We have tried for years to persuade the Department of Education to improve policies and programs for financially distressed student loan borrowers.  We hoped the new Administration would act quickly to resolve festering problems.  So far, unfortunately, the current Administration has responded mostly with talk, very little action.

We began our renewed efforts in February 2009 soon after the new Administration came into office.  We sent a letter to Secretary Duncan outlining a number of operational problems that we thought would be fairly easy to resolve.  Here are a number of key issues we raised and the responses so far:

1. Improve Information to Direct Loan Borrowers Selecting ICR and IBR

We wrote earlier about this issue.  Among other improvements, we recommended that the Department change the letter sent to borrowers applying for consolidation.  Our recommended changes would help borrowers applying for IBR or ICR to understand that they do not have to make interest-only payments if they cannot afford them while the IBR or ICR payment amount is being calculated.   The Department agreed to review this letter.  Since then, however, the Department set up a new servicer contract system and they tell us that they cannot  tell the new servicers which letters they must use.  Our experience so far is that borrowers applying for ICR or IBR are still confused by initial letters that state an unaffordable payment amount.  To make matters worse, as described below, most of these borrowers cannot even access IBR.  (see #2 below).

2. Ensure that Borrowers Consolidating as A Way out of Default Can select IBR

The regulations allow these borrowers to  select IBR and the Department has added IBR as an option on the repayment plan selection form.  However, Department staff tells us that they have not figured out  how to ensure that borrowers consolidating out of default can actually get into IBR.  At this point, the Department says that these borrowers will be placed in ICR and will later have to switch to IBR.  (This is despite the regulations which say that the borrowers have a right to select ICR or IBR).  They also say that  borrowers seeking to switch from ICR to IBR will first have to make three payments.   We have asked for clarification, but have yet to hear back.

3. Collection Agency Complaint Process

We asked for clarification of the escalation process when borrowers have trouble with collection agencies.  This is the information the Department gave us (see complaints about private collection agencies).  Yet we continue to hear complaints from borrowers trying to resolve problems with collection agencies.  Please let us know about your experiences.

4. Disability Discharge Process

We have documented the problems with the disability discharge process for years.  More recently, a federal district court concluded that the Department’s administration of this program violated borrower constitutional due process rights.  We keep hearing that the Department is planning to make improvements, but we have yet to see these changes.  We are told that the internal review of this process is not public.  The Department has not asked us (or as far as we know other borrower advocates) for input on new forms or new processes.   How can they get a complete picture without checking in with borrowers and their advocates??

5. Communication with Attorneys

We have an ongoing problem with respect to the Department’s varying policies about communicating with attorneys representing borrowers.  We understand the Department’s need to get releases from borrowers.  The problem is the lack of a standardized process.  All other federal agencies, as far we know, have figured out a way to handle this issue and therefore respect a borrower’s right to legal counsel.  The Department of Education has stonewalled on this issue.

We sent a follow-up letter to Secretary Duncan in August 2009 summarizing these issues.  Since then, we have also met with  Department  staff to discuss the problems with loan rehabilitation.  The Department has yet to exercise authority given by Congress in 2009 to address problems with sale of rehabilitated loans.  They have told us that they are developing a possible solution for the problems faced by borrows making  low payments during rehabilitation, but we have yet to hear anything definite.  (a lot of talk, very little action).

More recently, we wrote to the Office of General Counsel  describing inaccuracies and other problems with the Department’s 2009 manual for private collection agencies.  We also wrote to Secretary Duncan asking for a meeting to outline the problems low-income borrowers are having with rehabilitation.  His office wrote back and said he could not meet with us.  The Office of General Counsel responded to tell us that they refered our letter to the Office of Postsecondary Education.   No response yet from them.

In the meantime, after news stories and blogs describing problems with the collection agency manual came out, the Department apparently took the  PCA contractor site off-line.  This is shocking given that the Department has allowed public access to this site for years (throughout the past Administration for example).  So much for transparency in government.  The answer in this case, it seems, is not to do something about the problems, but to make the public less able to find out about them.

We will post future developments on these issues as we get them.

