Changing The Way Students Repay Loans


 

The Trump administration recently announced plans to put their mark on the student loan system with a plan to overhaul how borrowers repay their debts. Officials said the administration is expected to offer an exclusive contract that will give one company the right to service billions of dollars of outstanding federal student loans; currently handled by many servicers.

“The existing student-loan servicing requirements, put in place by the Obama administration, created a chaotic system that has resulted in numerous consumer complaints,” Secretary of Education Betsy DeVos wrote in a Wall Street journal op-ed. DeVos is also responsible for having framed the new system.

Budget documents obtained by the Washington Post show the Trump administration also plans to end the Public Service Loan Forgiveness (PSLF) program. More than 400,000 people currently participate in the program which has the potenital to positively impact their financial futures. The program was enacted under the Bush administration in 2007, and offers government and non-profit employees the chance to have their student loans forgiven after 10 years of on time, income based payments. The first of the loans expected to be forgiven are set to be wiped in October of this year.

The new system would be implemented in 2019 once the existing contacts expire. “We can better monitor the performance of one servicer and one platform,” acting undersecretary of education James Manning told the Washington Post.

In recent years, the federal government has paid debt collectors nearly $1 billion annually to help borrowers from defaulting and be able to make regular monthly payments. According to government figures, from the Department of Education’s analysis of about 600,000 borrower accounts, a large percentage of billions spent could have been wasted. The figures show that nearly half of the students who defaulted on loans, and worked with debt collectors in order to return to good standing on their loans, defaulted again within three years. Since the start of the 2013 fiscal year, the department has given more than $4.2 billion for payments to debt collected. Federal records show that that the government often pays debt collector’s nearly 40 times what they bring in.

“When student loan companies know that nearly half of their highest-risk customers will quickly fail, it’s time to fix the broken system, that makes this possible,” said Seth Frotman, the Consumer Financial Protection Bureau’s (CFPB) top student loan official.

According to the CFPB, 1.2 million student loan borrowers have defaulted in the past year and 90 percent of the highest risk borrower are not enrolled in affordable repayment plans.

Concerns have been brought up with the Trump administrations proposals, which would roll back many Obama era policies. Some have argued that Obama’s plan to have servicing companies compete for federal contracts based on customer service ratings would have been more effective, since zero competition gives no incentive for the single student loan company to work for students, borrowers, and their families.

The Trump administration’s proposals does keep some elements from the previous administration’s plans. DeVos has said that the single servicer will establish a user platform and a standardized process for handling customer calls. Currently borrowers recieve different communications and send payments to various places depending on their servicer. The single platform will look to insure that the repayment process is more constant for borrowers. In the Obama administrations plan, one company would have been in charge of creating the new platform, but allowed a number of other firms to actually service the loans; the Trump administrations plans require that only one company handle both tasks.

Critics of the proposals argue that putting one company in charge raises ‘too big to fail’ alarms, especially since the firms that will be competing for the contracts have been accused of mistreating borrowers by both state and federal regulators.

“The approach may raise concerns that the Education Department will be overly reliant on a single student loan company. The changes will certainly increase profits for the industry, but will do nothing to tame the high levels of default in the program,” Senior fellow at the Consumer Federation of America, and former student loan ombudsman at the CFPB, Rohit Chopra said.

 

Undersecretary of education Manning stated that they expected it be easier for the government to monitor performence given that they will be working with just one company.

“We’re confident that with the final decision we’ll have someone who steps up and can perform. We can better monitor the performance of one servicer and one platform,” Manning said.

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