It is good news that the Department of Education and Congress are starting to take a closer look at the for-profit higher education industry.  Our low-income clients have struggled for years trying to pay back debts from rip-off schools.  Unfortunately, we have seen a steady increase in complaints in recent years.  This is not surprising given the astronomical growth in this industry and the constant push to bring in new students to fuel profits.

 The U.S. Senate held a hearing on June 24, focusing on the federal investment in the for-profit sector.  The Senate’s Health, Education and Labor Committee issued a report on this topic, focusing on the high cost to taxpayers and borrowers of the federal investment in for-profit higher education.  The Administration recently issued proposed regulations on “program integrity.”

We hope that Congress and the Administration will take action to help put an end to abuses in this sector.  This action must include relief for borrows who have been harmed by abusive practices.  The numbers cited in the Senate report are critical, but numbers cannot fully portray the human toll.  To help show the costs to individual borrowers, we will post periodic summaries of clients we are working with.   Here are a few recent cases:

1.  Our client is a 23 year old woman living in a homeless shelter.  She receives less than $350/month in public assistance benefits plus food stamps.  She saw ads for a local for-profit school a few years ago.  She had dropped out of high school, did not have a G.E.D., and was looking for a way to find work.  The school signed her up without giving her the required ability to benefit test.  We are still investigating her case, but it appears that she has a private loan, not a federal loan.  She attended for about three weeks.  She said the school was “horrible” and  that she didn’t learn anything.  She dropped out because she heard from fellow students that she would only be able to get work in the field if she had a high school diploma or G.E.D.  Among other problems, because of the student loan delinquency on her credit report, she is now having trouble finding work.  She is also very discouraged about going back to school.
2. Our client is a 28 year old woman with one child.  Her sole income is through public assistance.  She attended a local proprietary school in 2006.  She  did not have a high school diploma or G.E.D. at the time.  She completed the medical assistant course, but never found work.  She said that the potential employers told her that they would only hire people with high school diplomas.  She is upset because she told the school when she signed up that she didn’t have a high school diploma and was in fact attracted to the school because of ads that encourage those without diplomas to come in.  She was given an ability to benefit test, but failed the first time.  They gave it to her again.  We are investigating to see if she might qualify for a false certification discharge.  She has almost $7,000 in federal loans plus significant Pell grants.  She is in default on the loans and was recently told by her servicer (inaccurately) that she would have to pay $900 to get out of default.  (These borrowers not only face problems with the school, but are then stuck dealing with the deceptive and often illegal practices of servicers and collectors.)  This client wants to go back to school, but can’t because she is in default.  Next time, she says, if she can get out of default, she will go to community college.
3.  Our client is 21 years old and attended a local for-profit school in 2009, taking a medical assistant course.  She described numerous problems with the school and said it was a terrible experience.  She asked early on about dropping out, but was told (erroneously) that she would owe the loan money regardless.  She stayed in school, finished, but never found work.  She has over $6,000 in federal loans, not yet in default.  She has one child and limited public assistance income.  She was most upset that the school representatives told her that she could transfer credits if she completed the course.  She said she later found out that this was a “complete lie.”  She wants to go back to school some day, but is worried about how to pay for it and how to avoid getting into the same trap.

We previously wrote about our efforts to persuade the Department of Education to resolve a number of problems with policies and programs for financially distressed student loan borrowers.  Unfortunately, not much has changed since we last wrote.  A quick summary:

1.  Ensure that Borrowers Consolidating as a Way out of Default Can Select IBR

 The Department tells us that they understand the problem, but still have not been able to fix it.  This is shocking given that IBR has been around for a year now.  Borrowers that select IBR when consolidating out of default, according to the Department, have the right to get IBR (assuming they qualify), but the Department does not have a process to get them into IBR.  These borrowers will be placed in ICR, they tell us, and will later have to switch to IBR.  However, these borrowers should not have to make three payments in ICR before getting into IBR.  Please let us know your experiences if you are in this situation.

