U.S. Secretary of Education: Help Students! STOP spending a BILLION dollars on Student Loan Collectors.
The Department of Education is paying $1 billion dollars a year to collection agencies to collect on defaulted student loans when the reality is that almost no one should default if adequate default prevention and aversion counseling strategies were put into effect and adequately funded.
We need your support to protect student loan borrowers from collection agencies, student loan servicers and even schools that have a vested interest conflicting with the “best interest” of the students.
We are asking the U.S. Secretary of Education, Arne Duncan to allocate just $200 million of the $1 billion currently going to collection agencies, to fund a successful default aversion and prevention process both at schools and through independent non-conflicted organizations.
Independent organizations have successfully assisted student loan borrowers in preventing their loans from default by providing students with highly experienced counselors to guide them through the loan repayment process.
Unfortunately, college debt isn’t just taking a financial toll on millions of borrowers. It’s also inflicting staggering costs on the health, careers, emotional well-being and personal relationships of those burdened with big college loans.
We just created this petition: U.S. Secretary of Education, Arne Duncan: STOP spending a BILLION dollars on Student Loan collection agencies , because we care deeply about this very important issue.
I’m trying to collect 100 signatures, and we could really use your help.
To read more about what we’re trying to do and to sign this petition, click here!
It’ll just take a minute!
Once you’re done, please ask your friends to sign the petition as well. Grassroots movements succeed because people like you are willing to spread the word!
WASHINGTON, Feb 21 (Reuters) – The U.S. consumer watchdog said on Thursday that it is seeking suggestions on how to develop a policy plan that would help borrowers of private student loans find more affordable repayment options.
The Consumer Financial Protection Bureau said it is studying the issue because millions of young Americans graduate from college with huge amounts of student loan debt every year.
Those who borrowed from private lenders find repayment even more challenging because they don’t have the kind of flexibility or negotiating power that the federal government offers borrowers, such as income-based plans or extended repayment options.
Also, tuition prices keep rising, while wages, when adjusted for inflation, keep dropping, the agency said.
The CFPB said it is inviting the public, including financial institutions, colleges and professional associations, to make suggestions it will use to make recommendations to policy makers. The agency itself has limited power to develop and then enforce a new framework for private market student loan oversight.
The CFPB said it is taking comments through its website until April 8, and will make the information public soon after.
“Too many private student loan borrowers are struggling with unwieldy debt that prevents them from climbing the economic ladder,” said CFPB Director Richard Cordray in a statement. “We will be analyzing plans for policymakers to consider that might help avoid a repeat of the mortgage meltdown for today’s student loan borrowers.”
According to the CFBP, student loan borrowing has already crossed the $1 trillion mark, with more than $150 billion of it in private loans. The agency issued an October 2012 report that found there are more than $8 billion in defaulted student loan balances.
Rohit Chopra, the student loan ombudsman at the CFPB, said heavy debt from student loans has a domino effect on the economy and could affect borrowers’ ability to access credit, or purchase homes or cars.
“If you think everything in this market is hunky-dory, you’re missing the warning signs. Waiting any longer is just not an option,” Chopra said during a press briefing.
The agency was formed as part of the 2010 Dodd-Frank Wall Street reform law to protect consumers from exploitation by financial institutions. This call for information is part of a larger effort by the agency to address the student loan crisis. Last year, the agency recommended that borrowers with stable jobs be allowed to refinance their private student loans, just like homeowners.
“Federal student loans remain the best option for borrowers, but we know some students have turned to private student loans and are struggling to repay,” said U.S. Secretary of Education Arne Duncan in a prepared statement after the press briefing. “We’re glad to see the CFPB is taking steps to help create options for those who are having trouble managing their private student loan debt.”
According to the Institute for College Access and Success (TICAS), the average student debt at Vanderbilt has fallen from $24,044 in 2003-04 to $18,605 in 2009-10. That puts Vanderbilt below the average student loan debt nationwide for students who borrow, which is $26,600, according to the Institute for College Access and Success.
