There’s Still Plenty the Obama Administration Could Do About Student Debt in Its Last Year
The fourth quarter of the Obama presidency has been relatively active when it comes to higher education. Last year alone, the Administration announced a proposal to make two years of community college tuition-free, finalized and released a treasure trove of data on earnings and loan repayment data by college as a substitute for its once-vaunted plans for a College Ratings system, came out with a Student Aid Bill of Rights, and issued regulations intended to streamline the confusing set of student loan repayment options. And as with other issues, the President has often announced his vision for higher education during the State of the Union speech – from the community college proposal to a famous quote about putting high-priced, low-value colleges “on notice.”
To this point, the Obama higher education platform has followed a predictable pattern—pushing for investments in grant aid and ways to lower the price of college for students, followed by initiatives try to hold colleges’ feet to the fire on issues of cost, debt, and value. It’s clear that the President views the lack of college affordability as a function of three things: inadequate public investment (thus, free community college and expansions in Pell Grants), inadequate consumer information and protection (thus, ratings and repayment data), and inadequate belt-tightening by colleges themselves (thus, evergreen incentive funds to improve productivity and efficiency, as well as putting colleges “on notice”). Throw in tweaks to income-based repayment plans and you have a general sense of how this Administration, absent Congressional action, thinks the higher education system should function and which incentives to embed within it.
In his final year, there are still actions the President could take on student debt, and with student debt and college affordability proving to be an issue with staying power on the campaign trail, the Obama Administration has an opportunity to inject ideas directly into the 2016 debate and potentially shape the next President’s agenda on this front.
The Obama Administration has tinkered with the formula and eligibility for income-based student loan repayment (IBR), most recently with its release of REPAYE, a plan that would allow all borrowers to cap their loan payments at 10% of monthly discretionary income. Income-based repayment is a necessary part of any federal loan program, but it in itself is not a guarantee that people will be able to navigate a complex loan process or that loan servicers will, well, service their loan in a way that ensures everyone who would benefit from a low monthly payment has that opportunity.
We know that there are a few major predictors of student loan default: delinquency, and non-graduation. The first one is self-explanatory – delinquency leads to default – and the second helps explain why the cumulative balances for defaulted loans are relatively low (at least compared to average debt for graduates).
The Administration could direct loan servicers – which are government contractors—to create and execute plans to enroll all borrowers that are, say 60-plus days delinquent, as well as those without degrees into income-based repayment plans. Not every struggling borrower will be saved (and some may not want to be found), but this would come close to eliminating the unnecessary default for the borrower whose income is low enough that his or her monthly payment could be $0 under IBR.
There is virtually no good reason student debt is treated differently from other forms of debt in our bankruptcy system. The Administration has acknowledged this, and the Department of Education recently recommended that private student loans be dischargeable. The Administration has even provided guidance to its loan collectors on how and when they should try to go after student debt that borrowers are attempting to discharge. Consumer advocates have derided that guidance as weak and counterproductive.
The truth is the Administration could be much more forceful with its debt collectors—including ECMC, the largest federal contractor in charge of pursuing defaulted loans—in attempting to ease up what have become exceedingly ruthless and drawn-out debt collection tactics, as well as encouraging settlements with borrowers that provide a modicum of relief.
Our treatment of student loans in bankruptcy is based on a persistent myth that college students will get rich quick by filing bankruptcy right after graduation—something that has never been allowed, nor would be under a sensible bankruptcy policy. The Administration has substantial leeway in enforcing the current law and leverage over its debt collectors, and could set a good example in its final year.
Since the implosion of Corinthian Colleges last year, the Department of Education has been trying to untangle a web of debt relief claims made by students who attended the now-defunct for-profit chain. Under the Higher Education Act, students can see their debts canceled in cases where schools close or break state law. And yet, nearly a year after Corinthian Colleges closed their doors (due to mounting financial and legal pressure from the Department of Education, SEC, and several state attorneys general), and despite the Department of Education’s insistence on fast-tracking applications for relief, minimal progress has been made in granting debt forgiveness even in the most obvious of circumstances.
Today, the Department of Education is beginning a rulemaking process to determine how to deal with these cases in a timely and effective manner—not just for former Corinthian students, but for the next (likely inevitable) school collapse. But in the meantime, the State of Massachusetts has helped more students apply for relief than the U.S. Department of Education—signaling that the Department has done an insufficient job making certain everyone who has a claim to relief knows they can apply for it.
The State of the Union provides an opportunity for the President to use this as a cautionary tale, to hit broader themes of what happens when we fail to protect consumers, provide insufficient public funding for education, and ask little of colleges whose business model is built entirely on federal aid. Tonight could be an acknowledgment that, for this year at least, the White House is still looking out for vulnerable students and borrowers.
Posted on 15 January 2016
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