     2.   Disability Discharge Process

 We have yet to receive information from the Department about how they plan to resolve problems with the disability discharge system.  The mantra from the Department has been that they will implement changes when the new rules go into effect on July 1.  Well, July 1 has now come and gone (just a few days ago).  Where is the new discharge form that reflects the new definition of total and permanent disability?  (Answer:  not available yet).  What about other changes to the system? 

    3.   Communication with Attorneys

 This issue is hardly worth updating since nothing has happened for years.  Perhaps the General Counsel’s office will get a chance to finally finish reviewing the one page release form that allows the Department to speak with authorized third parties?  We will post an update if this occurs. 

      4.   Loan Rehabilitation

 The Department has still not exercised its authority given by Congress in 2009 to address problems with sale of rehabilitated loans.  The word is that they believe that the market has recovered sufficiently so that they do not need to use this additional authority to buy loans.  If this is the case, why do many guaranty agencies continue to claim that they do not have buyers, particularly for borrowers who are making very low monthly payments?  We urge the Department to take action, but the lack of action should not be used as an excuse by guaranty agencies to give inaccurate information to borrowers or otherwise pressure them to pay more than they can afford.  Borrowers have the right to make reasonable and affordable payments with no minimum amount.  Agencies should also  ensure that these borrowers have a smooth transition into IBR if they qualify for this program. 

     5.   The Manual for Private Collection Agencies

 We have still not heard back from the Office of Postsecondary Education about the problems we noted in the Department’s 2009 manual for private collection agencies.  To make matters worse, as we previously wrote, the Department decided to take the manual off-line.  (You can still get a copy on the Student Lending Analytics blog site and on the Center for Public Integrity web site).    The Department went even further and took the entire private collection agency site off-line.  This occurred after news stories and blogs describing problems with the manual.  We are told that some of the site will be back on-line soon, but we have been hearing that for a while.  This is a valuable web site, especially for advocates seeking updates on Department of Education interaction with collection agencies.  We have used this valuable resource for years without incident.  Suddenly it is gone!  If there are confidential items that should not have been posted, then take them off.  However, most of the information should be public and restored to public view.

 More developments soon!

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.  

We wrote a while ago about a new law that was supposed to unclog the loan rehabilitation logjam.  Since then, the market has rebounded and according to guaranty agencies, there are now buyers for most rehabilitated loans.  However, we are finding that borrowers that are only able to make relatively low “reasonable and affordable” payments are all too often denied relief.  And the Department of Education has yet to exercise the authority granted in the new law to help these borrowers.

The lack of buyers is hardly the only problem with loan rehabilitation.  We recently compiled a list of the most common “excuses” or justifications we hear from lenders about why they pressure borrowers into paying more than they can afford, including:

1.   Borrowers must pay more to pay off the loan in a reasonable period of time.

Response:  These borrowers should be able to use the income-based repayment program (IBR), which allows qualified borrowers to stretch payments over a longer period of time if necessary.  Why should borrowers coming out of default be treated differently than other borrowers selecting IBR?

2.   Borrowers must pay more so that the agencies can sell the loans.

Response:  We have seen no evidence that prospective buyers place restrictions on loans based on the amount of monthly rehabilitation payments.  If this is in fact true, shouldn’t the agencies be counseling borrowers about other options such as consolidation?

3.   Borrowers with low payments are more likely to default.

 Response:  Once again, where’s the evidence?  And even if this is true, it does not trump the borrower’s right to a reasonable and affordable rehabilitation plan.  Further, borrowers that default after rehabilitation are not allowed to rehabilitate again in the future. 

4.   Higher payments demonstrate borrower commitment.

Response:  This does not trump the borrower’s right to a reasonable and affordable rehabilitation plan.  The key terms are “reasonable” and “affordable”, much different than a collector’s subjective feelings about the borrower’s level of commitment.

