I just returned from the National Consumer Law Center Conference that took place in Tampa, FL from Nov. 6 to Nov. 8. It was an overwhelming experience to say the least. I learned lots of stuff to help my clients and met amazing people. One of the highlights of the conference was that keynote speech delivered by Sarah Bloom Raskin, governor of the Federal Reserve Board.
Her speech was mainly about the student loan crisis and what should be done to solve it. Already, 7 millions of student loan borrowers are in default on their student loans, many more could face default in the near future; and countless others are struggling to keep their payments current. Consumer advocate groups, market regulators, and federal officials are only just now beginning to focus on effective student loan servicing and debt collection as a strategy to slow down the rate of student loan defaults. It’s about time. If you pay student loans you are probably a victim of unfair student loan servicing in the following instances:
- Servicers allocating partial payments proportionally across a borrowers loans, causing all the loans to be considered delinquent;
- Private student loan servicers charging late fees when payments are received during the grace period after the due date
- Servicers failing to provide student loan borrowers with sustainable repayment options, which only compounds financial struggle instead of controlling it.
With more than 40 million federal student loan borrowers interacting with servicers and debt collectors, servicer and debt collector actions heavily influence the ability of students to complete their higher education, avoid the consequences of delinquency and default, and achieve their educational potential to the benefit of themselves and to the benefit of the country.
Up to this point I was captivated with Ms. Raskin’s analysis of the problem, however I was very disappointed with her recommendation to solve the problem. One prescription to prevent further defaults is for the federal gov’t to offer student loan servicers contractual incentives (i.e. more money) when they do the work they are supposed to do in the first place: work with a student loan borrower to find the option that best meets the borrowers needs before the borrower becomes delinquent or in default. What a sweet deal for the servicer. When they don’t do their job right pummeling more borrowers into an deep abyss of debt, they don’t get fired or shut down like in most other industries, they instead they get an offer of more money to do the job they are supposed to do in the first place.
I did agree with her on the reforms needed for student loan collections. Currently, student loan collection companies rely on abusive debt collection practices to get borrowers to pay. After some point, discouraged borrowers just don’t answer the phone and don’t open the collection letters anymore and just let it go into default. Federal student loan debt collectors need to be encouraged to remove loan accounts from default when possible, as well as deal fairly with borrowers, and the incentive structures in debt collector contracts should convey these priorities.
Student loan default carries serious consequences to a borrowers life. When delinquencies are reported to the private credit bureaus, it can inhibit a borrowers access to future credit for buying a home, starting a business, or completing or furthering education. It may hinder a person from getting married, having kids, or just feeling confident and good about themselves. Borrowers may also have a portion of their wages taken directly from their paychecks. In other words, borrowers may disengage from personal and professional development, and may drop into the ranks of those preyed upon by scams. Additionally, the fresh start afforded by bankruptcy is not available for student loan debt, unless student loan debtors mount a case that proves undue hardship.
I’m not optimistic that Ms. Raskin’s proposal will solve the student loan debt problem. But at least the student loan debt problem is getting more attention and finally, the servicers and collection agencies are now being held more accountable for their business practices.
The root of the student loan problem lies in the question: whether everyone should seek higher education (college or university) in the first place? Is higher education worth it anyway? and whether college is too expensive anyway for what you get? Or maybe, just cut off financing for useless degrees and skills in favor of useful one’s like learning to code.