Home > Students > 5 Things We Can Do Now to Solve the Student Loan Problem

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The U.S. Department of Education recently unveiled a new and improved methodology for calculating student-loan payment delinquencies. Where it once figured the late-payment rate of student loans as a whole to be 17%, the department has now determined that when the same data is expressed in terms of individual borrowers, it’s as high as 38%.

However, the new calculations don’t even take into account the borrowers who are currently in default or have had their payment plans modified by loan servicers so that their accounts no longer appear to be past due – even though many technically are. Taking all that into consideration, the number of distressed borrowers approaches 50%.

There are two problems with the ED’s latest effort to convince a skeptical world that it really does know how to manage the more than $1 trillion of directly-originated and government-guaranteed student loans that are on its books.

The first problem is, frighteningly, the ED has demonstrated that it really doesn’t know what it is doing — not with all its restated metrics and loan-administration mishaps. The second is that even this latest parsing of payment-performance data has yet to inspire anything more than a frustratingly incremental approach to solving what is clearly a rapidly deteriorating situation.

Starting with the manner in which performance is evaluated, there are three categories of loans: those that are not in default, those that are and those that are someplace in between because the contracts have been temporarily restructured (granted forbearance) or permanently modified (via the government’s Income-Based Repayment and Pay As You Earn plans).

True, the above three categories combine to make up the aggregate value of student loans currently in repayment, but each of these types must be separately tracked and analyzed, for two reasons: first, so that migrations between delinquency statuses (30-, 60-, 90-days past due, for example) can be monitored and corrective actions (with regard to servicing) taken; second, so that the activities of the loan servicers can be more closely scrutinized than they currently are.

These private-sector companies are compensated for managing payment performances to within predetermined standards. So it’s reasonable to be concerned about the temptation to improve upon the results, such as by temporarily accommodating delinquent borrowers so their loans no longer appear as past due.

These dreadful metrics should inspire lenders and servicers to find a comprehensive solution, but don’t. The plain truth is that the plans to help student loan borrowers — those currently in place (income-based repayment programs) and proposed (such as Sen. Elizabeth Warren’s reintroduction of the Bank on Students Emergency Loan Refinancing Act) — don’t do enough.

Here’s why: PAYE and IBR are helpful but cumbersome. Not only must borrowers re-qualify for the relief they need every year, but as their incomes grow, so will the value of their monthly payments. That makes it harder for households already under pressure to set budgets, let alone plan for the future.

What Can Be Done?

A loan portfolio in which roughly half the borrowers are either in trouble or treading water is one that is in obvious need of restructuring. So let’s stop wasting time pointing fingers about how these loans were first approved or structured, or why borrowers are still struggling as the economy improves, and solve the problem. Here’s how.

  1. Restructure every loan—without regard for origination channel and payment status—for terms of up to 20 years. Longer repayment durations will do more for affordability than monkeying around with interest rates, although these, too, should be reconfigured because the consumer-unfriendly rate-setting mechanism that Congress put into place in 2013 has more to do with politics than it does finance.
  2. Permit partial and full prepayments—without penalty. Just because a loan has a lengthy duration shouldn’t mean that it can’t be settled ahead of time. Penalty-free prepayments—where the additionally remitted amounts are appropriately applied against the principal—will help borrowers to limit the amount of interest they pay overall.
  3. Expunge previous credit histories for loans that are subsequently refinanced. The standard 10-year repayment plan that was originally put into place is to a large extent responsible for the problems many borrowers have had. Creditors should therefore be more concerned about repayment performance after the contracts have been restructured.
  4. Offer student-loan borrowers the same tax relief that has benefitted homeowners. Waive taxation on the value of the debt forgiveness that may be granted on an exception basis, just as it has been for distressed home mortgages that were permanently modified after the crash.
  5. Permit student loan debts to be discharged in bankruptcy. This will motivate recalcitrant owners and servicers of government-guaranteed loans to come to the bargaining table with tangible, sustainable solutions.

The money exists to pay for all this.

It’s no secret that the ED rakes in enormous profits from its student loan programs. Much of that is a result of the risky manner in which the government has chosen to finance this activity (low-rate, short-term borrowing is used to support its high-rate, long-term lending at a time when the Federal Reserve is contemplating raising rates). But even if the ED were to “match fund” its portfolio as lenders often do, it would still earn substantial profits from the combination of fees and interest that are charged.

What’s not so well-known is how these profits end up appropriated by Congress to offset the national debt. Said differently, lawmakers are, in effect, taxing the very same constituents it should be helping.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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  • nancyfarmer

    What’s missing in this discussion about student loans and debt is a
    reminder that the best solution is to avoid debt by planning and saving for
    college. I am President of a consortium of 278 private colleges and
    universities that voluntarily sponsor a prepaid tuition plan, Private College
    529 Plan. Section 529 savings and prepaid plans offer tax breaks for families
    and even small, regular contributions to a 529 Plan will add up over
    time. Bottom line: earn interest rather than pay it.

    • Thirty6

      Wow. Kind of hard to read that. Someone so far displaced from reality… What teenager on this planet is concerned with tax breaks? What child do you know that can save 30-40 thousand dollars for college (and higher for vocational)? What kid would want to make payments out of their awful paychecks from their mcjobs? Better yet, what kid do you know that could afford that? Educate your little heart out but the system is broken no matter which way you try to shine the light. A trillion. Freaking. Dollars. Private colleges/universities need to be put into check.

  • AlanCollinge

    This is one of the better pieces I have seen on this topic. However, it is still critically uninformed due to the following:

    The removal of bankruptcy and other consumer protections has, in fact led to a lending environment where nearly every systemic element of the lending system (up to and INCLUDING the federal government) actually make PROFIT on defaults!!

    This fact has been ignored by the mainstream media for years and even decades at this point. This is a defining hallmark of a predatory lending system. It is not defensible, nor should it be tolerated.

    When a lender has a financial preference for defaults, we can predict, and indeed we are seeing with the student lending system,- a plethora of systemic failings, like horrible loan administration, a high default rate, and inflation in the price of the product or serviced being purchased (in this case, higher education), and many, many others.

    This is a KEY, if not THE KEY fiscal dynamic that must not be overlooked if we are to have an informed discussion on this topic.

    The author is absolutely right that bankruptcy protections should be returned to student loans. However, it should be #1 on the list, not last. See studentloanjustice.org/defaults-making-money.htm to understand this more fully.

    • http://www.Credit.com/ Gerri Detweiler

      Appreciate your insights and I know you have been fighting for this for a long time. There are additional articles that discuss restoring bankruptcy protections to student loans.

  • AlanCollinge

    Good to see this analysis. The public has been completely misinformed about default rates for years. There is another huge fact that is missing here, however, and that is that the entire lending system up to and including the federal government has been PROFITING on defaults for many years, and the removal of bankruptcy and other standard consumer protections has caused this. This perverted fiscal incentive had huge, massive consequences that we are only now beginning to acknowledge. Please see studentloanjustice.org/default… to understand this more. fully.

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