“Student loan servicers may not be acting as the beacons we need them to be,” Raskin said. “We need to see increased enrollment in income-driven repayment plans, high touch servicing, and counseling that helps borrowers understand their options and sets them on a more secure financial path.”
Raskin’s comments arrive as Treasury and other federal agencies carry out President Obama’s plan to overhaul the way Americans repay their student loans. This week, the Consumer Financial Protection Bureau is scheduled to release a report detailing problems in the servicing of student loans.
Ahead of the release, Raskin identified shortcomings in the way servicers are managing the nearly $1.3 trillion in outstanding student loans. She noted that 8 percent of federal student loans are in default and 10 percent are past due, despite the availability of plans that cap monthly loan payments to a percentage of earnings.
“Certainly default cannot be avoided in every case,” she said. “However, many distressed student loan borrowers should qualify for an affordable payment through an income-based repayment plan. Borrowers have good options when it comes to repayment, and servicers need to inform borrowers of these options. ”
A recent report from the Government Accountability Office found that while servicers make information about income-driven plans available through customer service representatives and Web sites, borrowers have to actively seek it out. And even when servicers contact people who are falling behind on their payments about repayment options, the information is often inconsistent. About 70 percent of the people who defaulted on their loans could have qualified for an income-driven plan had they known about them, the report said.
Still, Raskin laid an equal amount of blame for the problems in student lending at the feet of schools. She took aim at for-profit colleges, where students borrow heavily and have great difficulty paying back loans. Raskin referenced a recent study from the Brookings Institute that found nearly half of recent borrowers from for-profit schools defaulted within five years, and were more likely to have low wages or be unemployed than students at four-year public and private colleges.
“These results suggest that students who could receive some of the greatest benefits from education are seeing the worst outcomes,” Raskin said. “They are borrowing more and earning less. Who is advising them? Who is helping them navigate?”
All colleges, she said, should share in the financial risk of their students taking out loans to pay for school. That could mean tying state funding to student outcomes or forcing colleges to pay up in the event of widespread defaults, an idea that is gaining broad support in Congress.
“Schools benefit from tuition payments often made with the support of federal student loan dollars. Yet these schools feel little impact if students do not complete their education, fail to realize earnings gains, and are unable to repay their loans,” Raskin said. “Students and taxpayers end up bearing all of the risk associated with delinquency and default.”
Critics of these so-called risk sharing plans say they could lead colleges to admitted fewer low-income students out of fear of having to foot the bill if they fail to repay their loans. Raskin said policymakers must weigh those sorts of unintended consequence as they shift more of the risk of borrowing toward schools, but not abandon measure that could ultimately encourage schools to rein in on costs and improve the quality of the education.
“Too many institutions are consistently failing to produce positive outcomes for the students who would benefit from a quality higher education,” she said. “It is critical that we continue to focus on enhancing accountability so that these institutions are not removed from the consequences of unacceptable results.”
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