It’s not a coincidence that Vanderbilt is moving in this direction. The university and Johns Hopkins University, which has also prioritized increasing institutional need-based aid, provide a simple playbook: emphasize need-based aid and make it a presidential priority. In cultivating donors, administrators at these institutions say they place an overwhelming emphasis on endowing funds for need-based financial aid.
“I was at a dinner with a combination of alumni and parents, and the host asked me what my top three priorities were for fund raising,” said Vanderbilt’s provost, Richard McCarty. “I said, ‘Need-based aid, need-based aid, and, um, need-based aid.’ They pushed me really hard to say something other than that, but there really isn’t.”
‘A Singular Focus’
Vanderbilt officials say the overwhelming emphasis on securing need-based aid is really the work of one person: Chancellor Nicholas Zeppos. Zeppos, who was an undergraduate and law school student in public universities in Wisconsin, became the institution’s provost in 2002 and began to push the university to increase the amount of money the university awarded on the basis on need.
“In 2002, we came to the realization that students were walking across the stage and off the stage with one of the highest debt burdens in the country,” McCarty said. Back then, about 37 percent of graduates had debt, with average debt in the low $20,000s, higher than the national average of about $17,000, according to TICAS.Institution Degree-seeking undergraduates (2011) Institutional Need-Based Aid (2011) Institutional Non-Need-Based Aid (2011) (excludes aid for athletics and tuition waivers) Vanderbilt University 6,755 $115,903,603 $17,154,626 Johns Hopkins University 5,047 $61,093,114 $2,477,953 Source: 2011-12 Common Data Sets (Vanderbilt, Johns Hopkins)
Six years later, Zeppos was named Vanderbilt’s chancellor, and as one of his first efforts in office he announced that the university would meet full financial need with no income caps and no loans starting in fall 2009. “We enrich Vanderbilt’s unique learning community and make it a more dynamic environment for everyone when we open our doors to highly talented and qualified students of all economic, cultural and geographical backgrounds,” Zeppos said at the time.
McCarty said the switch was a major financial hit to the university, since it would essentially forgo tuition revenue – previously unmet need that students would have found some way to pay, likely though loans – as it built up its need-based-aid endowment. “It forced us to manage our costs in every other area,” he said. “This became the singular priority.”
In 2008 Zeppos also began a three-year campaign to endow $100 million in financial aid, a campaign that ended in 2011 with $108 million. “What we also said was this will be the first phase of a prolonged effort to build up a dedicated endowment to meet the financial needs of students,” McCarty said. “We sort of turned the argument around. All students we admit are meritorious, so we’re going to fund them.”
The university has raised an additional $40 million for need-based financial aid since then. Vanderbilt’s institutional need-based financial aid budget grew from $36 million for the 2001-02 school year to almost $116 million for the 2011-12 school year, according to the common data set.
The focus on need-based aid is clear on a visit to the university’s fund-raising page. “Opportunity Vanderbilt,” the university’s need-based financial aid drive, is featured prominently. The site also notes that “we need to shift the costs of [aid] from the operating budget to a larger endowment.”
Vanderbilt’s endowment, which at about $3.4 billion in 2012 put it in the top-25 of university endowments, still pales in comparison to those of other universities that meet full need without loans, meaning much of the aid it spends still comes from revenue it would like to spend on other aspects of the institution.
McCarty said one aspect that has helped foster strong fund raising for need-based aid is the fact that the university secures a good applicant pool and enrollment, meaning it has less need to compete for top students. “I’ve been really impressed and reassured that our most generous donors buy into the notion that our pool of applicants has now been developed at Vanderbilt to the point that anyone you admit deserves to be supported by a scholarship,” he said.
Just because Vanderbilt is emphasizing need-based aid, however, doesn’t mean the university has moved away from merit aid entirely. In 2011, the university distributed about $17 million in non-athletic merit aid. Some of this comes from historic endowed scholarships. “We still use merit-based aid to get the best advantage we can,” McCarty said. “But we have decided as a university that our development efforts going forward will focus on need-based aid.”
Ronald J. Daniels, who became Hopkins’s president in 2009, seems to be following a similar playbook.
When Daniels was provost at the University of Pennsylvania, he helped institute a financial aid system that replaced loans in aid packages with grants, leading to lower student debt loads.
