The fiscal fault line of college loans
About 41 million Americans owe money on college loans. Ten million are late, or have stopped paying. The government wants to know why.
About 41 million Americans owe money on college loans. Ten million are late, or have stopped paying.
The government wants to know why.
On Wednesday, as a gang of U.S. senators and representatives geared up for hearings before the annual budget fight on subsidies for higher education, no fewer than three federal agencies - the Consumer Financial Protection Bureau and the Education and Treasury Departments - issued a joint report on college lending that said, in sum, We gotta find out more about this.
Do loan collectors, aka servicers, bleed students for unfair fees? The consumer bureau has accused lenders of that.
But this report noted that servicers charge flat monthly fees whether a borrower is in trouble or not, and that it might be good to "realign incentives" so more borrowers get into debt relief programs before they default.
Are student loans confusing? There aren't consistent service or reporting standards - as there are for home loans and credit cards - and maybe there should be, the report finds.
The agencies note that a lot of college borrowers don't understand how much they end up paying over the long run - and aren't equipped to distinguish between government-backed loan deferment, forbearance, forgiveness, slow-pay and pay-what-you-can programs, all to keep borrowers from going completely deadbeat. Even when they qualify.
Can't pay your loan? Call the Education Department, your lender, and your loan collector or servicing firm, and you are likely to hear from each about different troubled-loan programs and alternatives, each with different short- and long-term effects on your payments and your loan's co-signers (hi, Mom and Dad!).
There are so many choices that borrowers have to "evaluate trade-offs between competing benefits," the report says.
And whose fault is that? "Shoddy student loan servicers are failing to enroll borrowers in income-based repayment plans when they get into trouble paying these loans," says Maura Dundon, counsel at the Center for Responsible Lending. "Student loan servicing is a mess in need of an urgent cleanup and more government oversight."
Or is it the borrower's fault? "Federal policy should make it a priority to educate borrowers before they sign on the dotted line," argued Navient, the Wilmington-based company that contracts with the government to service student loans and make sure they are repaid, in a presentation to investors the same day the government report came out.
Maybe borrowers too distracted to read a loan agreement and weigh the costs of not being able to pay the money back aren't ready to borrow for college?
Maybe we ought to test borrowers - make them take a loan SAT - before they sign up for college debt?
Reading between the lines, you can interpret the student loan data to show that the situation might not be quite as ugly as it looks on first glance.
For example, even though one-quarter of borrowers are late, they are late on only about $175 billion, or one-seventh, of the $1.2 trillion-plus in outstanding student loans.
So the typical student in trouble borrowed less than the average of all student borrowers. It's as if people who borrow a lot to complete a challenging pre-professional curriculum may be more likely to pay it back than those who take a few for-profit trade school courses, then call it quits.
The government points out that the typical student debt load - the amount owed on graduation - is up 60 percent from 2007 levels, outpacing inflation.
Navient replies that the actual monthly debt payment is up less than 20 percent, compared with 2000, when loan terms were more onerous.
The government admits that it doesn't know the factors that make some people less likely to repay, and wants more research. When it learns more, should it be less willing to back loans to shaky borrowers? What if they turn out to be the people most in need of borrowing, if they are to get higher education?
The report stops short of detailing new guidelines; those will presumably be proposed by the government agencies in the months ahead.
That creates uncertainty. So investors assume bad news: Maybe the government will force lenders and servicers to educate borrowers better, without letting them raise their fees to pay for it, cutting profits. Navient shares traded down the day the report came out, to their lowest value since going public last year. Sallie Mae, which writes private student loans, slipped to a two-year low.
Three of my kids have graduated college with student loans. Teased by a colleague who managed to graduate her kids debt-free so they could see the world and buy a truck while mine slave away, I asked Son Three if I'd been a bad dad, leaving him in debt.
"No," he told me. "If I wanted to graduate from college without owing any money, I'd have gotten more A's in high school."
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FOR MORE HELP
Consumer Financial Protection Bureau: Independent federal agency advocating for fair lending practices. http://www.consumerfinance.gov/blog/category/student-loans
Clarifi: Philly-based nonprofit counseling service 1-800-989-2227 https://www.clarifi.org/node/1211
Community Legal Services: Helping poor city borrowers in disputes with lenders. http://clsphila.org/get-help/student-loans
Pa. Higher Education Assistance Authority: 800-692-7392 https://www.pheaa.org/college-planning/student-aid-guide/guide.php?pg=23
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(215)854-5194@PhillyJoeD