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Student Loan Bill of Rights

On March 10, 2015, President Obama introduced the Student Aid Bill of Rights; another executive action to deal with student loan debt. Read the official Memorandum.

Let’s take a look at some of the details.

State-of-the-Art Complaint and Feedback System

The President is requesting a “simple process for borrowers to file complaints…including those pertaining to lenders, loan servicers, private collection agencies, and institutions of higher education.” Sounds awesome, especially when further reading says the information should be shared with other agencies responsible with enforcement of violations. In other words, share complaints about debt collectors with the FTC.

Helping Borrowers Repay Their Student Loans and Avoid Default

There are several sections here which are excellent. First, any prepayment should be applied to loans with higher interest rates. No more sending instructions with payments that “accidentally” get lost. Also, servicer performance is to be tracked, “to better ensure that servicers help borrowers responsibly make affordable monthly payments.” I’m excited to see the results from this. The President also requests researching better ways to communicate with borrowers. I’m not sure if that includes “manners” training, but it couldn’t hurt. Another nice request is the creation of a central payment portal, no matter who the servicer is. This would help borrowers avoid the unsavory characters, if they so choose.

IBR Fix?

There is a section here that covers IBR re-certification that is both good and bad. The president would like a feasibility study of allowing borrowers to authorize the IRS to share income information with servicers to streamline the process.  The idea is, if servicers can contact the IRS directly, they can verify income each year for re-certification AUTOMATICALLY, thus bypassing borrower error. This is could be a very useful service. Imagine never having to worry about completing forms annually to re-certify IBR. Instead, a letter would be sent (in theory) to the borrower letting them know that re-certification is about to complete and what the expected new IBR payment will be. For those who use auto debit, they’d never miss a payment. Compare that to the current system where those who fail to re-certify in time, are suddenly looking at a payment based on the Standard repayment plan. OUCH!

But there is a down side. Let’s say re-certification occurs in July. Let’s say there is a change in income between the time taxes are filed and re-certification. If the servicer conducts an automatic re-certification via the IRS, the IBR number may not be accurate. The real question is, what kind of process will be instituted to give the borrower a chance to stop the “auto re-certification”. If a warning letter is sent that says it’s time, we’ll contact IRS unless told otherwise, then this system could work. But if it’s an auto-pilot program, I worry, and you should too!

Fair Treatment for Struggling and Distressed Borrowers

There are great things happening under this section.

  1. The Department of Education SHALL publish debt collector performance reports quarterly! Oh I love this one. Maybe public humiliation will get these clowns to do things the right way.
  2. The Department of Education SHALL consider factors used by Courts in determining undue hardship to better evaluate if bankruptcy discharge cases should be fought, and if so, how hard. Finally, an order to add common sense into the factors of how to handle bankruptcy discharge cases. Is it worth fighting something that a Court might discharge? I’ll be paying close attention to this issue
  3. The Department of Education will work with Social Security to identify Social Security Disability recipients to determine who could qualify for discharge, and who could qualify for lower payments based on their limited income, and then assist those borrowers obtain the discharge or lower payment. I call this customer service. Apparently it took the President to initiate this.
  4. The Treasury Department will do a test study on bringing debt collection in-house. This all comes down to who provides better service; independent debt collectors or the government. I’ll call it a toss up now. The only downside to this is that if there are screw-ups, it’s much harder to correct it. A borrower can sue a debt collector that screws up. It is much harder to sue the government for the same screw up. On the upside, maybe this would do away with the absurd debt collection fees.

What got left out?

This Bill deals with aiding those who already have Federal student loans. The gaping holes are private loans and future generation of borrowers.

There needs to be action on Private student loans, such as allowing them to be dischargable in bankruptcy again. Or maybe strengthen oversight of underwriting practices. I’ve seen grandparents co-sign for multiple grandchildren, leaving the elder with nearly $500,000 in liability. Why? Would these banks lend the same senior the same amount for a mortgage? Doubtful!

There also needs to be action dealing with the amount of loans borrowers can take out. I (my opinion) support putting caps on Federal student aid. I believe that if lending amounts came down, IBR wouldn’t be needed. Everyone would have affordable loan balances that could be paid off within a reasonable time. IBR would become a true fall back, for the times when financial woes happen, as an exception and not the rule.

Capping loan amounts for Fed loans with stricter underwriting for private loans would force colleges to become more affordable (or shut – especially the for-profit sector). I think that is the real fix.