When he assumed the Hopkins presidency in 2008, he made fund raising for need-based student aid a top priority. At that time, the university still considered students’ financial need in admissions decisions. Daniels made changing that a priority, and in 2010 he said the class of 2014 would be admitted without consideration of financial need. The university shifted $4 million of the budget to the financial aid office to make that goal a reality and cranked up fund-raising efforts.
Raising enough money to cover the cost of providing a high-quality undergraduate education is a tall order, which helps explain why, despite a $2.5 billion endowment, Hopkins says it can’t ignore students’ financial need in admissions and meet need for all admitted students without loans.
Daniels’s and Hopkins’s focus became clear in January when the university announced the sum total of alumnus and New York Mayor Michael Bloomberg’s donations to the university – which exceeded $1.1 billion. Of that money, $164 million has gone toward need-based undergraduate aid, singlehandedly funding 20 percent of the university’s need-based financial aid grants in the schools of arts and sciences and engineering in recent years.
But that money only goes so far. According to the Institute for College Access and Success, Hopkins has continued to see the percentage of freshmen and overall students who borrow stay relatively constant, while the average debt load of graduates who borrow has grown from $14,0000 in 2004 to $25,266 in 2011, according to TICAS.Institution Percent of First-time, Full-time Freshmen Who Borrow Percent of Graduates with Debt Average Debt of Graduates who Borrow Johns Hopkins University (2003-04) 35% 52% $14,000 Johns Hopkins University (2009-10) 37% 49% $24,307 Vanderbilt University (2003-04) 36% 36% $24,044 Vanderbilt University (2009-10) 12% 37% $18,605 Source: The Institute for College Access and Success
The universities commonly referenced for helping low-income students graduate debt-free – Harvard, Princeton, Yale and the Massachusetts Institute of Technology – give out about $6,000 more on average per degree-seeking undergraduate in need-based aid than Hopkins.
McCarty and Zeppos at Vanderbilt have said that endowing money for need-based financial aid is the only way to make such a model sustainable. But in recent years that model has shown its own cracks.
Several colleges have learned in the wake of the financial downturn that began in 2008 that having a large endowment doesn’t necessarily guarantee sustainability. Grinnell College, which has a higher per-student endowment than all but a handful of the wealthiest colleges and universities and funds about 50 percent of its budget from its endowment, recently announced new strategies to try to grow the amount of money it brings in through tuition, including bringing in students who can afford to pay more.
The college’s president said the market turmoil meant that less money could be pulled from the endowment. He also suggested that the types of return seen over the past few decades would be unlikely in the “new normal” environment. The college recently announced that it would continue its commitment to need-blind admissions cut would reconsider its position in two years.
And Grinnell is not alone. Cooper Union, which has been effectively free to all students because it funds a large portion of its budget through a unique endowment, is debating charging some students. The financial downturn also drove Olin College, which gave all freshmen a full-tuition scholarship, to move away from that model; it now guarantees a half-scholarship to all students.
Ratings agencies tend to view tuition revenue as one of the most stable revenue sources for colleges and universities, since it is generally predictable and comes from diverse markets.
McCarty said that despite recent problems he’s not worried about his university’s strategy. “The miracle of compound interest is our strongest ally in this effort,” he said. “We’re taking the long view. Universities are going to be around for centuries to come, and the best long-term strategy for us is to invest in endowment.”
- February 19, 2013, 12:45 PM ET, Wall Street Jorunal
Teacher, teach thyself. The U.S. government isn’t known for financial responsibility, what with long-term debt of about $16.5 trillion. Yet it seems to think itself quite capable of teaching others how to keep their financial house in order.
Actually, though, its efforts may be symbolic of its own fiscal discord. During a Senate Banking Committee hearing last Thursday, Sen. Tom Coburn, an Oklahoma Republican, quizzed Consumer Financial Protection Bureau chief Richard Cordray on how many financial literacy programs the government has. Mr. Cordray didn’t know but acknowledged a piecemeal approach.
