By Deanne Loonin
The Obama Administration deserves to be commended for the many ways it has improved the federal student loan system, including the elimination of the Federal Family Education Loan (FFEL) program and its efforts to set standards in the for-profit college industry. These endeavors have shown levels of courage and innovation that we have not seen in a long time.
Yet when it comes to student loan collection policies and protecting the rights of borrowers in default, this Administration has unfortunately followed in the footsteps of its predecessors, too often using “take no prisoners” collection tactics even if it means denying borrowers their legal rights.
There is a delicate balance between the government’s responsibility to collect defaulted debts and the rights of borrowers. Despite what borrowers so often hear, the balance is not always on the side of collection. Borrowers have rights to get out of default or cancel their loans even if there is a cost to taxpayers in some cases. It makes no sense (and it is often against the law) to gouge every penny out of disabled, low-income borrowers.
Unfortunately, even when the law provides otherwise, the Administration and its contractors skew too far toward a “collection at all costs” system. I have come to see this not as a blind spot, but rather as an intentional way of doing business.
There are many ways to illustrate this point, but one experience in particular stands out -- the Department’s failure to allow borrowers into Income Based Repayment (IBR) program after they consolidate their defaulted loans.
This is a particularly puzzling issue because the Department knows it’s a problem and agrees that these borrowers are entitled to IBR, which caps the total amount struggling borrowers need to pay on their federal loans each month based largely on their income. Even so, more than a year has passed since IBR went into effect and the problem has not been fixed.
It is clear in the law that borrowers in default can consolidate with Direct Loans by either making three satisfactory repayments or by consolidating right away and selecting either IBR or the Income Contingent Repayment program, which was created in 1993 to help struggling borrowers in the Direct Loan Program repay their debt as a percentage of their income. The latter option (consolidating without first making payments) is what the Department calls “forced consolidation.” The problem is that when these borrowers select IBR, we have found that they end up in Income Contingent Repayment program instead. In numerous meetings and conversations with Department staff, I have been told that this is an operational problem that will be fixed. In the meantime, I am told, these borrowers can “simply” switch to IBR.
But the Department and its contractors do not appear to be telling these borrowers that they have the option to switch. To make matters worse, if these borrowers do try to do so, we have found that the servicers are telling them (wrongly) that they must make payments first.
This might seem like a minor problem in the overall scheme of the huge student loan program. In fact, it is a very important issue for borrowers in default. Payments under IBR for most borrowers are going to be substantially lower than under ICR because of the formulas the government uses under these programs to calculate repayments. The Department has touted the IBR plan as much better than ICR. Could the government possibly be saying that the borrowers in the most distress and greatest need should just live with the old plan?
There is more to this story. For one thing, it is pretty obvious that the Department doesn’t like forced consolidations. They compensate collectors more if they stay away from these consolidations. This is very clear from the 2009 private collection agency manual, which the Department so quickly took off-line this spring.
The manual acknowledges that many of the “requirements” discussed there are more restrictive than what the law requires. Collectors, according to the manual, should of course comply with the law, but they will only get paid in many cases if they go beyond it.
Money talks and when the government withholds or reduces payments for “forced consolidations,” the collectors listen. For example, the Department repeats in the manual that collectors must not tell a borrower that she is ineligible for consolidation, but then (wink, wink) specifically allows agencies to refuse to assist borrowers with consolidation or to choose not to mention consolidation as a resolution option.
It is not surprising that borrowers try to bypass the collection process since this is hardly a source of objective information about the pros and cons of various strategies. The collectors fight back, all too often telling borrowers that they must go through the collection agencies in order to get out of default. No wonder since collection agencies generally do not earn fees if borrowers apply directly to Direct Loans for consolidation.
It appears that the system is intentionally set up to reinforce a belief that borrowers in default should have to make some payments before they can consolidate. I disagree with this conclusion, but it’s certainly fair to have a policy debate on this issue. In the meantime, it should not be controversial to suggest that the Department must follow the law rather than enforce policy preferences through the collector compensation system and by putting up bureaucratic roadblocks.
I have written letters to Secretary Duncan and others and had countless meetings with Department staff about this issue and many others. Despite the responses of many people with good intentions, the problem has not been resolved. This is not a personal attack by any means, but good intentions are irrelevant if they do not lead to action.
I thought this problem would be fixed by now because I have seen the Department resolve other IBR problems fairly quickly. However, these other operational problems were not confined to borrowers in default, so I can’t help but conclude that this population is a lower priority at the Department.
The new IBR program is supposed to be a way for many of the most vulnerable and neediest borrowers, in many cases victims of proprietary school abuses, to start again. The ability to get consolidation right away is critical, especially for those who want to go back to legitimate schools and need federal assistance to do so. Yet they are being shut out of IBR. Is it because of indifference or incompetence? Either answer is not good.
Deanne Loonin is a staff attorney with the National Consumer Law Center and the Director of the Center's Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including "Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers," and "Income-Based Repayment: Making it Work for Student Loan Borrowers." Her views are her own and do not necessarily reflect those of the New America Foundation.