The U.S. Senate Health Education Labor & Pensions Committee (HELP) held a very important hearing a few weeks ago on federal student loan issues. This was part of a series of hearings to collect ideas for the reauthorization of the Higher Education Act.
The hearing began with testimony from James Runcie, COO of the Department of Education’s Office of Federal Student Aid (FSA). As occurred at the earlier House hearing, Mr. Runcie defended FSA in this case even after Senator Elizabeth Warren pressed him on the agency’s oversight of private contractors. We urge you to review this part of the hearing and judge what you think of Mr. Runcie’s response to Senator Warren’s questions about why the agency has renewed contracts with companies such as Sallie Mae despite evidence of pervasive problems. (We have written about the history of conflicts of interest and sweetheart deals Sallie Mae has enjoyed over the years and the harm caused to borrowers).
In response to Senator Warren’s questions, Mr. Runcie acknowledged that the profits from the federal student loan programs end up in the general treasury—the funds are not returned to students in the form or grants or other assistance. Senator Warren spoke about this “obscene” profit generating system at a symposium last weekend NCLC co-sponsored with Suffolk University in Boston. She focused mainly on charging less at the front end through lower interest rates and allowing current borrowers to refinance their loans. We urge Congress to view the profit system even more broadly. A major reason why the program is so profitable is because of the extraordinarily high government collection rates. The collection rates are so high because of the draconian collection powers that allow the government to hammer borrowers until they die. As we emphasized in our testimony, IT DOESN’T HAVE TO BE THIS WAY AND IT HASN’T ALWAYS BEEN THIS WAY. The government has not always had the power to seize portions of Social Security, for example. This began in 1996 when Congress passed the Debt Collection Improvement Act.
The Department of Education has not always relied so heavily on private debt collectors. (See the Government Accountability Office’s recent report on lack of government oversight of private debt collectors). Unfortunately for borrowers and taxpayers, there has been a steady increase in borrowing by the lowest income borrowers, a steady increase in the cost of college, and a steady increase in government powers to collect. The countervailing positive trend for federal student loan borrowers is the growth of affordable repayment and other options. Borrowers should learn about these programs and be persistent as they apply and navigate the system. At the same time, the government contractors administering these programs must do a better job and they must be evaluated, among other metrics, on compliance with consumer protection laws and customer service. There is way too much mystery surrounding the current servicer and collector evaluation system. We need to know how this money is being spent, how contracts are awarded and how the private contractors keep getting these contracts despite repeated problems.
1. Student borrowers take on too much of the risk under the current system. Schools may be profiting as tuition continues to increase, private servicers and collectors may be profiting due to borrower distress and even the government appears to be profiting, but it’s on the backs of students who are asked to take on nearly all of the risk.
2. Schools must be held more accountable because the best way to prevent defaults is to help students succeed in school.
3. The use of private contractors for servicing and collection plays out in that the contractors too often steer borrowers to the easiest options instead of providing holistic counseling. Some competition may be healthy, but the system should be about putting borrowers first, not ensuring that private companies get every opportunity to promote their brands and make large profits.
4. Eliminate private debt collectors. In our experience, collection agencies routinely violate consumer protection laws and prioritize profits over borrower rights. It’s time to end this experiment.
5. Restore a safety net for vulnerable student loan borrowers, including restoring bankruptcy rights.
6. The Administration was able to mobilize and implement the transition to full direct lending a few years ago. Now the government must put this same level of commitment to fixing the servicing and collection system. The Department of Education should stop hiding behind proprietary contracts and be transparent, including about performance and evaluation.
7. The Department of Education should work with other agencies, including those with clear consumer protection roles such as the Consumer Financial Protection Bureau.
Senators Harkin and Murray expressed concerns at the hearing about private collection agencies, including about the fees borrowers are required to pay even when services are minimal. Senator Baldwin raised concerns about the disability discharge system, highlighting the very critical problem that amounts written off due to disability discharge are currently considered taxable income.
Senator Warren reported on a recent letter she received from Sallie Mae in response to her request for information. On the positive side, Sallie Mae provided some data about servicer performance, but it was full of holes. It seems that the company self-selected data that looked best for them. For example, the company has been touting its default prevention data. Yet these numbers are not exactly what they seem to be. The Department’s “default prevention” category simply measures the number of borrowers in repayment who went into default during the particular quarter. It does not probe further to determine how a borrower avoided default. This is troubling given the widespread practice of steering borrowers into options, such as forbearance that are easier for servicers and collectors but not best for borrowers.
In our experience representing low-income borrowers, we consistently see examples of Sallie Mae and other servicers pushing borrowers into the quickest options, such as forbearance, rather than explaining and assisting borrowers to obtain more favorable long-term solutions, such as income-based repayment. Forbearances can be costly for borrowers because interest accrues during forbearance periods and because they must be renewed more frequently than most other options.
We applaud Senator Harkin and the committee for holding this important hearing and urge Congress to keep pushing to give students the best chance to succeed. Our higher education system should be about opportunity and access, not about government and private profits.