Sen. Coburn already had the answer: 56. That, in his view, is about 55 too many. He urged Mr. Cordray to have the CFPB analyze these efforts and recommend to Congress how to get rid of them or at least shrink them to one. Of course, that could be tough if some members of Sen. Coburn’s own party have their way and get rid of the CFPB. Too bad the government doesn’t have any programs aimed at curing political dysfunction.
– David Reilly
The student loan debt crisis has become a drag on the economy. Younger Americans who are saddled with bankrupting payments — or credit ratings damaged by delinquency — are in no position to buy homes, save for retirement or start businesses.
The Federal Reserve Bank of New York recently released a study showing just why many young people are being strangled by student loans. It found that 43 percent of 25-year-olds had student debt in 2012, an increase from 27 percent in 2004.
Unemployment and the collapse of household income in the recession only made the borrowing problem worse.
According to the new study, student debt almost tripled between 2004 and 2012, and is approaching $1 trillion, while the percentage of borrowers who were more than 90 days delinquent had risen to 17 percent, from 10 percent in 2004. In addition, student loan debt was the only kind of household debt that continued to rise through the Great Recession, and it is now the second largest after mortgage debt.
The student debt crisis has its roots in state cuts to higher education that began in the 1980s. By savaging support to the public colleges and universities that educate about 70 percent of the nation’s students, the states forced up tuition, causing students to borrow steadily more. The Federal Reserve study estimates that nearly 18 percent of borrowers now have student loan debts of $25,000 to $50,000, and nearly 4 percent have balances greater than $100,000.
Distressed borrowers who financed their educations with federal student loans can get relief through the federal Income-Based Repayment program, which allows them to reduce their monthly payments based on their income. Another program, called Pay As You Earn, is limited to people who started borrowing during the recession. It also allows for lower payments, and borrowers who adhere to the payment arrangement can have their loans forgiven after 20 years — or 10 years if they hold public service jobs.
But students who have taken out private loans from banks or other institutions are often stuck with high interest rates, high payments and few consumer protections. For example, one federal analysis of student payments in 2009 found that 10 percent of borrowers with private loans were spending more than 25 percent of their incomes in monthly payments.
Because private loans offer little flexibility, borrowers in bad straits have few options except default, which makes it difficult for them to get jobs or credit, or even to rent apartments. Refinancing a private student loan at a lower rate is rarely possible.
To get a handle on the student debt problem, the federal government needs to provide relief programs for private loan borrowers too. The federal Consumer Financial Protection Bureau announced last month that it was soliciting ideas from policy makers and others for a plan that would give private loan borrowers some relief. Such a plan, which would most likely involve a public-private partnership that freed up capital for refinancing, would have to be part of any solution to the student debt crisis.
3:40 pm March 25, 2013, by Christopher Seward, AJCBiz
Despite signs that the economy appears to be on the rebound, many consumers continue to struggle under the weight of debt they can’t pay off, especially when it comes to student loans.
Equifax reported Monday that student loan charge-offs, debts that creditors deem uncollectible, rose more than 36 percent to $3 billion in the first two months of the year, compared with the same period a year ago. When debt reaches that stage, lenders usually turn to collection agencies to get the money they’re owed.
High unemployment among recent graduates – and underemployment among those have been able to land a job – is hurting their ability to put dents in student debt. That, combined with credit card debt and mortgages, makes the problem more acute.
According to Forbes, the size of the average student debt load in 2005 was $17,233, but that figure had climbed to $27,253 by 2012, a 58 percent increase.
“Continued weakness in labor markets is limiting work options once people graduate or quit their programs, leading to a steady rise in delinquencies and loan write-offs,” Equifax chief economist Amy Crews Cutts said in statement on the charge-offs. She said the company is seeing a steady growth in lending to students.
Scott Scredon of Atlanta-based CredAbility, a consumer credit counseling service, said 15 percent of the group’s clients have a mix of mortgage, credit card and student loan debt.
“Student loans have been a problem for a while,” said Scredon, a CredAbility spokesman. To help some clients, the group works with lenders to try to restructure as much of the mortgage and credit card debt as possible.