5.   Borrowers with higher payments are better able to handle post-rehabilitation payment plans.

 Response:  This excuse is an agency favorite, but not usually accurate in the era of IBR.  Borrowers should be given information to ease the transition to IBR so that there is no big bump in payments as they come out of rehabilitation.

6.   Borrowers should pay more because they are probably hiding income and assets.

Response:  Collectors have the right to ask the borrower to document income and expenses.  If they think a borrower is hiding something, they should do their job and ask for verification, not deny rights.

We are very troubled by the failure of most collectors to discuss a range of options with borrowers in default.  Collectors must counsel borrowers objectively so that they can weigh the pros and cons of various options such as rehabilitation and consolidation.  Instead, many collectors highlight the options that benefit them the most.  For example, many collectors inflate the credit reporting benefits of rehabilitation to encourage this option and discourage consolidation.  We repeatedly hear from agencies that they try to avoid referring too many borrowers to consolidation because of a supposed limit on consolidation.  This is wrong.  There is no limit on the number of consolidations.  Instead, the collectors are referring to the fact that they get less commission if they refer too many borrowers to consolidation.  This is the reality—The collectors are following their own financial best interests rather than fairly counseling borrowers and fairly administering the complex rights available under the federal student loan programs.

 It’s so hard to agree on how to police our credit market place that policymakers (and sometimes advocates) often give up on regulation and call instead for more financial literacy and counseling.  It’s not surprising that so many financial literacy courses are funded by creditors.  It’s easier to put the burden on consumers to “get educated” and then blame the consumers if they end up in financial distress.

Although most of us agree that education and counseling can be useful, there are costs to promoting financial literacy as a substitute for regulating the market.   Professor Lauren Willis points out a number of these costs in a 2008 article.

There is a shocking lack of evidence that financial literacy is effective.  As Professor Willis details in her article, a number of studies show that financial management programs have no effect on literacy or behavior.  This doesn’t necessarily mean that the courses cannot have an impact on decision making, but the jury is still out.  This is hardly a strong foundation for the millions of dollars that are poured into financial education and the faith that this will somehow improve consumer financial decision making.

There is general consensus that long-term, individually tailored programs delivered in small settings are the most likely to be effective.  The problem is that these courses are too expensive to provide on a large scale.  Further, this type of counseling might be more effective because the providers not only teach, but often intervene on behalf of consumers.    

It is very difficult to close the gap between the current financial literacy levels of the average American and the increasingly complicated credit marketplace.  Even good courses get outdated fast.   There never was a glorious time in the past when we had a more financially literate population, but there was a time when the market was not so complicated. 

Most of us do not understand basic credit math, let alone adjustable rate mortgages and credit derivatives.  In her fascinating book on J.P. Morgan and its role in creating derivatives, Gillian Tett quotes one of the original creators of these products, Blythe Masters that “Financial engineering was taken to a level of complexity which was unsustainable.”  Many on Wall Street can’t even understand the products they push on consumers!

Those who believe in financial literacy have a challenge in delivering a clear message to consumers.   The public education campaigns that work best usually have a straightforward message, such as “Don’t smoke” or “Don’t drink and drive.”   The message is more nuanced when it comes to finances.   Some financial literacy instructors believe that consumers should not go into debt at all.  Others say use credit in moderation and only if you understand it.    NCLC tracked some of these biases in a 2007 report on the bankruptcy education mandate.  The director of one course, for example, told participants that “debt is dumb.”  Another told victims of predatory lending that they had no one to blame but themselves.    

Perhaps most important, even good financial education rarely affects consumer biases such as over-confidence and optimism about the future.  Even when armed with information and education, most consumers are able to consider no more than five features of a particular credit product.  This helps explain why so few consumers consider more “obscure” terms such as arbitration clauses or default fees.  Creditors design their products and advertising to exploit these biases.  Researchers such as Professor Alan White write about how predatory lenders frame their products in ways that obscure risks and overstate benefits. 

