A recent New York Times article about student loan debt collectors raises a number of important issues that we will be writing about in a series of blogs.
The article explains how student loan servicers and collectors lack incentives to prevent student loan defaults. Among other reasons, companies are not paid enough to talk borrowers through the payment options and collectors are rewarded primarily for collecting as much as possible, not for making sure a borrower can afford payments.
There are many ways to address this. We start with a simple suggestion to the Department of Education—CHANGE YOUR COLLECTION LETTERS!
Here is one example. Appendix C of our July report on why student loan borrowers default included one of the Department’s borrower delinquency letters. This letter fails borrowers and taxpayers in countless ways, including:
- In the first paragraph, the letter states “Because you have failed to meet the terms of your Promissory Note, we are requiring immediate full repayment of your Direct Loan(s) at this time.”
- In the second paragraph (note the CAPITAL LETTERS), “This means YOU MUST IMMEDIATELY REPAY THE TOTAL DUE shown below. We must receive this amount within 30 days of the postmark date of this notice.” (In this case, the total due was $21,193.90).
- A little bit farther down the page, the letter states “This is your last chance to avoid default. If we do not receive the entire unpaid balance of your loan(s) within 30 days of the postmark of this notice, your loan(s) will be placed in default.”
These statements simply aren’t true. Federal student loan borrowers have relatively long periods of delinquency before they are placed in default, usually 9 months. At any point during this period, the borrower may select from a range of options, including economic hardship deferment or income-based repayment. It is just plain false to say that the borrower has to pay the total amount due or that immediate full repayment is required. It is also false to say that this is the last chance to avoid default and that only immediate full payment will stop the train toward default.
The Obama Administration has gone to great lengths lately to publicize options such as income-based repayment (IBR). So where is the discussion of IBR in this delinquency letter? You can keep looking, but you won’t find it! The only thing even close is the last paragraph which states “If you want to take this last opportunity to arrange a forbearance, deferment, or change repayment plan to avoid defaulting on your loan(s) or if you have questions, please call the toll-free telephone number below.”
There is nothing in this letter about IBR. There is nothing about how a borrower with a very low income can have a 0 payment in some cases, but stay current on his loan.
Does the Department think these scare tactics work? Is it effective to tell someone with little or no money that she has to come up with $21,000 in 30 days? It is certainly frightening, but what is the Department hoping this person will do? Go to a payday lender and take out a high rate loan to pay off $21,000? That’s a horrible idea in any case, but even the worst payday lenders rarely lend that kind of cash to people with little or no money.
Why not try motivating someone by pointing out that there are serious consequences after default, but there are also very realistic ways to avoid it? If the borrower in this case chose IBR instead, taxpayers would at least have some chance of recovering funds if the borrower’s financial situation improved. And of course, borrowers would be much better off.
The Department must let borrowers know about IBR and other options not just in rote entrance and exit counseling, but in big bold letters when they are about to head over the edge into default. Better yet, use neutral, trained counselors to provide information and advice, not collection agencies and servicers incentivized to spend as little time as possible with borrowers and push them into options that work best for collectors, not borrowers. We need to hear more from the government about this. Why take this approach? Why pay millions of dollars to collection agencies when you could figure out ways to help borrowers avoid default in the first place?