Equifax said the balances outstanding on student loans rose more than 14 percent to $852.7 billion in January and February, compared with the period a year earlier. The number of student loans outstanding rose nearly 13 percent to more than 123 million.
Have ever you had to just walk away from a debt, leaving a creditor to charge it off, and has that debt ever come back to haunt you?
Rising federal student-loan debt and potential changes to how such loans are treated under bankruptcy could be a “train wreck” for U.S. taxpayers, Discover Financial Services DFS +1.49% President Roger Hochschild said Monday.
With total student-loan debt approaching the trillion-dollar mark, WSJ’s Jason Bellini deconstructs how we got here and what it all means. Image: Getty
The executive, speaking at an investor conference in New York, defended his company’s foray into the student lending market, stressing it adheres to high underwriting standards when approving loan applicants. However, he accused the federal government, which now controls the majority of student lending, of lax underwriting.
“I actually think it’s going to hit all of us as taxpayers in terms of what it does for the federal student-loan program and their utter and total lack of underwriting,” Mr. Hochschild said. “But I do not think it will be a train wreck for Discover shareholders.”
Student loans have been growing in popularity among investors who have been ramping up purchases through the asset-backed securities market to seek extra yield. Risk premiums on three-year private student loan ABS have fallen about 25% to about 0.9 percentage point over Libor, according to Bank of America Merrill Lynch.
Discover in recent years has ventured into student lending as well as personal loans and mortgages to expand beyond credit cards, which generate the bulk of its revenue. As concerns about rising student debt have increased amid legislative efforts to allow such loans to be discharged in bankruptcy, Discover has faced investor skepticism on its push into the business.
“There’s a tremendous amount of noise around student loans,” Mr. Hochschild said. “There’s a lot of explaining we have to do. We are very happy with the returns we are getting in that business and will continue to grow it.”
Discover is among the few lenders that offer private student loans, which aren’t backed by the government and are typically used by students to pay for college costs that remain after receiving federal loans and other financial aid for which they may qualify.
The ramp-up in ABS buying comes despite two separate bills to change the bankruptcy code by eliminating the exception provision for private student loans. One bill introduced by Sen. Richard Durbin ( D., Ill.) last month would restore the bankruptcy code’s former treatment of private student loans, by making them dischargeable in bankruptcy, which could result in a short-term increase in filings and higher defaults, according to analysts at Bank of America Merrill Lynch.
While the likelihood of passage is high, it is lower than last year because the employment situation has improved and credit on private student loans is stabilizing, said the analysts who were recommending the ABS for their relative yield over other securitized assets. Without a change to the code, private student loans should see stable to slightly improved credit this year, they said.
Mr. Hochschild said current proposals would be “extremely manageable” for Discover. He noted that more than 90% of Discover’s student loans are co-signed by a student’s parent, and the FICO credit scores of parent co-signers are in “the 700s.”
Discover’s student-loan portfolio ended the fiscal fourth quarter at $7.7 billion, up from $7.3 billion a year earlier.
Mr. Hochschild was speaking at a credit-card industry conference held by investment bank KBW in New York. In conjunction with the presentation, Discover also disclosed new performance figures in a filing with the Securities and Exchange Commission for its credit-card portfolio that showed its borrowers continued to pay their bills on time.
The sixth-largest U.S. credit-card lender’s net charge-off rate, or percentage of loans deemed uncollectible, fell to 2.2% in January from 2.5% in December. The rate was 2.9% a year earlier.
Its delinquency rate was 1.8%, unchanged from December and down from 2.3% a year earlier.
Discover’s shares have risen more than 41% over the last year, as the company’s credit-card loan portfolio has grown consistently while larger card issuers have struggled to expand their portfolios.
The company’s card loans totaled $49.9 billion at the end of January, down from $51.1 billion in December but up from $47.2 billion a year earlier.
Credit quality has remained strong for most players in the industry as consumers have cautiously taken on new debt and worked to pay their bills on time since the recession. However, industry executives and analysts expect delinquency and net charge-off rates to gradually edge back this year given there is little room for further improvement.
“At some point you do need to see losses go up,” Mr. Hochschild said. “I don’t think where we are now is a new normal.”
