The Obama administration is trying to get ahead of a nagging consumer finance problem: Borrowing from the federal government for college is cheap, but it’s complex, and debtors can run into trouble if they fall behind.
Over the past few years, the White House and Democrats have focused on measures to shift the cost of college away from students using grants or student loan programs. But the new focus of Obama’s new student aid “bill of rights” introduced Tuesday was on the guarantee that “every borrower has the right to quality customer service, reliable information and fair treatment, even if they struggle to repay their loans.”
It’s an area in which the Obama administration has received criticism in recent months, amid concerns about the treatment of borrowers at the hands of the private contractors that service loans and collect on loans in default for the government.
Consumer advocates and some lawmakers, including Sen. Elizabeth Warren, D-Mass., have raised concerns about servicers’ treatment of borrowers behind on their student loans. Last spring, for instance, one private company settled for $139 million to resolve accusations it cheated soldiers on student loans.
The Department of Education responded to the ongoing criticisms last week by firing five debt collection companies for “providing inaccurate information to borrowers.”
But with a $1.1 trillion federal student loan portfolio and 41 million borrowers, the government has a larger problem.
What Obama announced Tuesday was a grab-bag of administrative actions both to simplify the process for consumers and overhaul the Department of Education’s policies for managing the massive book of loans.
The two biggest steps include creating a complaints website at the Department of Education through which student borrowers can file complaints and have them addressed by the government and creating sites for student borrowers in which they can monitor all their student loans, no matter who may be servicing each loan. That could be especially helpful to borrowers whose loans are sold between companies.
Mostly, the effort was well-received by advocates and analysts outside the administration.
“We were very positive, and we thought it what was a very positive step forward,” said Rory O’Sullivan, deputy director of Young Invincibles, which aims to advocate on behalf of young adults.
“We hear from a lot of students there’s not a clear place for them to go if they have a problem with a servicer,” O’Sullivan said. Obama’s efforts Tuesday, he offered, were meant to address the fact that the “system for paying back is complicated and hard to navigate.”
Others, however, suggested that the steps taken Tuesday, including a requirement that the Department of Education overhaul its rules for debt collection by July, do not go far enough in clamping down on the problems with private sector loan servicing and debt collection.
Calling the use of private debt collectors a “disaster,” the National Consumer Law Center’s student borrower project said private-sector contractors are not equipped to understand federal student loan borrowers’ legal rights and do not receive adequate oversight. “We call on the department to ultimately eliminate the use of private collection agencies,” the group said in a response to Obama’s speech and administrative actions.
In fact, the Obama administration took a small step in that direction Tuesday, announcing the creation of a Treasury Department pilot program to test the feasibility of having the government service loans itself.
But others suggested Tuesday that the level of complexity and confusion in the federal student loan system can only be solved with legislation, not executive action alone.
Sen. Dick Durbin, D-Ill., the author of legislation to create a student aid bill of rights, said Obama’s moves were welcome but “that doesn’t excuse Congress from addressing our national student debt crisis.” Durbin called for Congress to pass legislation to ease the terms under which student debt may be discharged in bankruptcy and to allow federal student loan borrowers to switch old loans into newer loans with lower interest rates. Currently, federal student loans for undergraduates carry a 4.66 percent annual rate, well below what banks charge.
Kevin James, a researcher at the right-of-center think tank American Enterprise Institute, said Congress needs to pass laws clarifying the complex terms for federal programs that limit student debt payments as a share of income.
Obama touted those programs, which his administration has boosted legislatively and by administrative order in a series of actions, in his speech Tuesday at Georgia Tech. Income-based repayment plans, he told the audience of students, mean that graduates “don’t have to choose between paying the rent and paying back their debt.”
“If you don’t already know about the income-based repayment program, you need to learn about it because it’s still under-utilized,” Obama told the thousands of students.
One reason the programs are under-used, James said, is that the multiplicity of options, each of which depends on tax returns for previous years, has made it hard for all but experts to understand how they work. As a result, they have “become flipped on their head,” giving the greatest benefits to highly indebted graduate students who find their way through the system to reap massive savings.
Depending on the circumstances of the borrower and the year he or she left school, income-based repayment can limit payments to 10 percent of income and forgive the debt after 20 years. With those terms in place,”people really should be able to avoid default,” James said. The fact that the government instead projects that a quarter of undergraduate Stafford loans issued next year will default “raises questions about whether the focus is on the right thing,” he added.
