Servicers would be required to become licensed to operate in the District, and could have their license revoked, denied or suspended by the ombudsman, according to the bill. The student loan point person, who would be appointed to a five-year term by the mayor, would have the right to investigate servicers and refer cases to the District Attorney General.
Metropolitan Washington is one of the most educated and indebted regions of the country, with one in five residents carrying student loans. A recent study from the Center for American Progress and the Washington Center for Equitable Growth found that people in low-income neighborhoods with small balances are having a harder time repaying the money than people in wealthy areas carrying six-figure debt.
East of the Anacostia River, where the median household income hovers at about $30,000 a year, residents with student loans have balances that are either below the national average of $24,271 or between 10 percent and 25 percent higher. Yet they are three times as likely to be at least nine months behind on loan payments than people just across the river with twice as much debt, according to the study.
“Growing student debt presents a serious challenge for our residents and our local economy, creating a burden that follows them and stifles every aspect of their lives: buying a house, starting a business, saving for retirement and furthering their education,” Grosso said, in a statement. “This bill is a first step that assists District borrowers and increases servicer accountability.”
The legislation already has the backing of 10 of the 13 members of the council, signaling that the bill has a good chance of passing.
California and Connecticut have enacted similar laws in the last year to take a more proactive role in helping residents manage student loans, while Washington and Virginia are considering legislation. Greater state oversight of student loan servicers is an indictment of the Department of Education, which has drawn criticism for lax monitoring of the contractors it employs to handle debt payments.
Although servicers are paid millions of dollars by the federal government to keep people out of default, the Government Accountability Office found that when they contact delinquent borrowers the information is often inconsistent. Seventy percent of people in default, according to the GAO, qualified for a lower monthly payment through an income-based plan.
At the end of June, 8.1 million people — roughly the population of New York City — had not made a payment on $128 billion in student loans for at least nine months, an 8 percent increase over the same period a year earlier, according to the Department of Education. 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 who were falling behind on payments is high. And tens of thousands of people are defaulting for at least the second time, signaling a breakdown in the management of their loans.
The Obama administration is pledging to hold servicers accountable for fixing errors, being responsive and resolving problems. The Department of Education plans to upgrade and redesign its entrance and exit counseling on StudentLoans.gov to help students make better borrowing decisions, reduce delinquencies and increase college completion.
Servicers have bristled against charges that they are to blame for stubbornly high defaults. Despite deploying all of their resources to catch borrowers before they default, some servicers argue that all of the mailers, calls and emails often go ignored. What’s more, they say there are borrowers who are overwhelmed by their debt and never fully grasped the magnitude of the obligation.
In that respect, state and municipal efforts to provide reliable information to student loan borrowers could prove useful in keeping people current on their payments. Yet servicing organizations have fought state campaigns for greater oversight of their industry, arguing that lawmakers are missing the bigger picture by focusing on licensing servicers. Simplifying repayment plans and counseling students before they borrow, they argue, would be worthier goals.
None of the lobbying groups have taken aim at Grosso’s bill just yet, and at least one seems willing to work with the council member.
Michele Streeter of the Education Finance Council, a trade group representing nonprofit and state-based student loan servicers, said the organization “recommends that the D.C. Council reach out to student loan servicers to discuss solutions for most effectively addressing the needs of student loan borrowers.”
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