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White House steps up effort to reform student loan servicing to stave off rising defaults

The White House and the National Mall view from the Hay-Adams Hotel. (Photo by Oliver Contreras/For The Washington Post)

The White House unveiled a series of initiatives Thursday to improve the way the government collects payments on education loans, at a time when defaults are rising.

Government agencies are working together to provide the 43 million Americans who carry $1.3 trillion in student debt more transparent information about the terms of their loans, account features and consumer protections. They also are asking colleges, local governments and employers to help get out the word out about repayment plans, especially those that cap monthly payments to a percentage of earnings, known as income-driven repayment plans.

“We know costs are rising too fast and too many Americans are struggling to pay back their loans,” Education Secretary John B. King Jr. said on a call with reporters Wednesday. He said the administration is working to ensure borrowers “get the high quality customer service, strong consumer protections and support they deserve to successfully repay their student loans.”

The Obama administration has given Americans more options for repaying their student debt so they can avoid default, expanding income-driven plans that require little to no money from people in dire straights. Direct outreach by the Department of Education and marketing campaigns has led to higher enrollment, yet the amount of people severely behind on their debt remains stubbornly high.

Obama plans to make it easier to pay your student loans

At the end of March, 7.9 million people had not made a payment on $121 billion in student loans for at least nine months, a nearly 8 percent increase over the same period a year earlier, according to the latest data from the department. More than half of the people in default have loans from the old bank-based federal lending program, but the number of borrowers with newer loans falling behind on payments is creeping up. Some people are defaulting for at least the second time, signaling a breakdown in the management of their loans.

Democratic lawmakers and advocacy groups have questioned whether student loan servicers, the middlemen who collect and apply payments on the government’s behalf, are doing enough to keep borrowers current. These companies are paid millions of dollars by the federal government to essentially keep people out of default, but researchers at the Government Accountability Office found that when they reach out to delinquent borrowers the information is often inconsistent. Seventy percent of people in default actually qualified for a lower monthly payment through an income-based plan, according to the GAO.

[Not enough people know of a critical way to manage student debt. And it’s the government’s fault, GAO says.]

“This tells us that millions of borrowers may be failing to receive critical information about repayment options or are encountering communication breakdowns when they try to enroll,” Consumer Financial Protection Bureau Director Richard Cordray said of the GAO finding, in call with reporters Wednesday. “We must be mindful of the very real challenges facing those who have already accrued substantial amounts of student loan debt.”

To reach as large an audience as possible, the CFPB is releasing its own “Payback Playbook,” a guide to help borrowers determine the best repayment plans for them. The playbook will be available to borrowers in their monthly bills, in email communications from servicers and when they log into their student loan accounts. The bureau also is working to develop guidance to make sure servicers provide fair, consistent and accurate data to credit bureaus.

The new guide dovetails with efforts to strengthen loan servicing by establishing a clear set of minimum standards, including the right of a borrower to receive accurate, consistent information from well-trained staff. There are no market-wide federal rules for how servicers are supposed to operate. The administration is pledging to hold servicers accountable for fixing errors, being responsive and resolving problems.

Servicers have argued that they deploy all of their resources to catch borrowers before they default, but all of the mailers, calls and emails often go ignored. Critics of the administration’s student loan policies say the mushrooming options available to borrowers may be creating more confusion and could be undermining the effort. There are five repayment plans tied to income, and that’s not counting the suite of other repayment plans that exist. King said the administration is working to streamline the system.

As much as poor servicing may be to blame for stubbornly high defaults, there are borrowers who are overwhelmed by their debt and never fully grasped the magnitude of the obligation. The Department of Education plans to upgrade and redesign its entrance and exit counseling on to help students make better borrowing decisions, reduce delinquencies and increase college completion.

The people who fall the furthest behind on their payments often have not graduated and are unable to get a job that pays enough to cover their loan payments, according to the Federal Reserve Bank of New York. Researchers there found the borrowers with the highest chance of defaulting have less than $10,000 in student debt.

“Improved loan counseling and servicing will help borrowers access the important repayment options and benefits that come with federal loans,” said Pauline Abernathy, vice president of the Institute for College Access & Success. “We look forward to seeing these steps, tools, and servicing standards put in place.”

Thursday’s announcement comes a year after President Obama signed a presidential memorandum, called the Student Aid Bill of Rights, directing federal agencies to overhaul the way Americans repay their student loans. The initiatives are a part of the president’s call to action.

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