may make it difficult to get a job, especially in the financial services field or in a job that requires a security clearance.
"Employers do check your credit history," Kantrowitz says.
Student loan debt, both federal and private, is not dischargeable under bankruptcy laws. There is an exception for "undue hardship," but under the strict way the words are generally interpreted for federal loans, this is so rare it is practically non-existent. Kantrowitz says in 2008 there were 72,000 federal student loan borrowers with an active bankruptcy. Only 29 received a full or partial discharge of their loans.
"You are more likely to die of cancer or in a car accident than to get your federal student loans discharged in bankruptcy," he says.
But with all the programs and protections in place on federal student loans, there is some logic in not allowing easy bankruptcy. In private student loans, these protections are not in place — something to consider when taking out a loan.
Shrinking the iron bubble
Kantrowitz also says there is a general sense that the federal government needs to do a better job underwriting student loans. He says it is possible when Congress reauthorizes the higher education act that it may look at putting better loan limits and eliminate the unlimited ability of parents of graduate students to borrow.
Obama's changes may not enable bankruptcy protection, but they are one step closer for the growing number of delinquencies.
Miller points out, however, that even default on a federal student loan is not the end. Just nine consecutive payments and the loan is not in default anymore.
"It isn't the end of the world," he says. "Those loans enabled you to go to school. They were investments in yourself. Be thankful student loans are not like other loans. You have options."