By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
We’re well beyond the Presidential “Message: I care about the middle class” tour, but among his priorities at one whistle-stop was a plan for reining in the cost of higher education. The idea for a ratings system tied to federal funding and eligibility for student aid has been shredded both here and elsewhere, but another part of the plan was to bulk up the Income-Based Repayment (IBR) system. Under IBR, loan recipients have their monthly payment capped at between 10-15% (depending on the IBR program) of annual “discretionary” income, defined as above 150% of the poverty line for a fixed period (between 10-25 years, again depending on the program – public service or teaching professions reduce the years, for example), and at the end of that period, any outstanding principal balance is forgiven. Right now it’s open only to those who get into financial hardship; under Obama’s proposal it would extend to every student who takes out a loan. There’s bipartisan legislation that would expand IBR mostly along the Administration’s lines (from Tom Petri and Jared Polis).
This is a least-worst option as far as I’m concerned – using available tax benefits and other resources already employed to “make college affordable” and simply making college free would be at the top of the list – but it’s an improvement over a student loan system that currently works more like an indenture. With IBR, there’s at least a light at the end of the tunnel, it’s mildly progressive in that people with a higher ability to pay do pay more, and it generally reduces the risk of default, and all the attendant problems that go with that.
Perhaps because it’s a better deal for debtors, particularly struggling ones, it’s not being used very much. According to CFPB, only around 30% of those eligible for IBR are signing up. In many cases, the debtor doesn’t even know about the option; a National Consumer Law Center survey in May found that 65% of borrowers “do not recall receiving any contact prior to default.” As for the “pay as you earn” plan, the Obama Administration’s contribution to this (President Bush actually passed IBR in 2007), the numbers are pathetic – just 40,000 have signed up, out of 1.6 million potential eligibles. Rohit Chopra of CFPB said in a recent report that “If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided.”
Ah, there’s that word: “servicer.” Despite the fact that the government directly lends out about 85% of all student loans, they don’t directly service them. They hire for-profit companies to handle day-to-day operations, and they’re paid a sliver of the loan proceeds. (Does this sound familiar?) And though the government has laid out a payment option that would be more affordable for debtors in trouble, the servicers, who wouldn’t see the same profits under such programs, have not extended that information to their customers. (No, really, does this sound familiar?)
Shahien Nasiripour and Joy Resmovits have the story:
Sallie Mae, the nation’s largest servicer of federal student loans, is failing to enroll many of its distressed borrowers into one of the Obama administration’s main initiatives for alleviating high student debt.
Documents obtained by The Huffington Post and estimates provided by the White House separately suggest that Sallie Mae, or SLM Corp., has enrolled relatively few borrowers into the Income-Based Repayment program. Sallie Mae dominates the now-discontinued Federal Family Education Loan Program, owning between 37 and 40 percent of the outstanding FFELP debt held by the private sector. But its share of FFELP borrowers who are enrolled in IBR is about half that, or 15 to 18 percent [...]
“It is concerning that Sallie Mae has such a disproportionately low number of borrowers utilizing the Income-Based Repayment program,” said Persis Yu, a staff attorney at the National Consumer Law Center. “Unfortunately, we do not have a lot of data about Sallie Mae or other servicers’ performance.”
In an emailed statement, Martha Holler, Sallie Mae spokeswoman, criticized HuffPost’s figures, arguing that the “conclusion is misguided.” But despite several requests for data that could alleviate the alleged error, the company refused to provide any additional information.
Gotta love the “you’re wrong but we won’t tell you exactly how wrong” statement from Sallie Mae.
Data on student loan servicers is incredibly thin, but my guess is that this industry is as corroded and diseased as mortgage servicing, striving to wring every last dollar from their customers, denying them aid for which they are eligible. With IBR, like with HAMP, we have a program designed to help borrowers which is administered entirely at the discretion of the servicers. And here we have servicers just not complying with the program. In the case of mortgages, servicers used HAMP as a predatory lending accessory; here it appears that students just aren’t being told about IBR, or they make it so confusing to sign up that people don’t bother. The financial incentives are likely the same – additional late fees, collection fees, et al for servicers and their collection departments if the borrower slides into default. In addition, Sallie Mae’s chief executive said in an earnings call in July that it was labor-intensive and cost-prohibitive to move a borrower into IBR. That directly parallels the reluctance among mortgage servicers to engage in the high-touch business of loan modifications.
In this case, for the most part you have the US government as the underlying loan holder, rather than far-flung investors. Sallie Mae still has some legacy loans from when the government didn’t directly lend; many of those have been securitized, so there are VERY similar circumstances as with HAMP. But by and large, the Department of Education is in a far better position to do something about this.
So far, they have announced that they would use Sallie Mae less as a servicer. But considering that students aren’t picking up IBR across the board, I’d be surprised if just Sallie Mae were the culprit. In addition, the President has promised to publicize IBR, something CFPB has taken on as well. In March, the President cut commissions for debt collectors and retained them for low income-based repayments, which theoretically ends the incentive to avoid informing borrowers about IBR. But Sallie Mae’s statistics show that hasn’t worked yet.
One thing the Administration hasn’t done is auto-enroll students in IBR when they fall into hardship (eventually, every borrower could be auto-enrolled; that’s a feature of the Petri-Polis plan). The National Consumer Law Center recommended this in May, saying that “automatic placement into IBR will allow borrowers to avoid the draconian costs of collection and extraordinary government collection powers.” Because the private collection army wouldn’t have to be paid, the net effect for government finances is probably a wash, and borrowers benefit from a manageable payment.
Combining income-based repayment with auto-enrollment gets us close to the “Pay It Forward”-type plan under study in Oregon. Again, there are better options out there, but this isn’t bad. But it’ll never happen as long as it gets routed through rapacious servicers. It’s another failure of privatization of public processes, harming those who need the most help.