President Obama’s latest effort to improve student lending has a catchy-sounding name — the Student Aid Bill of Rights — and it’s garnering praise from consumer advocates and Congressional Democrats.
But does it actually alter the student-lending landscape? Yes and no.
The "bill of rights," and an accompanying memorandum that the president announced on Tuesday at the Georgia Institute of Technology, will make it a little easier for borrowers to stay current on their debt payments and to file complaints against the companies that manage their loans.
But the president’s steps won’t ease students’ debt burdens or make it easier for struggling borrowers to discharge that debt. And they don’t fundamentally change how the government services student loans.
Here’s a rundown of what the memorandum does, what it doesn’t do, and what we still don’t know about the plan:
What It Does
Help borrowers keep track of their student loans. For years, consumer groups and colleges have been warning that borrowers with more than one servicer are losing track of their loans — and winding up in default as a result. The Education Department acknowledged those concerns last fall, when it adjusted some institutions’ "cohort default rates," or the share of borrowers who default on their loans within a certain time frame.
At the time, the agency cited confusion created by "split servicing" as a reason for those changes. To make it easier for borrowers to keep tabs on their loans, the administration is now creating a central portal where they can see information about all of their loans, regardless of the servicer.
Make it easier for borrowers to file complaints involving their student aid. Right now, borrowers can file complaints with a variety of agencies, including the Consumer Financial Protection Bureau, the Department of Veterans Affairs, and the Defense Department. But there isn’t a centralized website where all borrowers can lodge their grievances against lenders, servicers, debt collectors, and colleges.
The White House is directing the Education Department to create one — and to share the complaints it collects with other federal agencies. Young Invincibles, a policy group that represents young adults, called that "a significant step to give students struggling with poor loan servicing and deceptive debt-collection practices a voice."
Help borrowers remain in income-based repayment plans. Each year nearly 40 percent of borrowers "fall out" of income-based repayment plans, largely because they fail to provide annual "certification" of their income. Consumer advocates have urged the department to allow borrowers to authorize the Internal Revenue Service to release income information for multiple years, so borrowers don’t have to resubmit it each year. The president is requiring the secretaries of education and the treasury to at least study the idea.
What It Doesn’t Do
Prevent students from overborrowing in the first place. Many of the challenges that student-loan borrowers face in loan repayment are the result of unmanageable debt. After all, if borrowers could afford their loan payments, they wouldn’t have to turn to income-based repayment or deal with debt collectors.
To be fair, the administration has proposed and taken many other steps to lower tuition and reduce student debt, including significantly increasing the maximum Pell Grant and expanding education tax credits. But "unless the administration and Congress act urgently to constructively address escalating college costs," the American Association of State Colleges and Universities said in a statement on Tuesday, the "debt burden will inevitably escalate."
Overhaul student-loan debt collection. Consumer advocates say the system — which relies on private contractors to collect on federal student loans — is fundamentally broken. They want the government to handle debt collection itself. But the president’s plan merely talks of "raising standards" for student-loan debt collectors, and it’s pretty vague about what those higher standards would look like.
While the plan does create a pilot project that would allow the government to work directly with some defaulted borrowers, officials told reporters that would be a way to try out different debt-collection tactics, not a trial run.
Provide an escape hatch for defaulters. Consumer advocates and some Democratic lawmakers have called for the return of standard bankruptcy protections to student loans. They’ve also urged the department to exercise its authority to cancel loans in cases where colleges close or mislead borrowers.
The memorandum directs a trio of agencies to report on whether changes in bankruptcy laws and regulations are necessary, but it will take Congressional action to change the underlying statute. And the plan doesn’t direct the Education Department to use any of its existing tools to provide debt relief to borrowers.
What We Don’t Know Yet
How exactly will the government "raise standards" for debt collectors? The memorandum requires the department to "ensure that the debt-collection process for defaulted federal student loans is fair [and] transparent, charges reasonable fees," and "effectively assists borrowers in meeting their obligations and returning to good standing." That all sounds positive, but it’s not very specific. As Deanne Loonin, a lawyer with the National Consumer Law Center, puts it: "We need to know what that means."
What sort of consumer protections will be added to student-loan servicing? The memorandum promises "higher standards for student-loan servicing," including "enhanced disclosures" and "strengthened consumer protections."
But the examples it gives almost all count as disclosures — notifications when a loan becomes delinquent, when it’s transferred to another servicer, or when borrowers become delinquent or fail to complete applications for repayment plans.
The only protection listed is ensuring that servicers apply prepayments to loans with the highest interest rates first. Will there be others, and how will they be enforced?
Will the agencies’ findings be made public? The memorandum requires the Education Department to publish several reports, including ones that summarize and analyze data from the complaint system, and a quarterly performance report on private debt collectors. Presumably, those reports would be made public, but the memorandum doesn’t specify. "They’re not clear about how transparent a lot of this is going to be, said Ms. Loonin.