After a decades-long battle over whether the federal government or the private sector should front the funds for federal student loans, the spotlight is finally shining on the part of the student loan process that really affects borrowers: repayment servicing. And the spotlight has been harsh. The Consumer Finance Protection Bureau recently released a damning report about student loan servicing amid media story after media story detailing problems in the industry.
There’s no question that student loan “consumers” deserve the same speed, accuracy and customer service they would receive from other forms of consumer credit. As with car loans or credit cards, student borrowers’ requests for service should be handled in a timely, courteous manner; borrowers should have easy access to up-to-the-minute account information; and servicer representatives should be able to clearly provide basic loan information and statuses.
The federal student loan program was created with broad policy goals rooted in economics, social justice, access and equality. To further these policy goals, Congress has supplied a plethora of repayment options, borrower benefits, and even targeted forgiveness programs to eliminate or reduce the potential harmful effects of funding access to higher education with debt. That gives the federal student loan consumer rights far and above any other form of debt – but it also makes for a really complicated repayment landscape.
For example, when you pay your car loan or your credit card, you either make your monthly payment or you don’t. There are limited options to refinance, lower the interest rate or work something out with the lender. When you can’t pay your monthly student loan bill, on the other hand, you can consolidate, extend repayment, pay based on income, temporarily suspend payment – and the list goes on.
Student loan service providers, thus, have to do more. They must help borrowers navigate a confusing repayment system dotted with jargon, bureaucracy, and payment plans with distressingly similar names but very different benefits and outcomes. They must provide the “human” side of service -- the counseling, the hand-holding, the advocacy—that should be extended equally to every borrower who needs help over and above the collection of payment.
It is a lot to ask a low bid contractor, like the ones the U.S. Department of Education has outsourced student loan customer relations to, to provide high-quality customer service in this complex of an environment.
To solve this, we could, as some have suggested, simplify the program by eliminating options and repayment choices. Streamlining repayment plans is certainly in order (do we really need five different ways to pay based on income?) but stripping away borrower’s options all in the name of simplicity is too drastic. Student loan repayment isn’t one size fits all; borrowers who can afford to retire the debt early should, while those with low incomes relative to their debt should have the option of forgiveness after multiple years of income-based good faith payments. A system of multiple payment plans can offer borrowers the latitude to repay the debt in a way that works for them, while simultaneously lowering costs to the federal government.
Complexity need not be the enemy, if buttressed by additional guidance and support available to every borrower who needs it. It’s time to start giving borrowers the honest, impartial, proactive advice and counsel they need, separate from the traditional servicing process, on how to handle the debt. Let’s give them an independent advocate who is incented to take the time to examine their whole financial picture and help them find the best long-term payment solution. Let’s admit that servicers excel at transaction-based processes, but they cannot be the end all and be all of student loan service providers.
The student loan can be a consumer-literacy teaching tool. When we give borrowers the quality financial and debt management information they deserve, good things will come. Imagine a world where every eligible student loan borrower understood how to use income driven repayment, so they didn’t have to choose between saving for retirement and retiring their debt. Or a world where student loan borrowers have budgets and know enough to repay their credit card balance in full each month, because their student loan experience taught them how to avoid accumulating interest. Imagine if education debt could lead not to financial jeopardy, but to financial security because we’ve taught every student loan borrower the money knowledge they need to lay the foundation for a financially sustainable life.
Simplifying student loan repayment may make servicing easier, but it’s the lazy man’s way of shoehorning our policies to fit the process. Instead, we should be reworking the process to achieve the ultimate policy goal – an educated workforce with the financial competence to retire their education debt and attain permanent financial security. Dumbing down repayment may be the quick fix, but smartening up student loan consumers will be far more beneficial in the long run.
Combe is the president and CEO of American Student Assistance, a nonprofit aimed at empowering students before, during, and after college to make better decisions around planning for, financing, and repaying higher education.