New Jersey Made Its Student Loans More Consumer-Friendly. But Most Borrowers Were Left Out.

Here in New Jersey’s capital city, the power corridors of state government have been abuzz with efforts to make college more affordable.

Gov. Phil Murphy, a Democrat, campaigned for office on a promise of free community college, and the Legislature responded with $25 million. State lawmakers passed a measure allowing undocumented students to receive financial aid, and the governor spearheaded the creation of a state program to help pay down the debt of college graduates who work in STEM fields.

But a problem from the past still lingers: student borrowers who are struggling to pay off loans from New Jersey’s state loan program, the nation’s largest. After years of borrower complaints, the state has responded with some improvements. But critics are upset that the benefits aren’t helping the majority of borrowers with outstanding debt.

The state, for example, has unveiled two income-based repayment plans since 2017, but both are limited to recent borrowers.

The result: As of this past January, more than three-quarters of New Jersey’s 57,461 borrowers were ineligible for the state’s short-term program, which provides for two years of reduced payments based on income. About 90 percent of borrowers were ineligible for the state’s longer-term income-based repayment program, which offers loan forgiveness after 25 years of payments.

New Jersey says it can’t afford to expand its income-based repayment plans to everyone. The state’s loan agency stressed that all new borrowers are eligible for income-based programs, and as the share of new borrowers grows, “this benefit will be extended to a growing percentage of our active loans each year.” The debate over how to improve New Jersey’s program provides a glimpse into the world of state-run student loans. More than 20 states operate their own loan agency.

Federal Stafford loans offer the most-attractive terms for borrowers, and financial-aid experts say students should always max out on those loans first before turning to other products, such as state loans or bank-issued private loans.

A New York Times/ProPublica investigation in 2016 focused on New Jersey loans, and included accusations that the loans, characterized by strict repayment terms and aggressive collection tactics, amounted to “state sanctioned loan sharking.” At the time, New Jersey was one of the few places that demanded payment from dead students, by targeting parents who had co-signed for the loans.

The fallout from that investigation was significant. A state Senate committee convened a hearing to hear complaints from borrowers. New Jersey lawmakers passed a law so that the families of dead borrowers would no longer be held responsible for student debts.

“We heard outrageous stories of people, young people, who felt that their life was over, simply because they could not live their life with their debt hanging over their head.” Sen. Sandra Cunningham, a New Jersey lawmaker who chairs the state Senate’s higher-education committee, said in an interview. She expressed hope that New Jersey’s loan agency, which gained a new executive director a year ago, will benefit from “a new vision, and a new opportunity to start treating people with more respect.”

“I think they’ve been making an effort,” Cunningham said. “But I don’t know how that effort has paid off yet.”

David Socolow, executive director of New Jersey’s Higher Education Student Assistance Authority, told The Chronicle that improving customer service is a “top priority.” In June the agency began a pilot program to work with borrowers who are in default by negotiating more-flexible payment plans on a case-by-case basis.

“There are some borrowers from the past who are struggling, and borrowers who are in economic distress are a symptom of the affordability problem,” Socolow said. “We need to do everything we can to help them.”

Fewer Borrower Protections

The grumbling in New Jersey highlights some of the recurring criticisms of state loans in general.

“A lot of these state loan agencies act just like the for-profit lenders,” said Mark Kantrowitz, a financial-aid expert who publishes the website Savingforcollege.com. Kantrowitz said state lenders have been criticized at times for egregious practices; states such as Iowa, he said, were faulted in the past for promoting their low monthly payments while leaving out important information about how much the loan would cost in total.

State-issued student loans come from the government, but they lack the full menu of borrower protections and safeguards found with federal Stafford loans, which offer five different income-based repayment options, partial loan forgiveness for public-service careers, and a full discharge of loans for students who attend a college that closes before they can graduate.

Borrowers sometimes pick state loans because they trust a product financed by their state, but the payment terms are often similar to what private banks would offer.

State loan agencies defend their products, which they say offer competitive interest rates to borrowers who are already maxed out on federal Stafford loans. The choice for those borrowers is generally a federal parent PLUS loan, a state loan, or a private loan. New Jersey says that nearly 40 percent of its borrowers are from families who earn an annual income of $40,000 to $80,000, and that these families would have to pay “much higher” interest rates if they obtained a loan from a private bank.

But borrowers who face financial challenges can find themselves in the crosshairs of aggressive state-loan-collection practices. State governments, for example, can garnish your wages if you don’t pay. New Jersey used to suspend the professional licenses of delinquent borrowers who worked in fields like architecture, cosmetology, and dentistry. New Jersey lawmakers ended that practice in 2017, but similar laws remain on the books in some other states.

Borrowers like Stephanie Katzer say New Jersey needs to be more flexible. Katzer reached a settlement deal on her defaulted loan with one of the state’s debt-collection lawyers under the new pilot program, in September. While the payment plan was an improvement over being sued (New Jersey had already obtained a legal judgment against her and was poised to start garnishing her wages) the process still left her feeling disappointed.

Katzer studied history at Rutgers University but ended up working outside her field; she’s a manager at a GameStop video-game store. She said the $416 a month required by her student-loan settlement is more than she and her father, the co-signer, can afford. And it was basically a take-it-or-leave-it offer.

For her federal loans, Katzer is on an income-based repayment plan, something that New Jersey doesn’t offer for borrowers like Katzer who took out loans more than two years ago.

“They need to be more human,” Katzer said. “They need to actually help people.”

