Amounting to $1.3 trillion at present, America’s student loan debt has become the largest form of consumer debt, second only to mortgages. Given the pace at which the nation’s student loan debt is increasing, the Obama administration has unfurled its latest measure in promoting college accessibility and affordability: The Student Aid Bill of Rights.
President Obama has signed a presidential memorandum, titled the Student Aid Bill of Rights, which directs federal agencies to revamp the manner in which borrowers repay their student loans. The president announced the bill during an appearance at the Georgia Institute of Technology in Atlanta. The White House believes that the changes proposed could affect no less than 40 million Americans with current student loan debt.
It’s worth noting that the nation’s student loan debt varies greatly by state. For example, approximately 140,000 borrowers in DC have an average student loan debt of $40,885. The borrowers of Georgia (about 1,454,000) come next with an average student loan debt of $30,443. North Dakota (with 114,000 borrowers) comes at the bottom of the list with an average student loan debt amounting to $22,379. For the entire list, click here.
Creation of the Central Federal Student Loan Website
The bill includes instructions for the Education Department to create a new web site by July 2016. This website would particularly benefit students:
- Having multiple loans
- Whose lenders have sold the loans to another lender
The website would enable borrowers to file complaints and provide feedback. The feedback could pertain to federal student loan lenders, servicers, collection agencies and schools. The website would enable the department to respond quickly to complaints.
Similarly, the Obama administration plans to establish a central point of access for all borrowers repaying their federal student loans to enhance transparency levels. This centralized point of access would enable borrowers to check their accounts and track payments – regardless of the company that services their loans. At present, borrowers rely on their respective loan servicers to furnish this information on an as-needed basis.
Greater Levels of Transparency and Clarity on Student Loan Disclosures
The Student Aid Bill of Rights also focuses on enhancing the way borrowers interact with student loan servicers. These loan servicers typically collect and apply loan payments. As part of the measures listed in the presidential memorandum, companies such as Sallie Mae (Navient) and Nelnet would need to alert borrowers when:
- The loan servicers transfer loans to another firm or,
- Borrowers fall behind on their payments
For years, many consumer groups have complained that student loan servicers have failed in their duties to borrowers. For example, many student loan servicers do not help borrowers struggling with their loans to become aware of the options available to them. As a result, these borrowers end up falling behind on their loans or defaulting on them.
Stronger and Clearer Reforms on Student Loan Repayment
The Consumer Financial Protection Bureau (CFPB) conducted a study which concluded that loan servicers often spread out payments across multiple loans even after receiving payments within the stipulated grace period. Doing so enables these loan servicers to trigger more late fees or to levy late fees on the hapless borrowers. In fact, the CFPB also found that servicers often inflate the minimum payment by including loans in deferment.
To address such occurrences, the new presidential memorandum also seeks to ensure that servicers automatically apply prepayments to loans that have the highest interest rates, unless directed otherwise by borrowers.
In addition, the federal government has tried adding incentives for encouraging loan servicers to assist borrowers. For example, the Department of Education recently re-negotiated its contracts with the companies that manage the government’s portfolio of student debt. A key change in the new contracts is the provision of bonuses to staff members, who help in reducing delinquencies or defaults.
Provision of Fair Treatment for Borrowers with Defaulted Loans
President Obama also plans to simplify and automate the income verification process, by working in conjunction with the Treasury. This measure would help in keeping borrowers enrolled in the income-based repayment plans. To an extent, the Department of Education believes that income-based repayment plans have contributed to the improvement in student loan defaults.
Another provision specifies that the president will hold accountable the companies used by the federal government for collecting past-due student debt. The president wants these organizations to focus on helping borrowers return to good standing without charging them an exorbitant fee in the process.
The Department of Education Rescinds Contract with Five Private Collection Agencies for Duping Borrowers
It is worth noting that the Department of Education recently canceled its contract with five of the 22 private collection agencies it uses for recovering past-due student loans. These five collection agencies include:
- Pioneer Credit Recovery
- Coast Professional
- Enterprise Recovery Systems
- National Recoveries and,
- West Asset Management
After reviewing hundreds of phone calls between borrowers who had fallen behind on their loan payments and all the collection agencies it employs, the department found that five of its collectors had misled borrowers into believing that they could repair the credit of the borrowers or waive collection fees if the borrowers paid up.
Reports from the National Consumer Law Center accused the department of creating a system whereby collection agencies felt empowered to use high-pressure tactics against borrowers. Research has revealed that the more money that debt collectors recouped, the higher scores and money they ended up receiving from the department. For instance, Pioneer Credit Recovery earned $65 million for recovering past-due student loans payments for the government in 2014 alone.
Danielle Douglas-Gabriel writes that the department’s Office of the Inspector General had criticized officials for not tracking and responding to complaints filed against debt collection agencies appropriately. To remedy this, the Treasury had planned to launch a pilot program for removing some student loan accounts from the purview of the department’s debt collectors.
In addition, the Treasury is ascertaining whether the government should take over the management of debt collection services, rather than leaving them under the control of third-party contractors.
The Student Aid Bill of Rights – Another Step in Making College More Affordable and Accessible to Students by President Obama
Making college more affordable and easier to access has been one of President Obama’s constant endeavors. Five years ago, President Obama signed student loan reform into law. As a result, several billion dollars’ worth of bank subsidies went toward student aid. Other noteworthy measures taken by President Obama for making college easier to access include:
- Increasing the maximum Pell Grant by $1,000
- Creating the American Opportunity Tax Credit worth up to $10,000 over four years of college and,
- Enabling borrowers to cap their student loan payments at 10 percent of their income
Given that the average college graduate leaves school with a debt amounting to nearly $29,000, the new measures will be useful too. The new Student Aid Bill of Rights will focus on streamlining and improving the manner in which the federal government interacts with students, thereby making it easier for student borrowers to repay their loans.
At present, the federal government is managing over a trillion dollars of consumer debt. Douglas-Gabriel mentions that in the preceding five years, the government has cut banks and other financial institutions to become the foremost lender in the student loan market. This decision enabled the government to save about $60 million, which it redirected to federal grants to enable lower-income students to attend college.
For the moment, President Obama’s Student Aid Bill of Rights will apply primarily to federal student loans. As such, it will not have any effect on the education loans given by banks and other private financial firms.
However, President Obama has entrusted a group of federal agencies to ascertain ways by which they could strengthen consumer protections by covering private loans. These agencies would analyze student debt trends before coming up with various regulatory changes. If needed, the government could resort to formulating new regulations or statutes for achieving these objectives.
The new measures proposed by President Obama will not require new legislation from Congress. Although it might not appear to be a “game changer”, it will certainly help in tilting the student loan process in favor of the student borrowers.