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Guest Post: Putting an End to Default
By Pat Smith
The time has come for a new era in federal student loan policy -- one in which students can borrow fully confident that their loan payments will be manageable when they leave postsecondary education.
In theory, we should already be there. Flexible repayment options are widely available in the federal loan programs. And starting this fall, all borrowers with economic hardship -- no matter whether they borrow through the Federal Family Education Loan (FFEL) or Direct Loan programs -- will have the option of repaying their loans as a percentage of their income. After 25 years, the federal government will forgive any remaining debt.
But we're not there yet. Unfortunately, we're not even close. According to the U.S. Department of Education, more than 200,000 of the 4 million student loan borrowers who entered repayment in the 2006 fiscal year were put into default status. While the problem is particularly bad at for-profit colleges and trade schools, it is not confined to one sector; 25%, or 50,000, of these defaulted borrowers had attended public four-year institutions. And while the new Income-Based Repayment program may reduce these numbers somewhat, we're not expecting any miracles.
The truth is that many student loan borrowers are not told or helped to fully comprehend the full array of repayment options available to them. Nor do many of them realize the full range of penalties for defaulting on federal student loans, including the fact that there is no statute of limitations on federal student loan debt once it goes into default or that this debt can't, for the most part, be erased in bankruptcy.
At the American Association of State Colleges and Universities, we believe that the only way that the federal government will be able to move past "default" is if it takes a much more active role in helping struggling borrowers manage their debt loads. In addition, we believe that the government needs to put an end to abusive private collection practices that put defaulted borrowers into a damaging debt spiral.
To this end, we have offered, in our 2009 Public Policy Agenda, the following three proposals:
Helping Delinquent Borrowers
The U.S. Department of Education should take a more substantial role in addressing loans that are past due but not yet in default. Currently, the Department cannot claim FFEL loans until after they default and lenders have been reimbursed by student loan guaranty agencies for their losses on the loans. Under our plan, lenders holding delinquent loans could assign them to the Department prior to the 270-day default trigger. Department officials could then use borrower income data from the Internal Revenue Service (IRS) to work out an appropriate repayment plan with the borrower.
Working with Borrowers in Default
For loans already in default status, current policy is an unnecessary hurdle for low-income borrowers. The only ways in which borrowers in default now can escape that status and have access to the full range of repayment options is to "rehabilitate" the loan (requiring the guaranty agency to find a lender who will buy the loan), or to consolidate the defaulted loan into the Direct Loan program. Only then can they have access to Income Based Repayment (IBR), Income Contingent Repayment (ICR) or the full range of other manageable repayment options. But the rules governing rehabilitation and consolidation are overly complex and guaranty agencies often administer these procedures more strictly than is required. As a result, borrowers' efforts to get themselves back on track often are derailed.
Under our plan, all defaulted loans would automatically be assigned to the Department of Education, which would help financially distressed borrowers enter a repayment plan that takes account of their income. The Department could use contractors to collect loans in accord with this revised goal. Congress or the Department could set up standards by which the default record is expunged without maintaining the cumbersome "rehab" process.
Establishing fair treatment for defaulters would not handicap the government in collecting loans from borrowers with sufficient resources to repay. The Department would maintain the authority it has to attach wages or sue defaulted borrowers in court.
Ending the Debt Spiral
A borrower's rights should not disappear when a collection agency holds his or her file. Under current policy, when a collection agency begins collecting on a loan, the borrower is no longer able to postpone payments. Instead, the whole loan becomes due. Even borrowers that wish to make payments or exercise other rights are often shut out because of problems with overly aggressive and often abusive collection agencies.
Federal loan policy should be altered so that borrowers would be responsible for what is due and manageable instead of adhering to a practice of declaring the entire loan to be due and payable. Such a policy change would help borrowers address their past due status and mitigate the accumulation of excessive collection charges and fees when collection agencies are able to assess penalty fees based on the entire loan rather than just the payments that are due. The Department would be allowed to contract with many groups, including collection agencies, to get delinquent and defaulted borrowers to understand the repayment plans available to them. However, it should not be allowed to routinely hand problem loan portfolios off to these agencies.