Financed by Wall Street

New Jersey lawmakers this year approved some small steps. One approved bill, which now awaits Governor Murphy’s signature, would add the state student-assistance agency’s new settlement policy for defaulted borrowers to state law. That would ensure that the program continues even if the agency gets a new director or New Jersey gets a new governor.

Another approved bill, which is also now on the governor’s desk, would add two relatively new programs — the Repayment Assistance Program and the Household Income Affordable Repayment Plan — to state law, to ensure that they, too, continue uninterrupted. The programs, started by the agency in recent years amid the chorus of criticism from lawmakers, offer income-based payments to borrowers.

But there are limits. Both programs are subject to “the availability of funds” in the agency’s budget, and both are available only to recent borrowers. The short-term Repayment Assistance Program is limited to loans from mid-2017 or later. The longer-term Household Income Affordable Repayment Plan is limited to loans from mid-2018 or later.

A January legislative fiscal note for the bill states that “there are currently eight borrowers participating” in New Jersey’s Repayment Assistance Program.

The funding mechanism for many state loan programs is selling tax-exempt bonds to Wall Street. That allows the programs to be operated without any taxpayer money, but states give up some control: Wall Street investors expect the loans to be repaid under their original terms. For older loans, creating borrower-friendly options like income-based repayment is changing the rules in the middle of the game — and potentially reducing investors’ profits.

Capstone, a research firm for investors, issued a warning in 2016 that the mounting calls for reform in New Jersey could lead to pro-borrower legislation, which, it predicted, would hurt the profitability of the state’s loans. Capstone noted that New Jersey’s bonds have historically been given high ratings by Moody’s because of the state’s “aggressive collections.”

The nightmare scenario: New Jersey makes big changes to its program, and the bondholders sue in court.

That dynamic makes it tricky, but not impossible, for states to offer an income-based repayment option to all borrowers.

‘It Does Cost Money’

In Rhode Island, for example, the state’s income-based-repayment option offers payments as low as $10 per month, and it applies to all borrowers.

Rhode Island initially offered the program only to newer borrowers, but within a year, the state changed course and allowed all borrowers to enroll. The deputy director of Rhode Island’s student-loan agency, Noel F. Simpson, said the agency wanted to make sure that Rhode Island residents felt like they were getting a fair shake.

“If you have a program and only a handful of individuals are eligible for it, it’s hard to explain that to the person who is not eligible,” Simpson said.

To make its income-based program happen, Rhode Island reassured Wall Street rating agencies that providing flexibility to borrowers wouldn’t adversely impact bondholders and that the state’s loan program would remain on solid financial ground. Before starting the program, Simpson said, Rhode Island’s agency increased its budget reserves so that it would have a cushion to absorb any reduced cash flow coming from borrowers making income-based payments.

“It does cost money,” Simpson said. “But it’s an important element in providing a loan program to students and parents.”

New Jersey’s agency, in a written response to follow-up questions, wrote that it provides loans to a “much larger population” than Rhode Island, and that New Jersey at the moment has “insufficient funding available” to extend its flexible payment options to everyone.

“We will continue to explore funding options to extend this support to all borrowers,” the agency wrote.

Rhode Island has 17,309 borrowers, less than a third of New Jersey’s total.

Kantrowitz, the financial-aid expert, said it is easier for a state to add borrower benefits going forward, as New Jersey has done, because those lending terms are then included in the next batch of financing bonds sold on Wall Street, so investors foot the bill.

“It’s a common excuse of state loan programs that they can’t change the terms of the loans because the bondholders would object,” Kantrowitz said. “That’s why you often see them waiting until they have a new bond issue to change the terms, and the reason is because they want to put the cost of it to the bondholders. The state doesn’t want to spend any of its own money.”

Bond financing requires a state to be careful not to upset investors, Kantrowitz said, but it doesn’t prevent a state from helping older borrowers.

“Everything costs money, and to the extent that the state is willing to spend its own money … they can do a lot,” Kantrowitz said.

A Sampling of States’ Loan Terms for Student Borrowers

New Jersey

• Income-based repayment? Limited to new borrowers
• Loan rehabilitation? Yes — settlement program
• Automatic six-month grace period? No
• If no, can it be requested? Yes
• Funding source? Tax-exempt bonds

Alaska

• Income-based repayment? No — only extended payment or reduced payment options
• Loan rehabilitation? Yes
• Automatic six-month grace period? Yes for student loans, no for parents
• If no, can it be requested? No response
• Funding source? Bond funding

Connecticut

• Income-based repayment? No
• Loan rehabilitation? No
• Automatic six-month grace period? Yes for undergraduate borrowers
• Funding source? Tax-exempt bonds

Georgia

• Income-based repayment? No
• Loan rehabilitation? Yes
• Automatic six-month grace period? Yes
• Funding source? Lottery funds (through state budget) and payments received

Minnesota

• Income-based repayment? No
• Loan rehabilitation? Yes
• Automatic six-month grace period? Unclear
• Funding source? Tax-exempt and taxable bonds, and payments received

Rhode Island

• Income-based repayment? Yes
• Loan rehabilitation? Yes
• Automatic six-month grace period? Yes
• Funding source? Primarily tax-exempt bonds

Kentucky

• Income-based repayment? No
• Loan rehabilitation? “Payment arrangements may be made on a case-by-case basis.”
• Automatic six-month grace period? Available to borrowers who choose it
• If no, can it be requested? Yes
• Funding source? Tax-exempt and taxable bonds

Michael Vasquez is a senior investigative reporter. Follow him on Twitter @MrMikeVasquez, or email him at michael.vasquez@chronicle.com.