On Thursday, November 5, Senators Sherrod Brown (D-OH), Michael Bennett (D-CO), Al Franken (D-MN) and Barbara Mikulski (D-MD) introduced new legislation (S. 2733) to create a private student loan ombudsman program.
This is a promising first step in improving assistance for financially distressed private loan borrowers. As we wrote in a 2007 report, informal assistance programs, such as mediation, can be beneficial for many borrowers. The current federal ombudsman program has provided valuable assistance for our clients and many others across the country.
Despite the importance of this program, it is hardly a magic solution for borrowers. There are limits to the ombuds concept. As a neutral mediator, an ombudsman should be able to help many borrowers, particularly those with less complex questions and certainly those that need basic information about their accounts. However, there are many situations where borrowers need advocates that are clearly on their side. Ombuds programs are not borrower advocates. Ombuds programs are also not substitutes for private enforcement remedies.
The program is more likely to be successful if the ombuds program is as independent as possible, particularly from creditors. The ombudsman office must also have the power to require creditors to cooperate by providing loan documentation and other information necessary to assist borrowers. The federal ombuds staff has this information at their fingertips through the National Student Loan Data System (NSLDS). There is no similar comprehensive source of information for private student loans.
Probably the most important limit to ombuds programs is their lack of authority to force solutions. In our experience, the federal ombudsman staff generally work very hard to resolve problems, but they cannot force the Department of Education to accept solutions. This is not a reason to oppose these programs. They work very well in many cases, but they won’t work for everyone by any means!
The same limitations will arise with a private loan ombuds program. Lenders that refuse to assist borrowers are unlikely to change their minds just because an ombuds asks them to. In addition to mediation, Congress and the Administration must create incentives to push lenders to modify loans and offer other flexible solutions for borrowers. So far, private student lenders have offered little in the way of voluntary assistance. There are some signs that this is starting to change perhaps because the creditors have realized that it is often in their economic interests to get something rather than nothing from financially stretched borrowers, but change is coming slowly and is often not enough.
Most important, borrowers should not wait to wait for lenders to get around to providing voluntary assistance. Borrowers also need options such as bankruptcy rights so that they can find real relief from debilitating private student loan debt.