Fitch Ratings said last week that U.S. credit-card delinquencies tied to securitized loans ended last year at 1.63%, the lowest level it has recorded since launching its Prime Credit Card Index in 1991.
WASHINGTON, March 14 (Reuters) – The Consumer Financial Protection Bureau said on Thursday that it is seeking to regulate non-bank student loan servicing companies as more and more Americans struggle with high student loan debt and hefty monthly repayments.
Once a loan is issued, the CFPB said, most borrowers conduct nearly all their student loan affairs through servicing companies hired by the lenders.
These companies provide such services as maintaining records, collecting payments and answering questions. Borrowers do not get to pick which company services their loans.
Servicing companies, the agency said, face the stress of dealing with many delinquent borrowers as the student loan market has grown rapidly and deteriorated. But many borrowers are unhappy with the services and treatment they receive from such companies.
“We’ve heard complaints from private loan borrowers that nobody holds service companies accountable for answering questions and providing quality customer service. So students find themselves at a dead end, stuck without a clear path forward,” said CFPB Director Richard Cordray.
Under the agency’s new proposal, the CFPB would supervise any company handling more than a million student loan accounts. The CFPB currently has jurisdiction over the seven big loan servicing companies.
U.S. student loan debt has recently become a contentious issue as reports have estimated it is close to or has passed the trillion dollar mark.
While all other forms of debt have fallen since the economic crisis, student loan debt continued to rise and is estimated to have tripled between 2004 and 2012. A recent report from the Federal Reserve Bank of New York found that 6.7 million borrowers were at least 90 days delinquent on their repayments.
Lawmakers and consumer groups have said the current student repayment system is too complex and confusing for borrowers and needs to be overhauled.
This CFPB’s announcement is the latest of several initiatives it is taking to reform the student loan market. The agency recently said it was particularly concerned about private student loans, which tend to offer fewer repayment options and often have higher interest rates than federal loans.
The agency is seeking a policy that would make private student loan repayment more affordable and more flexible.
“Managing debt can be complicated for borrowers especially for those who encounter problems with their servicers,” Cordray said. “Our rule would bring new oversight to the student loan market and help ensure that tens of millions of borrowers are not treated unfairly by their servicers.”
If banks could be given more regulatory flexibility to work with struggling borrowers of private student loans who just recently graduated, they believe they could reduce defaults. They pushed regulators in a letter Wednesday to give them that leeway.
“We propose that banks should be granted greater flexibility to work with borrowers experiencing financial difficulty who are recent graduates, or early in their careers, when it is more difficult to enter the labor force and establish financial independence and stability,” wrote Richard Hunt, president and CEO of the Consumer Bankers Association.
“Our members believe they can responsibly use more options than are now permitted under current regulatory guidelines,” he added.
In the letter, Hunt argued that student loans are unique financial products and should not be subject to the same definition of troubled debt as other types of loans. Many borrowers paying back private student loans are just entering the workforce and, especially faced with a slow-going economy, could take a while before they are able to pay back the loans in earnest.As a result, Hunt asked financial regulators to give banks more flexibility to modify loan terms in the first years they come due to allow for lower payments and longer forbearance periods. Doing so could reduce defaults and save borrowers from damage to their creditworthiness.
“The uniqueness of the student loan product justifies more flexibility in the offering of forbearances, since economic conditions may, especially for those who are early in their careers, lead to a higher level of unemployment and underemployment,” he said.
Hunt emphasized that banks are not saying that all borrowers could be helped by that flexibility. But he contended that banks could be trusted to use more of their own judgment in granting assistance to struggling borrowers.
“In many cases, prolonging the inevitable only makes things worse. But there are a significant number of cases where borrowers can avoid default and bring their loan payments current if lenders have more regulatory flexibility to work with them,” he said.
The letter was sent to the heads of the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
March 28, 2013By PHILIP ELLIOTT, Associated Press
WASHINGTON (AP) — Incoming college freshmen could end up paying $5,000 more for the same student loans their older siblings have if Congress doesn’t stop interest rates from doubling.
