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Student Loan Programs Fail Those Who Need Them Most, Consumer Watchdog Charges

A new government report suggests policymakers scrap parts of the present system and start fresh.
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A federal program meant to help the most distressed Americans struggling with their student loans all too often fails them, a top official at the Consumer Financial Protection Bureau said on Monday.

Efforts by the Obama administration to improve the treatment of Americans in default on their student debt have been inadequate, according to a report by Seth Frotman, the CFPB’s student loan ombudsman. He suggested that policymakers scrap parts of the current system, in which federal contractors make immense profits for debt collection practices that neither return enough money to taxpayers nor provide enough help to troubled borrowers, and start anew.

Frotman’s warning adds to a growing list of worries plaguing the federal student loan system, in which more than 41 million Americans collectively owe nearly $1.3 trillion

More than 1 million Americans annually default on their government-owned student debt, data show, despite the widespread availability of repayment plans that cap monthly payments relative to borrowers’ earnings. “The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default,” CFPB Director Richard Cordray said in a statement. "Today’s report shows that far too many of these borrowers continue to fall through the cracks."

As many as 75 percent of borrowers who default on their federal student debt will default again, according to estimates cited by Frotman.

Kelly Leon, an Education Department spokeswoman, acknowledged that "too many" borrowers are struggling, and said that the administration is trying to revamp how it collects debtors' payments. Neither Winkie Crigler, executive director of the Student Loan Servicing Alliance, a group representing companies that, together, collect payments on more than 90 percent of all outstanding student loans, nor Pamela Shepherd, a spokeswoman for the National Council of Higher Education Resources, a Washington trade group that represents student loan debt collectors, had a comment on the consumer watchdog's findings and recommendations.

Making things even worse for struggling borrowers, it is exceedingly difficult to shed federal student loans in bankruptcy. Borrowers who default often face a lifetime of crippling wage garnishments that can lead to the seizure of Social Security benefits. In about two dozen states, defaulting on a federal student loan can even cost a borrower his or her job.

Meanwhile, debt collectors working under contract for the Education Department are often paid nearly $40 for every $1 in cash they recover from borrowers who successfully repay their defaulted debt under a special government program meant to get borrowers out of default. Collectors keep the money, even if borrowers quickly re-default. Frotman said the contractors "have no ‘skin in the game.'" He urged policymakers to reform student loan programs “that are failing those borrowers that need help most.”

The report "confirms one of our greatest fears," said Persis Yu, a student loan specialist at the National Consumer Law Center. "That the implementation of programs designed to help student loan borrowers may actually put them in a worse position."