For the past few months, the student loan debt consolidation policy debate has centered almost exclusively on interest rates. That debate should be over, at least for now. President Obama signed a law today that makes a number of important changes to interest rates for new federal student loan borrowers. The bill ties federal student loan rates to the financial markets. That means that rates will be lower….for now, but could certainly increase as interest rates increase.
The interest rate issue is important, but hardly the only concern for student loan borrowers. In fact, the new lawonly lowers rates going forward, doing nothing for existing borrowers. As the CFPB recently asked, What about the trillion dollars of debt that’s already been borrowed? It’s even more than one trillion, now approaching $1.2 trillion according to the CFPB. This astronomical figure is higher than ever. In fact, there was 20% growth in student loan debt from the end of 2011 to May 2013, much faster than the growth for other credit products.
As many of you may already know, U.S. higher education is now a "debt-based system" due to ever-escalating tuition costs and declining median family incomes. That said, College Stats.Org has put together a very informative graphical display of the problem (shown here). Of note, many of College Stats.org's sponsored schools are for-profit colleges and universities who traditionally have a very poor track record for student loan borrower default and drop-out rates. The site does, however, offer some good information as well, such as this informative graphic
Last week, the New York Attorney General announced a ground-breaking settlement with Career Education Corp., one of the largest for-profit colleges in the U.S. This settlement highlights the crucial role student loan debt consolidation that state law enforcement agencies play in protecting students from for-profit college deception. Too many states have abdicated their consumer protection role, leaving many non-traditional and low-income students – working parents, veterans, non-English speakers, and older people who need new job skills because of today’s rapidly changing job market – at the mercy of for-profit colleges that prey on their dreams and mislead them about their job prospects after graduation.
The New York AG is one of many states attorneys general who are increasingly cracking down on for-profit college deception. Attorney General Schneiderman has taken action to protect students on several fronts, including by filing a lawsuit that alleges that an educational institution, The Trump Entrepreneur Institute, was unlicensed, unaccredited, non-federally funded and engaged in deceptive business practices. Students who finance their educations with non-governmental funds, such as private student’s loans, hard-earned savings, credit cards, or loans from family or friends, are equally deserving of protection from state oversight agencies.
New York’s $9.25 million student restitution fund in the Career Education Corp. case is the largest obtained by any AG in recent years and will provide much needed relief to many former CEC students. Unfortunately, it will not be enough to wipe out their student loans debt consolidation. Attorney General Schneiderman gathered evidence of widespread deception at New York CEC campuses that goes to the heart of why students enrolled – to obtain the skills necessary to earn higher wages and improve the lives of their families. The reality is, however, that most of these students have only earned high student loan debt and no ability to earn the higher wages necessary to pay it back. We therefore urge the Department of Education to rely on this evidence and grant students covered by the settlement a complete discharge of their student loans.
No parent should ever have to endure losing a child. Financial Times' writer Anjli Raval tells us a tragic tale made worse by a private student loan company's insistence that a grieving mother pay for an education that her deceased son will never use. Heather contributed to the article.
Four years ago, Ella Edwards lost her 24-year-old-son Jermaine. Depressed and unable to work after the unexpected death of her only child, the 61-year-old retired, hoping to grieve in peace.
PLUS Loans are the only federal student loans debt consolidation that come with some “creditworthiness” requirements. Basically, the government will deny an application if the parent is considered delinquent for 90 days or more on the repayment of a debt or has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a student loan in the past 5 years. Parents can appeal denials based on extenuating circumstances.
In 2011, the Department tightened the credit standards for parent PLUS loans by deciding to go back five years instead of just 90 days in looking at a borrower’s delinquent accounts and charge-offs. The decision stemmed at least in part from concerns about increased PLUS loan borrowing, very high PLUS loan acceptance rates and increased default rates. (We don’t really know the extent of PLUS loan defaults, however, because the Department does not include PLUS loan in the cohort default rate statistics).