Sound familiar? The same warnings came last year. But now the presidential election is over and mandatory budget cuts are taking place, making a deal to avert a doubling of interest rates much more elusive before a July 1 deadline.
“What is definitely clear, this time around, there doesn’t seem to be as much outcry,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “We’re advising our members to tell students that the interest rates are going to double on new student loans, to 6.8 percent.”
That rate hike only hits students taking out new subsidized loans. Students with outstanding subsidized loans are not expected to see their loan rates increase unless they take out a new subsidized Stafford loan. Students’ non-subsidized loans are not expected to change, nor are loans taken from commercial lenders.
The difference between 3.4 percent and 6.8 percent interest rates is a $6 billion tab for taxpayers — set against a backdrop of budget negotiations that have pitted the two parties in a standoff. President Barack Obama is expected to release his budget proposal in the coming weeks, adding another perspective to the debate.
Last year, with the presidential and congressional elections looming, students got a one-year reprieve on the doubling of interest rates. That expires July 1.
Neither party’s budget proposal in Congress has money specifically set aside to keep student loans at their current rate. House Republicans’ budget would double the interest rates on newly issued subsidized loans to help balance the federal budget in a decade. Senate Democrats say they want to keep the interest rates at their current levels but the budget they passed last week does not set aside money to keep the rates low.
In any event, neither side is likely to get what it wants. And that could lead to confusion for students as they receive their college admission letters and financial aid packages.
“Two ideas … have been introduced so far — neither of which is likely to go very far,” said Terry Hartle, the top lobbyist for colleges at the American Council on Education.
House Republicans, led by Budget Committee Chairman Paul Ryan, have outlined a spending plan that would shift the interest rates back to their pre-2008 levels. Congress in 2007 lowered the rate to 6 percent for new loans started during the 2008 academic year, then down to 5.6 percent in 2009, down to 4.5 percent in 2010 and then to the current 3.4 percent a year later.
Some two-thirds of students are graduating with loans exceeding $25,000; one in 10 borrowers owes more than $54,000 in loans. And student loan debt now tops $1 trillion. For those students, the rates make significant differences in how much they have to pay back each month.
For some, the rates seem arbitrary and have little to do with interest rates available for other purchases such as homes or cars.
“Burdening students with 6.8 percent loans when interest rates in the economy are at historic lows makes no sense,” said Lauren Asher, president of the Institute for College Access and Success, a nonprofit organization.
Both House Education Committee Chairman John Kline of Minnesota and his Democratic counterpart, Rep. George Miller of California, prefer to keep rates at their current levels but have not outlined how they might accomplish that goal.
Rep. Karen Bass, a California Democrat, last week introduced a proposal that would permanently cap the interest rate at 3.4 percent.
Senate Democrats say their budget proposal would permanently keep the student rates low. But their budget document doesn’t explicitly cover the $6 billion annual cost. Instead, its committee report included a window for the Senate Health Education and Pension Committee to pass a student loan rate fix down the road.
But so far, the money isn’t there. And if the committee wants to keep the rates where they are, they will have to find a way to pay for them, either through cuts to programs in the budget or by adding new taxes.
“Spending is measured in numbers, not words,” said Jason Delisle, a former Republican staffer on the Senate Budget Committee and now director of the New America Foundation’s Federal Budget Project. “The Murray budget does not include funding for any changes to student loans.”
The Congressional Budget Office estimates that of the almost $113 billion in new student loans the government made this year, more than $38 billion will be lost to defaults, even after Washington collects what it can through wage garnishments.
The net cost to taxpayers after most students pay back their loans with interest is $5.7 billion. If the rate increases, Washington will be collecting more interest from new students’ loans.
But those who lobbied lawmakers a year ago said they were pessimistic before Obama and his Republican challenger Mitt Romney both came out in support of keeping the rates low.
“We were at this point and we knew this issue was looming. But it wasn’t anything we had any real traction with,” said Tobin Van Ostern, deputy director of Campus Progress at the liberal Center for American Progress. “At this point, I didn’t think we’d prevent them from doubling.”
This time, he’s looking at the July 1 deadline with the same concern.