With the Obama administration and Congress considering proposals to restructure the federal student loan programs, we believe that it is absolutely vital that they take the steps necessary to put an end to default in the federal student loan programs once and for all.
Pat Smith is a senior federal policy consultant at the American Association of State Colleges and Universities (AASCU). Before joining AASCU, she served as the student loan examiner at the White House Office of Management and Budget from 1993 to 1997. She has been an expert on student aid policy for more than 35 years. Her views are her own and do not necessarily reflect those of the New America Foundation.
This Barely Touches the Surface of This Problem
1. Defaulters are not just angry over collection practices. They are angry over having to borrow in the first place to pay for what benefits our country the most. This resentment has built up over no less than a fifteen year period so it is dense and fierce because, to be responsible, the middle class has to tell its children and grandchildren not to try to pay for college since loans are the only way.
2. The current income contingent repayment plans leave borrowers, upon retirement, transferring from a government agency with absolute power (DOE) to another with similar power (the IRS) when the remainder of the debt is forgiven because the forgiveness is taxed. Defaulters are angry over any entity having absolute power in America. Absolute power hasn't gotten all that debt paid and prevents the market from functioning naturally, so now it's a debacle that might not be able to be fixed at this point. Too much has been taken from the middle class to support this regime plan. It's a pacifier when the middle class is starving.
3. Colleges are afraid to face the period when we transition away from student loans. But we have to do it now, if it is not already too late. The debt burden leaves all the weight on those who can bear the weight the least. Man up! It is time to let go of trading debt for knowledge. Such debt has proven to be toxic to everyone in the world. We have to restore consumer protections and start planning how to manage student debt from there. Why this would not be part of any future solution is as inexplicable and suspicious as AIG giving out bonuses.
4. There are still no published reports that state how many and how often people who have borrowed in the last 20 years defaulted on their student loans during their lifetime. Since it is not common knowledge at a time when the DOE has been given absolute power, it must be many and often. How many agencies turned a blind eye to defaults as a "favor" to the borrowers and to keep their default statistics low? I know of a state agency that didn't declare a default for 7 years, even though it didn't receive any payments during those years. It kept entering tiny payments by the borrower into the computer. The toxicity of that debt became more and more poisonous for going on 20 years now, even though that borrower made every possible attempt to manage it. Many can and have told stories like this.
5. AASCU completely missed the point of what students want and it's frustrating to parents and students. America wants this debacle cleared up completely. We don't want to borrow to learn, ever. We want a pay as you go scheme. Paying for college out of your own pocket was an American rite of passage. Preventing that puts us on a trajectory aimed unwittingly towards the end of democracy. Students don't need nice buildings, manicured lawns, and athletic teams that win the tournament to get a good education. They can pay a country club for those amenities. But student loans go towards paying for those things. Very shortly, Americans will be able to get a face-to-face education while sitting in our homes and will be able to pay those teachers directly. Whatever policy proposal AASCU makes needs to cover how we handle the transition to individual teacher pay because students will be perfectly willing to dismantle large universities charging outrageous tuition just like the country is willing to dismantle AIG so that no entity like that is too big to fail again and no school can raise tuition for other than teacher pay.
6. AASCU's focus is again on borrowers with economic hardship who defaulted. Economic hardship is a fumbled concept that coats the core of this debacle. Incomes now can't fully amortize tuition charged 15 and 20 years ago, including for the top professions, because incomes flat-lined a long time ago. This led to our Credit Card Nation mentality. The top professions have a glut of workers, so competition is fierce. As soon as a new high paying profession comes to fruition, the herd runs to it and it becomes overly competitive. Is that economic hardship? It's not treated as such. This is a time when America has too few products being sold and little lucrative innovation because people are chained to paychecks to pay back tuition. The money paid back for student loans could have served to fund individual innovation. We might have had the cure for all cancers by now, because clearly no one has been in the right place at the right time to discover it. Why not?