The fact that so many PLUS loan borrowers are struggling with student loan debt consolidation should not be all that surprising given the rough economic conditions in our country, combined with the relatively high cost of PLUS loans and the limited number of repayment options. Most Direct PLUS loans have fixed interest rates of 7.9%. Going forward, the new fixed rate (at least for now) is 6.41% with origination fees of just over 4%. Most distressing of all, parent PLUS borrowers are not eligible to repay through the income-based repayment programs.
In the 1950s, the "American Dream" consisted of a black & white television (a color TV for the one lucky guy at the end of the block, who nobody liked anyway), a white picket fence, a beautiful or handsome spouse, a ranch-style home, and 2.5 children (of course, even that half-child ate more breakfast cereal than you believed one teenager capable of consuming). Today, the "American Dream" may be to simply find a job that pays enough to cover your student loan payments, fill the gas tank on a small car, and spring for a bi-weekly latte (no half-kids here). To achieve even that revised American Dream, you will most likely need a college degree and for most, that means student loans.
recent New York Times article focuses on the low college entry and completion rates for lower-income students. Greg Duncan, an economist at the University of California, Irvine summarizes these troubling trends in the article: “Everyone wants to think of education as an equalizer-the place where upward mobility gets started…But on virtually every measure we have, the gaps between high-and low-income kids are widening. It’s very disheartening.” The Times article digs deeper into these troubling trends to help shed light on why it is so difficult for many low-income individuals to complete college.
Started getting those tax docments arriving in the mail? Remember that the income-driven repayment plans (like Income-Based Repayment and Pay As You Earn) limit a borrower's student loan payments to an affordable level given his or her income. Monthly payments are determined based on the borrower’s Adjusted Gross Income (AGI) and family size.
To maximize the allowable reductions or adjustments from your total income:
Despite all of the government money spent on financial aid, the difference in college graduation rates between our nation’s top and bottom income groups has widened by nearly 50% over two decades. We need to reset our nation’s policy priorities so that student borrowers are given the opportunity for a fresh start, to finish school, and hopefully climb the economic ladder.
Priority Agenda for Higher Education this week, listing priorities for federal and private student loan assistance. The priorities focus on the goals of promoting equal access to higher education, giving borrowers a chance to go back to school, restoring a reasonable safety net, and ensuring that federal funds target the needs of students. These solution-oriented priorities can help restore the original goals of federal student aid to make higher education more accessible.
You say tom-a-to, I say tom-ah-to. But the income driven repayment options are much more different than their names imply.
Pay As You Earn (PAYE) gets you the lowest payments and earliest forgiveness, but can't be chosen by people who borrowed before October 1, 2007.
Income-Based Repayment is a little more expensive than PAYE but is available to more folks.
Income-Contingent Repayment isn't the newest or cheapest option, but if you are a Parent PLUS loan borrower, it's the only available income-driven plan (and only after those Parent PLUS loans are refinanced into a Direct Consolidaton Loan).
More than two years have passed since the Department of Education pulled the private collection agency handbook off of its web site and as far as we can tell, the handbook has yet to reappear in public. (You can find the old handbook from 2009 on our site).
The Department does have some collection-related information available on the “Information for Financial Aid Professionals” section of its web site. For the most part, however, this site does not include the most important information about how the government instructs and compensates its collectors. There is also some information on the government web site soliciting contractors to bid for these lucrative collection contracts. This information can be useful, but it is hard to find and far from complete in any case.
The Consumer Financial Protection Bureau (CFPB) is requesting information about ways to provide relief for private student loan borrowers. Comments must be received on or before April 8, 2013. This is a critical opportunity for borrowers and their advocates to provide input on student loan debt burdens and recommendations to help borrowers.
Our experience is that private lenders have been generally inflexible in trying to assist financially distressed borrowers. Unlike the federal student loan programs, there is no federal law requiring private student lenders to offer particular types of relief or flexible repayment. Private student loan borrowers are generally at the mercy of their creditors.
Today the Consumer Financial Protection Bureau (CFPB) released the nation’s largest searchable public database of federal consumer financial complaints, including information on more than 90,000 individual complaints on mortgages, student loans, bank accounts and services, other consumer loans, and credit cards.