Low-income consumers do not collectively make worse decisions nor have more biases.  The difference is that that the consequences of “bad decisions” are so much worse for the lowest-income and most vulnerable consumers.  For student loan borrowers, for example, the erosion of the safety net means that there is less cushion to soften the fall.

2009 was a big year in the student loan world.  Unfortunately, as the economy has worsened and joblessness rates have increased, more and more student loan borrowers are finding it difficult to deal with overwhelming debt loads.  We will write more in 2010 about our clients and other financially distressed student loan borrowers.  We will also write about legislation and the need to push government servicers and collectors to respect borrowers, provide real default management services and at a minimum, comply with the law.

In the meantime, here is a quick look back at 2009 through a few interesting and important pieces from other blogs. 

 On Proprietary Schools and Loan Defaults

From the Education Sector’s quickanded.com: Cohort Default Rates and Proprietary Schools (December 2009)

From New America Higher Education Watch:  Sky High Default Rates at Career Colleges (December 2009)

From Student Lending Analytics:  Defaulted Student Loan Portfolio Crosses $50 Billion (December 2009)

A New York Times Blog piece on default rates (December 2009)

On Private Loans

From the New America Higher Education Watch:  Putting an End to the Subprime Student Loan Racket (October 2009)

From New America Higher Education Watch on the private loan debt swap proposal (December 2009)

On Student Loan Legislation in Congress

From New America Higher Education Watch:  It’s Deja Vu All Over Again (December 2009)

The Education Sector:  Increasingly Desperate Arguments Against Reform (September 2009).

Just a slice of many interesting posts from 2009.  Happy New Year.

The holiday season can be a time for  reflection, so I am thinking  back on the student loan borrower clients I have worked with this year.  On the positive side, we have helped many  borrowers manage their overwhelming student loan debt loads. I will write more about these successes in future posts.  For now, I am thinking about the many clients who are stuck, unable to move forward because of debt loads that will haunt them forever.

The policy debate all too often breaks down over who is to blame… an exercise that is rarely constructive.  When will the finger pointing end so that we can focus on finding solutions for borrowers and hopefully help prevent future problems?

Here is one example:   I met a young Latina woman in her early 30’s a few weeks ago.  This is through a new program where we are representing mostly homeless women or recently homeless women who are trying to get back on their feet.  The key to success is often more education, but many cannot go back to school because of past student loan defaults.

This client recently fled a horrifying domestic violence situation in New Jersey and is living in subsidized housing in Massachusetts with her young daughter.  She receives less than $500/month in public assistance benefits plus food stamps.

This is not where she wants to be for long.  She is educated.  Educated to the tune of about $68,000 in private Sallie Mae loans and about $50,000 in federal loans.  She has an undergraduate degree, but has worked only sporadically.  She wants to be a teacher, but needs a state certification.  She attended a wide variety of schools over the years starting in the mid-90’s– city university, community college, private four year school, proprietary school and most recently the University of Phoenix (she dropped out of there).

For those who think that everyone is trying to game the system, I suggest that you come and meet some of my clients.  Believe me when I say that this woman is committed to  education and learning.  But I agree and she agrees that her education has been a failure on many levels.  She certainly acknowledges  that she should not  have taken out so many loans.  She came from a large family of eight children where education was emphasized.  Her low-income recently retired father even co-signed for the private loans. She  thought when she was young that the best thing to do was to keep going to school because it would certainly lead somewhere.  Isn’t that what usually happens, she asks?

She should have asked for more guidance, she should have looked for less expensive options, she should have figured out a better career trajectory.  But shouldn’t the schools also have played a greater role in guiding her education?  What about the lenders?  Why keep lending to someone who is not completing her degrees?  And why give her  loans with variable interest rates starting at 10% and higher??

