Emma (not her real name) is typical of borrowers we assist at the SLBA. She is 60 years old, sufficiently disabled to qualify for Social Security Disability and Supplemental Security Income, but not considered permanently disabled by Department of Education standards. She has over $5,000 in federal loans from a community college she attended in the mid-1990’s. She paid for a while, but could not continue after she was no longer able to work. She gets by on about $760 from Social Security and lives on her own.
There is no perfect solution for Emma, but there is an imperfect one. It is a resolution we seek for many of our clients. Emma can get out of default by consolidating her loans with the Direct Loan program and selecting an income contingent repayment plan (or income based repayment as of July). Under the income contingent (ICR) or income based (IBR) formula, Emma’s payments will be 0. If her income improves for some reason, she can start paying more.
At this rate, she will never pay off the loan, but she will be free from collection. After 25 years, if Emma is still alive, the remaining balance should be written off, although under current law some of that amount could be taxable income.
It is not easy to get this imperfect resolution. The first problem is that until Emma sought legal assistance, no one told her about this option. Our experience is that guaranty agencies, collection agencies, the government, and just about everyone servicing student loans rarely takes an objective look at each borrower’s situation to review the pros and cons of different options. This is a lost opportunity because many borrowers would not end up in default if they were counseled properly.
The second hurdle occurs at the application phase. All too often guaranty agencies cause unreasonable delays by sitting on these applications. The applications that get out of guaranty agency offices often get stuck in Department of Education back logs.
The third hurdle is unique to borrowers seeking ICR. This problem has arisen with every borrower we have represented. While the Department is calculating the ICR amount (unclear why this takes so long), they send misleading billing statements that confirm that the borrower has an income contingent payment plan, but then list the interest-only amount as the required payment.
Our clients usually panic when they get these statements because they are expecting a 0 or very low payment and instead get what appears to be a bill with a higher amount. Nowhere on the statement does it explain that the borrower can request forbearance or deferment and postpone payments until the ICR amount is finalized.
The stakes are huge. If borrowers think this is another loan they cannot repay, they will default again. If they default on the new consolidation loan, they will not be able to reconsolidate. There are costs to taxpayers too. If the process is successful, the government will not waste resources trying to collect from borrowers who can’t repay.
There are a few simple steps the Department can take to help address this problem. They can change the billing statements to:
- explain to borrowers that the Department is still calculating the ICR payment;
- explain that borrowers can request forbearances or deferments instead of paying the interest-only amount; and
- that they will get a future billing statement with the ICR amount and that this is the amount they will be required to pay.
They should also figure out a way to calculate the ICR payments more quickly and efficiently.
We have been urging the Department to make these changes for over two years now. They keep telling us that it is very difficult to change a letter, even though they agree that it would be a positive change for borrowers. It is head-bangingly frustrating for us, but of course, much worse for our clients.
Changing a letter is not a catchy rallying cry. It is far from the radar screens of most policymakers and the media, but it is one of many important procedural issues that can make a huge difference for borrowers.