“By sharing these complaints with the public, we are creating greater transparency in consumer financial products and services,” said CFPB Director Richard Cordray, "The database is good for consumers and it is also good for honest businesses. We believe the marketplace of ideas can do great things with this data.”
Social Security helps give aging and disabled Americans peace of mind. No matter how destitute we become, Social Security is meant to give us some measure of confidence that we will be able to get by.
Social Security and other federal benefits are not as secure as they used to be. A major change occured in 1996 when Congress allowed federal agencies to seize portions of Social Security payments to collect debts owed to those agencies. Certain other critical benefits are also part of this authority, including certain Railroad Retirement and Black Lung benefits. (The Treasury Department has a list of federal benefits that cannot be taken).
Our nation’s largest banks can borrow funds from the federal government at 0.75%. If Congress doesn't act, college students eligible for subsidized Stafford loans will pay 6.8 percent (more than nine times the rate big banks get).
Unfortunately, the bad news about student loan debt burdens keeps coming. The Education Sector recently highlighted a number of troubling trends, including:
From 1994 to 2009:
The percent of graduates taking out loans increased from 42% to 62%,
Median monthly loan payments as a percentage of monthly salary increased by 1.2% during this period. For the lowest income group of graduates, this figure increased from 13% to 34%,
Minnesota Congressman John Kline (R-MN), the Chairman of the House Education and the Workforce Committee, and Virginia Foxx (R-NC), Chairwoman of the Subcommittee on Higher Education and Workforce Training, co-introduced legislation yesterday to tackle the upcoming student loan interest rate hike by returning to variable interest rates on student loans. The Smarter Solutions for Students Act, otherwise known as H.R. 1911, seeks to tie the federal student loan interest rate to a market-based interest rate (similar to the plan put forth by President Obama in his Fiscal Year 2014 budget request).
In May 2012, Student Loan Collection Agency Complaint Systems Need Massive Improvement, focusing on major gaps in the federal student loan collection agency complaint system. The report found that the U.S. Department of Education (the Department), as well as its contractors, failed to provide a transparent complaint process for borrowers struggling to get out of default.
In a recent OpEd on Politico.com, Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, noted that the skyrocketing rise of unmanageable student debt is draining all aspects of the broader economy.
- Student loan borrowers are far less likely to qualify for mortgages, thereby delaying home ownership and the establishment of separate households. In 2011, 2 million more Americans in the 18-34 age group lived with their parents than in 2007. Moody’s Analytics estimates that each new household formed leads to $145,000 of economic impact.
- Student debt diminishes entrepreneurship and small-business growth. Entrepreneurs need capital to get business ideas off the ground. Unmanageable student debt often makes small business loans harder to acquire, thereby preventing many small businesses from ever getting off the ground.
- Student debt is a risk to retirement security. AARP believes that for families headed by an American ages 50-64, “increasing debt threatens their ability to save for retirement or accumulate other assets, and may end up requiring them to delay retirement.”
We have testified and written about the urgent need to restore bankruptcy rights for student loan borrowers. A robust debate on this topic is certainly welcome, but it is critical to get the facts straight. Unfortunately, a recent article by Jason Iuliano published in the summer 2012 edition of the American Bankruptcy Law Journal may give the false impression that it is not so difficult for consumers to discharge student loans in bankruptcy. (Iuliano discusses his article in this podcast). This document highlights the shortcomings of the Iuliano study and sets the record straight on undue hardship in bankruptcy.
President Obama and House Republicans seek a long-term fix to the federal student loan rate problem. Without Congressional action, subsidized Stafford federal student loan rates will double to 6.8% on July 1. Last year, Congress extended the deadline that would have mandated federal interest rates to rise from 3.4% to 6.8%, effectively punting the issue down the road one year.
