There is currently $1.6 trillion in outstanding student loan debt. That figure has nearly doubled over the course of the past 10 years. 44 million Americans carry student loan debt, and one in four of those borrowers are struggling with their payments. Millions of student loan borrowers are putting off critical life decisions such as home purchases, marriage, having children, and saving for retirement.
The scope of the problem is only aggravated further by a sprawling and dysfunctional student loan system, skyrocketing higher education costs, uniquely restrictive rights and options for borrowers, and poor government oversight.
Can the system be fixed? Yes. Here’s how.
Pass a national student loan bill of rights
Right now, there is no single federal law that provides student loan borrowers with clear legal rights. States are stepping in to protect their own citizens from unfair and abusive student loan practices, but this patchwork of protections is not uniform, and it is being challenged in courts. A nationally uniform student loan bill of rights can provide borrowers with real, national protections.
The bill of rights should include clear legal rights for student loan borrowers, and clear obligations by the government, its contracted loan servicers, and private lenders. It should also include independent government oversight, sanctions for student loan servicers and debt collectors who don’t comply, a robust ombudsman unit that can address borrower complaints and enforce decisions, and a private right of action that gives individual student loan borrowers the right to sue bad actors in court if they have been subjected to abusive servicing and debt collection.
Loosen bankruptcy restrictions, especially for private loans.
Since 2005, it has been exceptionally difficult for borrowers to discharge student debt in bankruptcy. Student loan debt is treated differently from every other form of consumer debt.
While there is an argument that student loans issued by the federal government should be tougher to get rid of in bankruptcy, it should not be as difficult as it is – previously, borrowers could discharge their federal student loans in bankruptcy, they just had to get through an initial post-graduation waiting period first. Meanwhile, the lack of bankruptcy options for private loans has caused the private student loan market to explode over the past 15 years, leading to hundreds of millions of dollars of high-interest, predatory debt that many student loan borrowers have no hope of ever repaying. This needs to change, and bankruptcy would be a way to give borrowers more options.
Simplify Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program is a critical program that allows public servants to get their qualifying federal student loans forgiven in as soon as 10 years. PSLF provides an incentive for people to go into lower-paying, high-need positions with government agencies and nonprofit organizations – positions that often require a college or graduate degree. The program, however, is riddled with problems, and the approval rate for PSLF is dismal.
An overhaul of Public Service Loan Forgiveness is in order. Luckily, a bill has already been filed. If passed, the What You Can Do For Your Country Act would simplify and streamline PSLF, allow for partial loan forgiveness halfway through the program, and make it easier for borrowers to submit disputes if there are problems.
Link college federal aid eligibility to borrower employment outcomes and loan default rates
Right now, it is too easy for schools to rely on access to federal student aid programs to fund their bottom lines. Schools may be providing subpar coursework, dismal career placement, and poor financial aid counseling, causing their graduates to struggle after leaving the program. But by the time the student graduates, the school has already been paid, due to its access to federal student aid.
Linking a school’s ongoing access to federal aid to the employment and loan repayment outcomes of its graduates would help ensure that students are getting what they paid for. And failure to maintain adequate standards could lead to some schools shutting down for good, which wouldn’t necessary be a bad thing.
Automate income-driven repayment recertification through IRS data-sharing
Currently, borrowers on an income-driven repayment plan must affirmatively recertify their income each year by submitting a new application along with their income information. This process is riddled with problems. Borrowers sometimes forget to recertify. Servicers sometimes fail to properly notify borrowers when it’s time to renew. And even if the borrower does everything right, the servicer may still make processing mistakes or cause delays that can lead to financial harm. An automated process whereby the IRS submits the required income information directly to the U.S. Dept. of Education (with an option for the borrower to opt out, if they choose) would streamline the process for millions of people and reduce the rate of errors.
Cap borrowing at reasonable limits, and cap interest accrual
One of the reasons that the volume of student loan debt has skyrocketed is because there are few limits on borrowing, and there’s next to no limits on interest accrual. It is quite common for borrowers to wind up repaying several times the amount they originally borrowed due to interest accrual and capitalization, particularly during periods of deferment, forbearance, an income-driven repayment. Through a combination of borrowing limits and caps on total interest accrual, borrowers will have a much better shot at fair repayment, which would also reduce rates of delinquency and default.
Create a centralized data repository so that borrowers can access their loan records simply and easily
Our student loan system is a mess, largely because the Department of Education uses a confusing system of contractors to manage and service its sprawling loan portfolio. That servicing system is also sometimes reshuffled, which means that borrowers may see their loan accounts repeatedly transferred to various companies over the course of their repayment term. In the process, crucial records are often lost.
The Department of Education should create a centralized, user-friendly database (similar to the NSLDS database) where borrowers can access their promissory notes, payment histories, and correspondence records as needed.
Allow borrowers to refinance high-interest federal loans at lower rates within the federal loan system
One of the peculiarities with the federal student loan system is that interest rates for federal loans are set by Congress. And so those rates may fluctuate wildly depending on the year the loans were disbursed. Borrowers could have interest rates as low as 2-3%, or as high as 8-9%. The system is inherently unfair, since it’s not a measurably higher or lower risk to the government for a borrower to go to school and take out student loans in any particular year.
Borrowers who are stuck with a high-interest federal student loan simply because of the year that they borrowed it should be given an option to refinance – within the federal system – at a lower rate. This would cut down on interest accrual, make repayment more fair, and reduce rates of delinquency and default.