President Barack Obama on Tuesday proposed a “student aid bill of rights” that offers about a half-dozen small but important improvements for the 40 million Americans who are dealing with student loans.
While congressional action would be needed to make significant changes in the student loan program, President Obama has ordered the Department of Education to take steps by 2016 to make things simpler and easier for student borrowers.
In a speech at Georgia Tech, the president said the federal government will now "require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you’re falling behind, help you get back in good standing with reasonable fees on a reasonable timeline." The reforms announced today will:
1. Create a centralized website that makes it easy to file complaints and to see all your student loans in one place. Jesse O’Connell, assistant director of federal relations for the National Association of Student Financial Aid Administrators, said many students are confused by the government’s use of contractors to collect their loans. Some borrowers who receive letters from these anonymous-sounding private companies, such as Navient (a spinoff of Sallie Mae), throw the letters away, thinking they are identity theft scams. A simple centralized website where borrowers could see all their student debt information, payment amounts, and due dates is a “basic consumer-friendly protection,” O’Connell said.
2. Try having federal employees collecting debts instead of private contractors. The Department of Education is already working with the Department of the Treasury to test out having federal employees collect defaulted student loans. Deanne Loonin, of the National Consumer Law Center, called this a good first step, though only a first step. In a blog post about the proposals, she called the use of private debt collection agencies "a disaster" for financially distressed borrowers, and called for the Department of Education to stop using private debt collectors all together: “Debt collectors are not adequately trained to understand and administer the complex borrower rights available under the Higher Education Act, and the government does not provide sufficient oversight of their activities.”
3. Make it easier for borrowers who become disabled to get their student loans discharged. Currently, some borrowers who qualify as disabled through the Social Security system don't know that they are eligible for a disability discharge, Loonin says. Making the disability discharge rules clear and consistent “is a critical change for some of the most vulnerable borrowers and should be implemented immediately,” she wrote.
4. Ensure that the private debt collectors hired by the Department of Education apply prepayments first to loans with the highest interest rates, unless the borrower requests a different allocation.
5. Make it easier for students to get IRS information to qualify for income-based student loan repayment.
6. Clarify the rules under which students who declare bankruptcy can get their student loans reduced or eliminated. Congress and the federal bankruptcy courts have imposed tough rules that make it far more difficult for student loan borrowers to get out from under their obligations than almost any other kind of debt. But the president asked the Department of Education to at least clarify the rules to collectors so they can be applied consistently.
What Government Can Do Next
While these steps would improve the lives of many people struggling with student debt, experts pointed to three bigger, but politically unlikely, changes that could make student loans far more affordable and fairer. First, simplify the government’s complicated, income-based repayment system into one option, and automatically sign all borrowers up for the program. University of Michigan economist Susan Dynarski, one of the nation’s leading researchers on financial aid, calls the current menu of “income-driven,” “income-contingent” and "income-based” options a “bewildering array” that requires students to jump through many bureaucratic hoops to qualify for the payment plans that will benefit them the most.
Second, stop charging fees on federal student and parent loans. O’Connell, of the association of financial aid administrators, says that the 4.292% fees on federal parent PLUS loans, for example, are not well explained to borrowers and add an unnecessary expense to families. Eliminating them, which would take congressional action, would save families more than $1 billion a year, he says.
And finally, make it easier for borrowers in dire financial straits to reduce or eliminate their loans in bankruptcy. Loonin, at the NCLC, notes that bankruptcy judges across the country apply varying levels of strictness to the rules, which say loans can only be discharged if repaying would cause an “undue hardship.” These variations make it unfair for borrowers seeking relief and force many to spend what little money they do have on lawyers. Since the strict bankruptcy rules were created by Congress, however, it's up to Congress to change them.