Here is a brief summary of the four proposed solutions on the table:
1. President Obama's Fiscal Year 2014 Budget Request: Employs a market-based solution for setting the federal student loan interest rates. Subsidized Stafford loan rates would be equal to the 10-year Treasury rate plus 0.93 percentage points; unsubsidized Stafford loans would be the Treasury rate plus 2.93 percentage points; Parent-PLUS loans would be the Treasury rate plus 3.93 percentage points.
With more than 850,000 private student loans currently in default and thousands of other borrowers struggling to make their payments, attorneys are urging the Consumer Financial Protection Bureau (CFPB) and policymakers to help borrowers struggling to keep up with their private student loan payments. Attorneys submitted comments in response to the CFPB’s formal request for information discussing the successes and failures of recent efforts to modify home mortgages, and how those lessons could be applied in the context of student loans. Attorneys said that borrowers with unaffordable payments have described how difficult it is to work out any kind of payment plan with private lenders (federal student loans, in contrast, offer a number of repayment and reinstatement options).
Student loan borrowers have about 6-months following graduation before they have to start making payments on their student loans - a grace period. For the class of 2013, that means their grace period for their federal student loans will end around October. The first step is to get a clear picture of your situation.
Get a clear inventory of your loans
- It's always important to start by figuring out exactly what kind of loans you have and what the "status" is of your loans. You can look up your federal loans on the National Student Loan Data System, where you will need a PIN issued by the Department of Education. You can get a PIN for NSLDS here.
In discussing the company’s lending to “non-traditional” students, Sallie Mae CEO Al Lord said in a June 5, 2008 interview that “[i]t was obviously a mistake and I’m not going to step away from responsibility because I was either chairman or CEO when those loans were made. We got a little too confident in our own view that credit scores are of limited meaning for undergraduates. Maybe as early as 2004, we started lending with less selectivity. The culture of the company has been a FFELP [federal guaranteed loan program] culture for 35 years. That meant you made every loan to every student. I guess with 35 years of experience of saying yes, we were just not very good at saying no.”
The House of Representatives is scheduled to vote tomorrow, May 23, on House Resolution 1911. Under the bill, sponsored by U.S. Reps. John Kline and Virginia Foxx, new federal student loans would have variable interest rates set using the following formula:
- Stafford loans (subsidized and unsubsidized): 10-year Treasury Note plus 2.5 percent, capped at 8.5 percent.
- PLUS loans (graduate and parent): 10-year Treasury Note plus 4.5 percent, capped at 10.5 percent.
While the debate about student loan interest rates attracts most of the buzz these days, student loan debt collectors continue to fly under the radar. It is particularly difficult to get to the bottom of the collections issue because we know so little about how these debt collectors get paid and how much they are profiting from financially distressed borrowers.
Given the high stakes and huge amount of money involved, one would think that the government would be meticulous in accounting for payments to collectors. Sadly, a recent Department of Education Inspector General report indicates that in 2012, the Department made payments based on estimates. According to the report, the Department was unable to calculate the actual commissions earned by the collection agencies and so they paid estimated commissions without reviewing supporting documentation. This was not small change—$448 million in commissions to agencies and $8.3 million in bonuses.
The Student Doctor Network, a non-profit educational website, announced earlier this month the results of its second annual user survey, which covers the impacts of student debt and the future of health care. Polling its membership of current and future health care providers including physicians, dentists, pharmacists and psychologists, the Student Doctor Network asked its members a number of questions based upon each respondent's educational level, while covering a variety of topics important to pre-health students (undergraduates), health professional students, and health professionals.
We released a new report today, Searching for Relief: Desperate Borrowers and the Growing Student Loan Debt Relief Industry. This industry has sprung up in response to the demand for student loan borrower assistance and this report documents multiple problems as well as potential violations of consumer federal and state laws. Given the many misrepresentations uncovered, it is unlikely that these companies are providing quality services in return for the money they are charging. Such practices severely compound the pain of vulnerable consumers seeking to find resolutions to difficult student debt problems. The U.S. Department of Education should make it easier for student loan borrowers to access its borrower assistance programs, and federal and state authorities should ensure that these companies comply with the law so that consumers truly understand what services they are buying.