The AASCU should not be forming a policy that turns a blind eye to what borrowers face and want, but it does. Ambition is taxed so badly through student loans that we've fallen and we can't get up. It was foreseeable, too. The debt for education scheme has had a domino effect so that the vast majority students are getting loans now (75% in some states). It's time to change the language of this debacle, restore consumer protections, create clear definitions before we act, fully expose this problem to light so everyone understands how the program and loan transfers work, and prepare for the next innovation in education that will leave fat universities without enough funding. Of course, then we'll have to deal with the fat universities without enough funding. Wait, we have to do that now, huh?
Even This Post "Saves" the Collection Agencies
Even in a seemingly pro-borrower, pro-student piece like this one, there still is the concept of "let's keep the private collection agencies." Why? What do these beggar-bounty hunters do to add value to the process?
Verify address and employment? That information is readily available from the IRS and the state Motor Vehicle office.
"Educate" defaulted borrowers? I don't need a cubicle jockey with a GED, an ANI "Annie" Caller ID spoofing software package, and a silly hands-free headset to "educate" me about personal finance.
The beggar-bounty hunter agency that currently "services" my defaulted loans has a SHARK TANK in their lobby.
What we need is a restoration of standard consumer protections to student loans, including refinancing rights, truth in lending discloures, statutes of limitations, usury protections, bankruptcy protection, and adherence to Fair Debt Collection Practices Act standards.
Education is Investment in Human Capital!
The USA has had a nursing shortage since at least the 1980s. Considering the generality that "every little girl likes to play nurse," why is it that what used-to-be the richest nation in the world can't provide enough nurses for its own population from among its own population? Could it possibly be the cost of American education? Hasn't the Dept. of Labor ever figured that out? Does the Dept. of Labor really care?
I love the comment about the collection agency having a "shark tank" in its lobby - how telling is that?
European nations have been provided free education to it's citizens for several generations. The USA will never catch up with these countries all because we have sold the education of our future generations to the greedy, unregulated, unpatriotically treasonous financial services industry. If Obama doesn't fix this we are all .... well, you know.
FREE HEALTH CARE AND FREE HIGHER EDUCATION ARE HUMAN RIGHTS! DON'T SETTLE FOR ANYTHING LESS! ALL POWER TO THE PEOPLE!!!
the fault lies with the bully
the american people want to pay.
we want to pay enough so those who lent to us make some money.
we understand when people, companies and countries get into financial trouble. . . and we can always be counted on to roll up our sleeves and help.
we do not want, desire, need or deserve to pay 300% to 400% mark up on student loans.
we do not want, desire, need or deserve to pay $25 to $35 fee at the bank on a $10 overdraft. . .
we do not think it is fair that the least of us pay the most percentage wise to live. . .if you think not ask yourself how much money you have to pay to cash your work check?
we have watched this country's government bail out businesses that have shipped jobs overseas and lost their money, banks and creditors that have bankrupted the average citizen with ballooning interest loans . . .but no where in there is a way for an average person start again. . .Guess like everything else bankruptcy is for the rich.
cut out the middleman
These banks are making too much money from student as they markup the loan rates. Why can't the government just loan the money directly the cut out the middleman? I've always believe that getting a student loan is what is wrong with the system at heart and this sort of program cannot be sustained in the long run. That is why I like the program they have in Germany. You dont need to pay for an education to go to a great school to lean your trade.
I really don't understand
I really don't understand this. If banks lend money to students, these students do not have jobs and they have to pay huge interests and eventually they might need another loan. This is just sad. I found a really great articles from BBC and MSN about student loans topic so this might interest some of you.
http://news.bbc.co.uk/2/hi/uk_news/education/3013272.stm
http://articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/Th...
Education costs are going
Education costs are going up, and it is saddening to see a student go in a debt spiral even before his professional career begins.
New America
Incomes now can't fully amortize tuition charged 15 and 20 years ago, including for the top professions, because incomes flat-lined a long time ago. This led to our Credit Card Nation mentality.
stomach pain gas bloating
I really don't understand
I really don't understand this. If banks lend money to students, these students do not have jobs and they have to pay huge interests and eventually they might need another loan. This is just sad.
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