Paying Student Loans: Unpacking the Process
The complexities behind improving loan servicing
Upwards of 43 million Americans collectively owe a staggering $1.4 trillion in student debt. The student loan crisis grows more daunting each year, but how do you begin to tackle a problem of this magnitude? While there are many potential policy solutions, Preston Cooper, higher education research analyst at AEI, argues that the most relevant solution lies within the complexities of federal loan programs. In a presentation to the House Committee of Appropriations, Cooper maintained that in order to improve loan servicing, program simplification is key. Let’s take a look at the complexities within federal student loan programs in order to better understand this problem that impacts millions of young Americans.
Who Collects Loan Payments?
The Department of Education currently works with nine servicers to administer and collect payments on federal student loans. Borrowers are assigned to servicers by the Department of Education.
When Are Payments Due?
Borrowers do not have to begin paying their student loans until six months after they graduate. This six-month grace period exists in order to give borrowers time to earn income before they begin to pay off their (sometimes) massive loans.
Beginning the Payment Process
There are a number of repayment plans to tackle student debt. Options range from standard ten-year monthly payment plans to more intricate income-based repayment schedules which fluctuate according to the borrower’s current income.
Keeping Up with Payments
With an applicable excuse, borrowers can request loan deferment, which pauses payments without accumulating interest. If the borrower does not meet deferment requirements, they can request forbearance, which also “pauses” payments, but includes high interest rates, for up to three years. Trends indicate that more and more borrowers utilize forbearance- currently 1.5 million student debt loans are in this state. Cooper argues that excessive use of forbearance has negative ramifications for borrowers, tax payers, and the higher education system as a whole.
Consequences of Late Payments
Late payments lead to loan delinquency. Once a loan becomes delinquent, the borrower is subject to lose benefits like interest rate discounts. If the loan is delinquent for 270 days, the loan then goes into default. Currently 3.3 million federally managed student loans are delinquent, while another 7.7 million loans are in default.
Entering Default… What’s Next?
Once a loan is in default, the loan servicer is replaced with a collection agency, who can use extreme measures such as wage garnishment (a court order which withholds part of a borrower’s paycheck to directly repay debt), or seizure of tax refunds. Additionally, borrowers who are in default must pay fees which can amount to thousands of dollars.
What About Loan Forgiveness?
The Public Service Loan Forgiveness (PSLF) program allows borrowers who have made loan payments for ten years, and work for specific public service organizations, to receive full loan forgiveness. While this sounds like a great option, the complexity of the program undermines many of its intended goals. As of September 2018, 44,724 student loan borrowers applied for PSLF, however a mere 423 applications were approved! Unclear parameters regarding the type of repayment plans and conditions of payments made disable thousands of borrowers from this program, further complicating the already confusing student loan process.
Now that we understand the problem, what are possible solutions?
Cooper maintains that systematic reform is necessary to properly undertake the student loan crisis, and he offers various levels of potential solutions. Incremental reforms such as the Department of Education’s NextGen Initiative, which seeks to provide a single platform for borrowers to manage loans, would make loan servicing simpler and more efficient. Moderate reforms such as simplification of loan programs would similarly pave a way for a more straightforward payment process. Cooper concludes with “bold reform” proposals, which would shift the current loan servicing system to an alternative such as the payroll method that is currently employed in the U.K. and Australia. Though some argue that these propositions may not be realistic, innovative ideas to cope with rising student debt must be discussed in order to initiate much needed reform.