President Obama signed a presidential memorandum Tuesday directing federal agencies to overhaul the way Americans repay their student loans.
The move is the latest in a series of steps the administration has taken to promote college access and affordability, including expanding a program that caps student loan payments to 10 percent of a person’s income for 20 years. It comes at a time when student debt has surpassed $1.3 trillion and the average graduate is leaving school with nearly $29,000 in education loans.
To highlight the importance of affordability, Obama unveiled his plan Tuesday at Georgia Institute of Technology, a school routinely ranked as one of the best bargains in education.
“Every borrower has the right to an affordable repayment plan,” said Obama. “Every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans.”
The new presidential memorandum, entitled the Student Aid Bill of Rights, calls for the Education Department to create a new Web site by July 2016 to give borrowers a simple way to file complaints and provide feedback about federal student lenders, servicers, collection agencies and even their schools. The portal is supposed to help the department to quickly respond to complaints.
Much of the president’s plan involves improving the way borrowers interact with student loan servicers, the middlemen who collect and apply loan payments. Obama will require companies, including Navient and Nelnet, to alert borrowers when their loans are transferred to another firm or if they fall behind on payments.
“We have to recall the bitter lessons that were learned from our experience in the mortgage industry, which shows us that quality servicing doesn’t just happen,” Treasury Deputy Secretary Sarah Bloom Raskin said on a call with reporters Monday evening. “Servicing…is a part of the borrower experience that may not be completely transparent and comprehensible to borrowers.”
To improve transparency, the administration will establish a central point of access for all people repaying their federal student loans to check their accounts and track their payments, rather than leaving it up to each individual servicer to furnish that information. It will also require servicers to automatically apply prepayments to loans with the highest interest rates unless otherwise directed by borrowers.
Consumer groups have complained that student loan servicers fail to make people struggling to repay their loans aware of the options available to them, leading borrowers to fall behind or wind up in default. A series of reports have questioned whether servicers intentionally mislead borrowers to maximize their profits.
A recent study by the Consumer Financial Protection Bureau found that some servicers spread out payments across multiple loans to trigger more late fees or charge late fees even when payments are received during the grace period. The CFPB discovered cases of servicers inflating the minimum payment due by including loans in deferment.
The government has tried adding incentives to get servicers to assist borrowers. The Department of Education recently renegotiated its contracts with the companies that manage the government’s portfolio of student debt, offering bonuses to those that reduce delinquencies or defaults.
“It’s our responsibility to make sure that the 40 million Americans with student loans are aware of resources to help them manage their debt, and that they are doing everything—and that we are doing everything that we can to be responsive to their needs,” Education Undersecretary Ted Mitchell said on a call with reporters Monday evening.
There has been a significant increase in the number of borrowers able to peg their monthly payments to their incomes, which the department credits for the decline in student loan defaults. The percentage of people enrolled in such programs at the end of September increased 64 percent from the same time a year earlier. To keep borrowers enrolled in these so-called income-based repayment plans, Obama will work with Treasury to simplify income verification by potentially automating the process.
The president also plans to hold accountable the companies the government uses to collect past-due student debt by making sure they are working with borrowers to return them to good standing and not charging them exorbitant fees in the process. The move dovetails with the Education Department’s decision last week to cancel contracts with five private collection agencies for duping borrowers into believing that they could repair their credit or waive collection fees if they paid up.
The department’s Office of the Inspector General has been critical of officials for not doing enough to track and respond to complaints filed against collection agencies. Against this backdrop, Treasury said in November that it would launch a pilot program to wrest some student loan accounts out of the hands of the department’s debt collectors. Treasury is trying to determine whether debt collection services are best left with the government, rather than third-party contractors.
In the last five years, the government has become the dominate lender in the student loan market by cutting banks and other financial actors out of the equation. That decision has saved the administration $60 million that it redirected to federal grants to help lower-income students attend college. But the decision has also placed the government in the unenviable role of managing over a trillion dollars worth of consumer debt.
“The steps that the president is announcing is going to refocus our system on borrowers,” Raskin said. “It’s going to improve loan servicing to provide greater customer service, and it’s going to ensure that affordable repayment options are available to those who are struggling.”
The new rules will only apply to federal student loans, not the education loans made by banks and other private financial firms. But the president has asked a group of federal agencies to look at ways to strengthen consumer protections to cover private loans, either through new regulations or statutes.
–Katie Zezima contributed to this report.