“Having a deadline does help. It’s much easier to deal with one specific date,” Van Ostern said. “But if Congress can’t come together … interest rates are going to double. There tends to be a tendency for inaction.”
Previously, the U.S. Education Department paid a commission as high as 16 percent of the entire loan amount only if collectors convinced defaulted borrowers to make stiff monthly payments. Starting this month, the fee dropped as low as 11 percent, no matter the payments’ size, according to a copy of a new contract obtained under the U.S. Freedom of Information Act.
With $77.4 billion worth of student loans in default, the federal government turns to an army of private collectors to pursue borrowers. These companies, which receive about $1 billion annually in commissions, have faced growing complaints that they insist on high payments, even when borrowers qualify for leniency, Bloomberg News reported in March 2012. Under the new schedule, collectors will no longer have an incentive to avoid offering affordable payments tied to borrowers’ incomes.
“It’s a big deal,” said Persis Yu, a staff attorney with the Boston-based National Consumer Law Center. “It will make life easier for borrowers. We’re not setting people up to fail.”Making Good
Federal-aid law requires collectors to offer “reasonable and affordable” payments, so debtors can rehabilitate their loans, repairing their creditand making good on what they owe taxpayers.
Under Education Department contracts, collection companies rehabilitate a defaulted loan by getting a borrower to make nine payments in 10 months.
The law mandates no minimum payment for a borrower to enter a rehabilitation program, and collection companies may take borrowers’ finances into account.
Yet, under the old contract, the companies received a much higher commission if borrowers made a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size.
For example, a $20,000 loan would require payments of about $200 a month for the collection company to get its full commission. Then, the collector would receive 16 percent of the loan amount — or $3,200. If the payment fell below that figure, the collector got an administrative fee of $150.
That differential provided an incentive for collectors to insist on the amount triggering the commission and fail to tell borrowers they could pay less, Yu said. Under the new contract, borrowers with high debts and low incomes could get back on track while making payments of as little as $5 a month, while collectors could still make their commission.Obama Effort
The new commission schedule is part of an Obama administration effort to give borrowers a break as student loan debt surpassed $1 trillion amid skyrocketing tuition costs. As of last year, 5.7 million student-loan borrowers were in default, generally meaning they have failed to make payments for 270 days or more.
In 2009, Congress expanded a program that lets students tie payments to their incomes. Obama has pushed to make the program more generous.
It’s a sliding scale, based on their debt, salaries and family obligations. A single borrower with $25,000 in loans and $20,000 in income would have to pay about $40 a month, according to a government loan calculator. If circumstances don’t improve, the loans can be canceled in as few as 20 years.Flexible Repayment
The Education Department wants to provide “flexible repayment options” while maintaining “a reasonable balance between borrower and taxpayer interests,” spokesman Chris Greene said in an e-mail.
Twenty-two collection companies work directly for the Education Department. They include Horsham, Pennsylvania-based NCO, a unit of Expert Global Solutions Inc., which is majority- owned by JPMorgan Chase & Co. (JPM)’s private-equity arm, and Pioneer Credit Recovery, owned by SLM (SLM) Corp., commonly known as Sallie Mae, the largest student-loan company.
Most of the same outfits have contracts with state guarantee agencies that also chase student-loan borrowers on the government’s behalf. The contract change applies only to collectors working directly for the federal government.
Former debt collectors told Bloomberg News they worked in a “boiler-room” environment, where they could earn bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers. In the year ended in September 2011, the department received 1,406 complaints against the debt collectors it hires, up 41 percent from the year before.Taxpayer Money
Debt collection companies said they follow federal laws and use all available tools to recover money for taxpayers, helping to make sure future college students have access to financial aid. The companies helped the Education Department recover $13.1 billion in defaulted loans during the year ended Sept. 30.
Regardless of commission rates, NCO offers “all available federal programs,” Tim Galloway, senior vice president, said in a phone interview. The company always treats borrowers “with dignity and respect,” he said.
Pioneer “works one-on-one” with defaulted student-loan borrowers, offering government programs “helping them return the money they borrowed to American taxpayers,” Patricia Nash Christel, a Sallie Mae spokesman, said in an e-mail.