The ‘No-Brainer’ Fix To America’s Student Loan Mess
Two years ago, America’s biggest labor unions urged the Obama administration to cancel its lucrative contract with Navient Corp., once known as student debt collector Sallie Mae. Last year, union leader Randi Weingarten upped the ante, referring to the company—the nation’s largest college loan servicer—as a “known predatory actor” whose “profit-taking has contributed to the wage stagnation of an entire generation.”
This year things are different. On Wednesday, both sides announced they’ve become friends.
The newfound partnership between the AFL-CIO, the nation’s largest labor federation; Weingarten’s American Federation of Teachers; and Navient concerns an effort to fix a little known aspect of the federal student loan program that could be helping distressed Americans manage, or even climb out of, debt. Right now, it more commonly lets them fall behind.
As student debt swelled to $1.4 trillion in recent years while wages remained flat, millions of borrowers signed up for government plans allowing them to repay based on their earnings rather than what they owe. Income-driven repayment plans are unique in the world of household debt, where Americans mostly make payments on their mortgages, car loans, personal loans, and credit card bills based on how much they borrowed.
To enroll in income-driven plans, borrowers have to share their most recent earnings information with loan companies—such as Navient—working under contract for the U.S. Department of Education. Little more than a few recent pay stubs or a copy of their most recent tax return are required before borrowers can enjoy a year’s worth of payments indexed to their income. The existence of income plans means the federal government should be “aiming at a zero default rate among student loan borrowers,” Education Undersecretary Ted Mitchell said last year.
But getting enrolled is tough, thanks to slow application processing by loan companies, random rejections, and frequently lost paperwork, according to an August report by Seth Frotman, the U.S. Consumer Financial Protection Bureau’s student loan ombudsman.
Compounding those issues is that borrowers have to navigate the process every year, since the government requires annual re-certifications. An Education Department study last year revealed that some 57 percent of borrowers, or 696,000 people, whose income information came due at re-certification missed their deadline. As a result, their required monthly payments shot up and their loan balances soared, thanks to accrued interest. Close to a third of borrowers who missed their deadlines ended up postponing subsequent payments. About 15 percent became delinquent.
The problem has become so widespread that, of the 4.1 million borrowers with loans direct from the Education Department who are enrolled in the government’s most popular income plans, more than one quarter have fallen out of them, federal data show. That helps to explain why, over the last year, more than 1.1 million Americans defaulted on a student loan obtained directly from the feds, translating to a default every 28 seconds.
Fortunately for borrowers, there’s an easy fix—one that President Barack Obama embraced in March of last year and that the Treasury and Education departments said “can and should be developed.” It calls for the government to create an electronic system that would allow borrowers to give the Internal Revenue Service permission to automatically share for several years a portion of their tax returns with the Education Department’s loan contractors. If such a system existed, there would be no need for annual paperwork nightmares that afflict hundreds of thousands of Americans.
The IRS says it doesn’t have enough money to create such a system, according to the Obama administration. The Center on Budget and Policy Priorities reckons the agency’s budget has been slashed by an inflation-adjusted 17 percent since 2010. Privacy issues are also probably hampering automatic disclosure of tax information. Eric Smith, a spokesman for the IRS, didn’t comment.
The frustration with such an easy fix being just out of reach has managed to bring together once-sworn enemies. The coalition of labor organizations, consumer advocacy groups, and loan servicers seek to pressure the White House to implement what Ben Miller, senior director for post-secondary education at the Center for American Progress, described as a “no-brainer.”
Jack Remondi, Navient’s chief executive, told the consumer bureau in June that a multi-year student loan system is among his recommendations that have the “greatest potential” to reduce loan defaults.
There’s little doubt that such a system would save Remondi’s company money. But it also would allow servicers such as Navient to focus their attention on aiding the most distressed borrowers, Miller said. “There are a lot of areas where servicers and consumer groups don’t always agree, but this is such an obvious thing that’s better for everybody,” he added.