President Obama’s executive action to make more students eligible for income-based payment plans is a tremendous relief for those 5 million students newly eligible. The Pay As You Earn Plan allows students lower payments in the early years of their careers and catching up on payments as their career advances. It makes great sense.
Unfortunately 6.5 million students, the equivalent of the combined population of Los Angeles and Chicago, whose loans are already in default are tragically being left behind. Under current rules, those students are not eligible for the plan just authorized by the president or for any of the other plans where payments are based on income.
Default on a student loan is a serious matter and the student must have missed at least nine regular payments to achieve that status. Default can cause students to be subjected to all sorts of penalties. Their income tax refund can be seized; their wages can be withheld if they work for the federal government; they can be sued and wages garnished. They could even be denied renewal of certain professional licenses or lose out on job opportunities because their credit score is so badly damaged. Think of the irony, students spending four years of their lives to become more employable – and now that their credit score is damaged, they become unemployable.
Student loan defaults cause tremendous harm to the national economy. The growing burden of student loans threatens to undermine the housing recovery by discouraging or preventing an entire generation of potential buyers from purchasing their first homes. Sales of new autos are impacted negatively. If students drop out of the housing and auto market, the economic recovery as weak as it is, sputters to a stall and slips into a tailspin. Some are already predicting this could cause a downturn equal to or worse than the housing crash of 2008.
The Department of Education hires outside parties to receive and keep track of payments. Those private companies, called loan servicers, do a pretty good job of tracking the roughly 50 million student loans while processing tens of millions of payments every month. What they are not good at is devoting the time and attention necessary to counsel students in financial difficulty about the various alternative deferment or payment plans. Largely, students simply don’t get the right advice or that extra help and their loan falls into default. Sadly, once the loan has defaulted, the student is no longer eligible for the income based payment plans.
Some critics claim that the loan servicers are simply terrible at communicating with students who need assistance and just don’t mention the income based alternatives to prevent default. Others point out how complicated the rehabilitation process can be. Regardless of the cause, the fact is that the nation cannot turn its back on 6.5 million students and their loans representing $90 billion of the government’s money.
President Obama made a bold decision when he decided to open the door and allow millions more access to the Pay as You Earn Plan. He should make another bold decision and use his pen to direct the Department of Education to take special and extraordinary action to focus on those students who have loans in default. The students who need it most have not received the help they need and are not going to get it under the current system.
The Department of Education should borrow a tactic from the FDIC. When dealing with a failed bank, the FDIC will quickly separate the troubled loans from the performing loans and assign the troubled loans to a different servicer. This process allows each servicer to focus on only one type of situation. Since the existing servicers clearly are not getting the job done, the defaulted student loans should be yanked away from the current servicer and assigned to a new Special Servicer who does nothing but deal with those defaulted loans -- the far greater challenge.
The Special Servicer will be more focused and more capable of working closely with students with defaulted loans. Rehabilitating those loans is the only way to keep the student out of a continued downward spiral. The rehabilitation is not hard but requires a lot of time and personal attention to each student to understand their situation and custom fit a solution. It will help that the student now has only one point of contact for everything.
More than just the extra attention, the Special Servicer would be required to help these students find jobs, provide financial literacy education, arrange for needed social services and help the student deal with any other credit problems in their life.
A Special Student Loan Servicer assigned to tackle only those defaulted loans will make a world of difference in the lives of those students. Imagine the possible outcomes of helping 6.5 million students out of a tough problem and helping the government recover the money it has loaned to give a young person an education.
The potential for greatness is incredible.
Bartmann is CEO of consumer financial recovery firm, CFS2. He is author of the recently published book Out of Control: Cases of Debt-Collection Abuse in America and What We Can Do About It. All proceeds from the book are donated to the National Consumer Law Center.