In April 2010, separate bills were introduced in the U.S. House and Senate to restore bankruptcy dischargeability of most private student loans.  The House Judiciary Committee held a hearing on H.R. 5043.  Deanne Loonin of NCLC testified in support of the legislation.  Student loan borrower Valisha Cooks and attorney Adrian Lapas (on behalf of the National Consumer Bankruptcy Attorney Association) also testified in support of the bill.

Below is an excerpt from NCLC’s testimony addressing the industry’s claims that restoring bankruptcy rights hurts their business:

“Many creditors argue that treating student loans the same as other debts in bankruptcy would create greater risk for them.  This is far from obvious.  If most borrowers who file for bankruptcy cannot afford to repay their debts, a more restrictive bankruptcy policy is not going to make them more able to pay.

It is certainly true that private student loans, made without government guarantees, can be risky for both creditors and borrowers.  Many students are young, with little or no credit history.  Their earning power is mostly speculative. Yet responsible underwriting of student loans is not impossible.  Recent trends in the industry show that creditors know how to sell less risky products.  For example, industry-wide, 80-90% of private student loans originated in 2009 required a cosigner, up from 50-60% in 2007.

The fact is that the private student loan industry grew rapidly during the pre-2005 period when these loans were fully dischargeable in bankruptcy.    This should not be so surprising.  During the past decades of irresponsible lending, creditors threw credit around like candy in markets where the credit was dischargeable in bankruptcy (such as credit cards) and those where it was harder to write off debts in bankruptcy.

The industry has contracted in recent years even with a restrictive bankruptcy policy. For example, Sallie Mae’s private loan originations were down 55% in the fourth quarter of 2009 compared to the same period the previous year.  The company cited tightening of underwriting criteria as a major reason for the decrease in loan volume. The more restrictive credit market has helped eliminate loans that never should have been made.  This has forced schools and lenders to think twice before pushing these high priced products, a welcome market correction.

There is simply no good evidence that bankruptcy policy has much impact on creditor behavior.  Interest rates, for example, were largely the same before and after the 2005 bankruptcy law which made private student loans more difficult to discharge in bankruptcy. 

The business of private lending has expanded and contracted based on market opportunities, not based on bankruptcy policy.  Some lenders continue to make high rate, risky loans even during the current economic climate.  While some of the larger lenders have at least temporarily tightened criteria, other, less selective lenders have stepped into the market.  In some cases, for-profit schools are making private loans knowing that the majority of their students will not be able to repay. Corinthian Colleges, for example, has told investors that it expects its students will not be able to repay 56-58% of its institutional private loans.  Yet they keep making these loans, even with a restrictive bankruptcy policy, presumably because it lures students to their schools and gives them access to federal student aid dollars.

The road to higher access to education will never be paved with high rate private loans.  Our nation’s record in helping low-income and other less advantaged students enter and complete college has been woefully inadequate when the private loan industry was booming and now that it is, at least temporarily, in decline.  Yet students continue to try to improve their lives through education.  Despite the decreased availability of private student loans, college enrollment has continued to grow.  In fall 2008, total college enrollment, including all undergraduate and graduate students, surged by 3.7%, the largest percentage increase since 2002, even though private student loan volume dropped by an estimated 30% or more for the 2007-08 school year.

We wrote in conclusion:

Restricting the bankruptcy safety net helps give private lenders some additional peace of mind and potentially more profits.  These goals reflect industry interests, not the key policy goals of improving access to education and making college more affordable.  

Bankruptcy policy should be about the pragmatic need to offer fresh starts to many debtors.  Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations.  There are many rules in place to ensure that only borrowers who are financially distressed get relief.  It is way past time to give financially distressed student borrowers equal access to relief.  

 Restricting the bankruptcy safety net helps give private lenders some additional peace of mind and potentially more profits.  These goals reflect industry interests, not the key policy goals of improving access to education and making college more affordable.  

Bankruptcy policy should be about the pragmatic need to offer fresh starts to many debtors.  Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations.  There are many rules in place to ensure that only borrowers who are financially distressed get relief.  It is way past time to give financially distressed student borrowers equal access to relief.