Student loans are big business. At the end of 2015, there were more than 41 million people paying off more than $1.2 trillion dollars worth of loans taken to pay for higher education degrees. The Consumer Financial Protection Bureau (CFPB) estimates that as many as 25 percent of those borrowers will default in repaying some or all of their debt. Recent records indicate that almost seven million are currently in default, and they account for 17 percent of all borrowers.
A challenging economy has hindered these borrowers from finding the high-paying employment that would facilitate repayment. Unpaid loans are liabilities for the financial entities that provided them and a black mark on the credit report of the borrower. The debt can negatively affect the ability to borrow money over the entire course of a lifetime.
Federal Government Steps Up Support
To forestall the possibility of even more loan defaults, the Obama government has taken steps to make repayment easier. By consolidating standards, streamlining processes and improving customer service, the administration plans to assist those borrowers most challenged now to do better and to reduce the financial stress on future students.
In conjunction with the CFPB, colleges and financial experts, the U.S. Department of Education (“DoE”) has announced plans to introduce a new “Federal Aid Servicing System” that will address six of the most troubling aspects of the current student loan landscape:
1. Standardized Language
Many companies around the country provide loan management services, but there is no consistency in the language they use with their debtor clients. The new standards will ensure that all will provide student rights and obligations information that is “consistent, actionable, accurate and transparent.”
2. Single Web Portal
Like mortgages loans, student loans are often sold to service-managing companies, a practice which often leaves the borrower confused about whom to pay. This single portal will connect all student loans to their loan account, regardless of who currently holds its servicing contract. Through it, they can make payments, review terms and apply for benefits, if need be.
3. A Single Platform for Federal Student Loans
Standardizing how its agencies manage these federal loans will alleviate loan repayment problems for millions of current and future students.
4. Reduced Loan Transfers
Transferring loan administration services from company to company creates confusion at best, chaos at worst. Preferably, these loans would never change hands so students would remain a client to the originating loan company. The Administration seeks to reduce the number of transfers in the event the goal of eliminating them is not possible.
5. Improved Customer Services
Another standardization process, this aspect of the new program will ensure students can get the information and support they need to repay or modify their loans, regardless of the servicing company. Today’s piece-meal marketplace offers varying levels of supports, response times, and even collections practices, so establishing and enforcing service quality standards across the industry should contribute to loan repayment success.
6. Enhanced Oversight of Loan Servicers
Perhaps the most complex aspect of the plan is that the Administration has promised that borrowers will be provided with a full explanation of their rights and obligations at the time of the loan initiation, during its payback period, through any transfers that might occur and into the collections process, if that becomes relevant. Access to customer service through the life of the loan should have a positive impact on the repayment process in general. Clarifying collections agency duties and obligations should also reduce the angst that most debtors experience when they are in default and afraid of a phone call. There will also be a new complaint system established where borrowers can seek assistance if collections agents are acting out of line.
Development of the new system is still in progress and the window for submitting an offer to participate closes at 3:00 p.m. EDT on May 9, 2016.
Earlier Student Loan Support Advances
In 2015, Obama’s DoE released two other proposals designed to help prevent students from defaulting on their loans. In March, he introduced the “Student Aid Bill of Rights,” which declares that higher education options should be affordable to all students and all loan services should be offered with respect and fairness throughout the repayment process. That proposal acts as the touchstone for future student loan policies.
In July, the President issued a proposal to cap annual loan payments at 10 percent of discretionary income to relieve the millions of debtors who currently pay a much higher annual wage percentage to student debt. Known as the “Pay As You Earn” plan, this plan allows qualified borrowers to keep their monthly loan payment at the 10-percent level. The government will forgive the remainder of the loan after 20 years of consistent payments.
Impact on the Credit Reporting Industry
The new focus on fairness to student borrowers has already caused the termination of government contracts with five collections contractors. In February 2015, the DoE reported that fact, claiming that each of the five made “materially inaccurate” representations to students about their ability to rehabilitate their loans.
From the lender perspective, the Administration is also contemplating rules to ensure that industry participants treat their student clients fairly and consistently. In addition to standardizing information statements, they are considering modifying the data included on credit reports to distinguish between debtors who postpone student loan payments due to national service or medical residencies from those who delay or miss payments due to financial hardship.
The government’s attention to this critical industry should relieve financial stress for millions on both sides of the lender/borrower equation.