These are the finger pointing questions that have little relevance to her life today.  She truly wants to be a teacher and I believe she can.  Most important, she believes she can, but her private loans are about to go into default.  She can get a deferment for the federal loans, but this is a stop gap measure.  They will come back to bite her.

As for the private loans, here is what Sallie Mae says when I speak with them just before Christmas eve.  If she can pay us $150 before the end of this year ($50 charge for forbearance for each loan) , we will bring the loan current, but she will have to start making payments in January.  Minimum payment?  Almost $600.  And even that unaffordable amount makes no dent in the principal.

To avoid this, they say, she  can go back to school and get an in-school deferment.  She likes this idea because she wants to be a teacher.  I caution her about taking our more loans and ask her—Can you go to school somewhere that will not require more loans?  She isn’t sure, she says.  The program that she is looking at requires her to take out more loans and more Pell grants too.  She is going to ask for help to search for less expensive options, but she feels pressured to make a decision to avoid the private loan payments and she really wants to find a specific program that will quickly lead to a teacher certification.

When will the cycle end?  Don’t you realize, I say to the Sallie Mae representative, that this borrower will never be able to pay back almost $70,000 in high rate loans?  Her co-signer father has no money either.  There is nothing we can do, they say, except of course, she can go back to school…maybe get more loans.

When will the cycle end?

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 volutnary 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.

Tim Ranzetta at Student Lending Analytics wrote recently about curing student loan defaults and rehabilitation.   We have a few responses to this useful article based on our experiences representing and working with borrowers.

1.  Reasonable and Affordable Repayment

Borrowers seeking rehabilitation are required to pay no more than what is reasonable and affordable for them.  The student loan regulations go even further by prohibiting  minimum payments.

Unfortunately, it is very difficult to get a reasonable and affordable payment.  This problem occurs in part because of a system established by the Department of Education which provides compensation to collectors for setting up rehabilitation plans only if the plans require borrowers to make certain minimum payments.

The tips in the CreditCard.com article are often not enough.  In many years of representing borrowers, I have never had a case, regardless of the loan holder, where a borrower was correctly informed at the outset that she had the right to pay only what is reasonable and affordable.  Never.  We can usually get to this place after negotiation, but this is a difficult process.  It is especially difficult for the majority of borrowers who do not have legal representation.

This roadblock occurs even when borrowers provide the requested documentation.  It is a huge problem that makes rehabilitation significantly less attractive than consolidation for many borrowers.

2.  Transition to Affordable Repayment after Rehabilitation

Our clients are consistently told that their payments will likely be higher after a successful rehabilitation.  This doesn’t make sense.  Once a borrower successfully rehabilitates a loan, she is then eligible for all of the pre-default repayment options, including the IBR option.  It is critical to inform borrowers of these options as soon as possible so that they do not go back into default because they cannot afford the monthly payment.

We are unfortunately finding that many servicers are not ready to process IBR applications.  The other problem is that a borrower’s post-rehabilitation payments will be sent to a different servicer.  The current loan holder usually doesn’t know who the new servicer will be.  Many borrowers want to be prepared and apply for IBR toward the end of their rehabilitation period, but they don’t even know who to talk to.

In order to make rehabilitation work well, the current loan holders have to figure out a way to manage this transition period so that a borrower making relatively low reasonable and affordable payments doesn’t end up with a huge increase in payments after resale of the loan.

3. No Prepayment Requirement for Consolidation

In evaluating the pros and cons of rehabilitation vs. consolidation, borrowers should know that there is no requirement that they make three reasonable and affordable payments in order to consolidate.  If you are in default and consolidating with Direct Loans, you must either make three reasonable and affordable payments OR agree to repay using the Income Contingent Repayment Plan (ICRP) or the Income-Based Repayment Plan (IBR).

 4.  Finding Buyers for Rehabilitated Loans

We share the concerns expressed by Tim Fitzgibbon of NCEHLP in response to the SLA piece about the lack of action at the Department of Education to help with the backlog of rehabilitation loans.  More on this in another article!