Default Response

As student loan defaults and student loan debt continue to trend upwards, regulators, lawmakers, policymakers and higher education institutions will be more and more motivated to act. In fact, a response has already been initiated by the President, Congress and the Department of Education.

When the federal student loan process was reviewed with an eye to reform, some basic questions were asked such as the inquiry of  Rep. George Miller (D-CA), then Chairman of the Education and Labor Committee,  “Why are we paying people to loan the government’s money and then the government guarantees the loans and the government takes back the loan?” This concern as well as some others were addressed when, in the historic health care legislation passed by Congress and signed by the President, commercial banks were eliminated as middlemen in federal student loan origination, which proponents at the time argued would save $63B over the next ten years, most of which will be invested into PELL grants.

On federal student loans signed after July 1, 2014, the following changes were made:

  1. All federal student loans will be originated by the Department of Education. Commercial banks will not be able to originate.
  2. Caps repayment at 10% of student’s income rather than 15%.
  3. If the debtor remains current, then the loan is forgiven after 20 years rather than 25 years (even less for certain public servants).
  4. A 6.8% interest rate (3.4% for those who qualify for subsidized loan).

 Last month the Department of Education issued its regulations pertaining to Title IV eligibility for career colleges by morphing the previously proposed gainful employment metric into a student loan repayment metric. This continues to increase the importance of student loan success to the DOE and those colleges effected. Because you might not be a career college or a for-profit, does not mean you will have perpetual absolution from this metric.

As warned by Peter Wood on January 16, 2011, in The Chronicle of Higher Education, the problem that this effort is trying to rectify is the efficient exploitation of the Federal Student Loan system while ignoring the quality of education provided and the high student debt caused.

However, he made a further important assessment when he wrote, “But the hard truth of the matter is that a great many colleges and universities in the not-for-profit sector are barely distinguishable from the for-profit institutions on any of these parameters except the efficiency by which they exploit the federal financial aid system.”

 There is no doubt that if the student default problem continues to trend upward then the spotlight will turn to the entire higher education spectrum.

Here are some of the future responses that are on the horizon or should be on the horizon to address student loan defaults and some of its ancillary issues.

Bankruptcy

Since 1978, federal student loans cannot be discharged in bankruptcy in order to protect federal taxpayer funds.

In 2005, commercial banks were able to get private student loans to be included in this discharge protection except under very rare circumstances.

However,  U.S. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Al Franken (D-MN) joined U.S. Representatives Steve Cohen (D-TN), Danny Davis (D-IL), George Miller (D-CA) and John Conyers (D-MI) in introducing legislation, that they believe will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. They can be discharged.

Senator Durbin stated, “Unlike federal student loans, there are few consumer protections available for these private student loans leaving some students stuck with this debt for the rest of their lives. Today’s bill will restore some fairness in student lending, by allowing financially distressed borrowers of private student loans to discharge those loans in bankruptcy, just as other types of private debt can be discharged.”

Co-Signer Notice

Legislation has been introduced in the House and the Senate to require private lenders to ensure that co-signers understand their obligations, if the borrower dies before the loan is repaid. According to Lauren Asher, president of the Institute for College Access & Success, federal student loans are usually discharged if the borrower dies before the loan is paid off. However, co-signers of private loans may not have this protection. It is all dependent on the wording of their loan contract.

Facilitation of Consolidation of Students Loans

The Student Loan Simplification and Opportunity Act Of 2011 filed by Senator Sherrod Brown (D-Ohio), will give six million college students a financial incentive of a 2% reduction in their FFEL student loan balances if they consolidate them under the federal government’s Direct Loan program within nine months of the laws effect. “Having multiple payments to multiple servicers can complicate the repayment process and increase the risk that a borrower may miss a payment and accrue financial penalties,” Mr. Brown said.

The Congressional Budget Office estimated the legislation would save $1.8 billion over 10 years by eliminating federal subsidies for FFEL lenders and under this bill. Those savings would be reinvested into Pell Grants.

Job Creation

There is no doubt that a major part of the increase in student loan defaults is due to the dismal employment market that we now find ourselves in. Every policy, every program, every regulation and every law must be implemented with both eyes on job creation. Job creation is the key remedy to most of our economic problems.  If you don’t have a job or if you are only able to work part time, then you will struggle paying your bills including your student loans.

That is exactly the challenge facing young college graduates that is empirically laid out in The Economic Policy Institute’s report, “The Class of 2011, Young workers face a dire labor market without a safety net”. This report cites a loss of 11 million jobs with the average stay on unemployment running at nine months. In other words, the job problem is deep and it’s wide.

 It also found specifically that college graduates under the age of 25 are experiencing an unemployment rate of about 9.3% as of March 2011, which is close to the overall unemployment and almost twice as much as the 4.7% for college graduates over 25. This number is especially concerning when you compare it to the last two downturns (6.4% in summer, 2003 and 6.9% in summer, 1992). This report expects that newly minted college graduates will continue to struggle in the toughest job market for them since the beginning of The Great Recession.

The recent June 2011 numbers do not show any relief from this expectation with nonfarm payrolls only adding 18,000 jobs and the unemployment rate increasing to 9.2%. That means that 14.1 million are unemployed, companies are not hiring and jobs are not being created. So, the response should be twofold, “Jobs, Jobs, Jobs” and “Retain, Persist and Graduate.”

Institutional Response

Colleges and universities need to become proactive in addressing the student loan non-compliance problem both at the front door and the back door.  On the front end, schools should have some mandatory education for prospective students to complete before getting their loans. For example, Virginia’s Tidewater College makes students develop budget plans.  On the back end, before a diploma is granted, each graduate should have to complete a formal process that will remind, educate and notify them of their obligations under their student loan contracts, the different remedies available to help repayment problems and the consequences of defaulting.  Throughout their educational journey, schools need to invest more in student success and contact resources that will increase retention and persistence rates and get them to graduation. As is well documented, those with a degree, even in this job market, have a higher likelihood of getting a job and making more money than those who don’t. And that means better resources for timely repayment of their student loans.

Steven Panagiotakos
Greenwood Hall
spanagiotakos@greenwoodhall.com

Steven Panagiotakos is the Senior Policy Advisor at Greenwood Hall. From 1993-2011 he was in the Massachusetts House of Representatives and the Massachusetts Senate, where he was the Chairman of the Ways and Means Committee.