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Student-Loan Defaulters in a Standoff With Federal Government

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The letters keep coming, as do the emails. They head, unopened, straight into Jason Osborne's trash and deleted folder. 

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The U.S. government desperately wants Mr. Osborne and his wife to start repaying their combined $46,500 in federal student debt. But they are among the more than seven million Americans in default on their loans, many of them effectively in a standoff with the government. These borrowers have gone at least a year without making a payment -- ignoring hundreds of phone calls, emails, text messages and letters from federally hired debt collectors. 

Borrowers in long-term default represent about 16% of the roughly 43 million Americans with student debt, now totaling $1.3 trillion across the U.S., and their numbers have continued to climb despite the expanding labor market. 

Their failure to repay -- in many cases due to low wages or unemployment, in other cases due to outright protest at what borrowers see as an unfair system -- threatens to leave taxpayers on the hook for $125 billion, the total amount they owe. 

The Osbornes say they are the victims of a for-profit school that made false promises and a predatory lender -- the government. 

"Do you think I'm going to give them one penny I'm making to pay back the loan for a job I'm never going to hold?" said Mr. Osborne, 45 years old, who studied to be a health-care worker but can't find a job as one. 

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The rising number of borrowers in default weakens the economy as underwater homeowners did after the housing crash: by damaged credit, an inability to spend and save for the future, and a lack of resources to move to better jobs. 

In the case of homeowners, though, foreclosures offered a chance to start fresh and slowly rebuild their lives. There is generally no such option for student debtors -- federal law prohibits them from expunging their debts in bankruptcy, except in extremely rare circumstances. 

The Obama administration says it can help borrowers like the Osbornes get back on track with programs that slash their monthly payments and forgive a portion of their balances, if only they would respond. The administration is also working to expand a program that forgives debt for borrowers who can prove their schools defrauded them with deceptive advertising claims. 

And in a controversial move, the government has stepped up garnishments of borrowers' wages. It garnished $515 million in the nine months through March, federal figures show. 

After years of uneven progress in reducing defaults, the Education Department is turning to a team of behavioral scientists who are trying to figure out how to get borrowers to respond, testing things such as what language to use in emails and what time of day to send text messages. 

Deputy Treasury Secretary Sarah Bloom Raskin has also met with borrowers to gauge what policies would help them avoid default. Ms. Raskin has the same concerns about defaulted borrowers as the administration did with homeowners who faced foreclosure. 

"As we intervened to help homeowners, I think we also have a responsibility to help students who might feel the aftershocks of economic developments they had no part in creating," Ms. Raskin said. 

Most borrowers in default owe relatively small balances -- a median of $8,900, according to the Education Department. But student advocates say that can be a lot of money for someone unemployed or in a low-paying job, and with other expenses to juggle. 

And many feel they shouldn't have to pay anything. 

The Osbornes' example underscores the challenge. Each enrolled at Abdill Career College Inc., a small for-profit school in Medford, Ore., shortly after the recession. They earned certificates as medical assistants and in 2011 graduated from a second program to become phlebotomists, or health-care workers that draw blood. 

But they couldn't find steady jobs in the field, Mr. Osborne said. Now, Mr. Osborne makes $13 an hour in sales for a solar-power company, and she works as a maid, he said. 

Mr. Osborne said Abdill provided a low-quality education and exaggerated the likelihood that they would find career success. And he said the government should have never extended them so much debt for jobs that are in low demand. The typical phlebotomist makes just under $32,000 a year, according to the Labor Department. 

About 1 in 5 student borrowers who left Abdill in 2012 defaulted on their loans within three years, the latest federal figures show. Its default rate of nearly 21% is far higher than the national average of 12% among all colleges. 

Abdill's owner, a woman named Ki who said she doesn't have a legal last name, confirmed the couple attended the school. But she said privacy law prevents her from discussing details of the couple's time there. She said the school has recently lowered its tuition, and that it prioritizes helping students find jobs. 

It isn't clear how many borrowers in default are simply unable to repay, or are able to pay but refuse to do so in protest. 

Illinois resident Jim Lopko, 36, said he would repay his debt if his balance hadn't skyrocketed because of interest. He owes $122,000 in student debt -- a combination of federal and private loans -- after graduating with an associate degree from one for-profit school and dropping out of a bachelor's program at a second in 2009. He said he dropped out because he had borrowed the maximum amount in federal loans and he couldn't gain access to any more private ones. 

He is in default on his private loans and in forbearance on his federal loans. Debt collectors call him almost daily but he ignores their calls. 

Mr. Lopko, who lives in a Chicago suburb, now earns $32,000 a year as a customer-service agent for an Illinois manufacturer. 

"The only way out of this situation honestly is to win the lotto or to find a job that pays me $300,000 a year," Mr. Lopko said. 

He says he tries to be frugal but admits he occasionally splurges. He recently upgraded to a one-bedroom apartment from a studio and took out a loan for a new Subaru WRX that carries a $445 monthly payment. 

"Are you supposed to stay in inside all the time, never go out, and pay these loans?" he said. 

Write to Josh Mitchell at joshua.mitchell@wsj.com