April 26, 2005

Court to Rule on Delinquent Debt

The U.S. Supreme Court agreed Monday to decide whether the federal government should be permitted to seize a portion of the Social Security benefits of borrowers more than 10 years after they defaulted on their student loans. The court will try to adjudicate conflicting language between the Higher Education Act and a 1982 law on debt collection, with many millions of dollars in student loan debt at stake.

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In its term that begins next October, the court will review a July 2004 ruling by the U.S. Court of Appeals for the Ninth Circuit in Lockhart v. U.S. (04-881), a case that was brought in 2002 by a Washington State man named James Lockhart.

According to a brief the U.S. Justice Department filed in the case, Lockhart received nine guaranteed student loans from four colleges from 1984 to 1989. He failed to repay most of those loans, and by March 2002, owed $80,000, according to the Justice Department brief. The Education Department alerted him that month that the government would begin to withhold money from his monthly Social Security checks, and the Treasury Department started doing so in May. Lockhart sued.

A federal judge dismissed his lawsuit, but the Ninth Circuit court agreed to hear his appeal. It cited a clause in the 1982 Debt Collection Act that applied a 10-year statute of limitations to the government’s ability to collect student loan debt through a borrower’s Social Security payments.

In its ruling last July, though, a three-judge panel of the Ninth Circuit found that in extending the Higher Education Act in 1991, Congress included a provision that specifically eliminated time limits on the collection of student loan debt. The revised law said: “(1) It is the purpose of this subsection to ensure that obligations to repay loans and grant overpayments are enforced without regard to any federal or state statutory, regulatory, or administrative limitation on the period within which debts may be enforced.”

When Congress amended the Debt Collection Act in 1996, the Ninth Circuit said in its ruling, it adopted conflicting language that expressly gave government debt collectors the ability to tap into Social Security benefits, although legislators sent conflicting signals about whether a statute of limitations applied.

“But it seems clear that in 1996, Congress explicitly authorized the offset of Social Security benefits, and that in the Higher Education Act of 1991, Congress had overridden the 10-year statute of limitations as applied to student loans,” the court added in ruling for the Education Department.

The Ninth Circuit’s decision conflicts with a similar case, Spellings v. Lee, in which the U.S. Court of Appeals for the Eighth Circuit ruled against the government, concluding that the Debt Collection Act holds sway. The Supreme Court almost certainly agreed to hear the Lockhart case to resolve the dispute between the two appeals courts.

In its brief regarding the Lockhart case, the Justice Department argues that much is at stake. The department says that as of last summer, about half of the $7 billion in delinquent student loan debt was held by borrowers who had defaulted on it at least a decade earlier.

— Doug Lederman

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