White House, ED, and CFPB Announce Major Student Loan Initiative But Don't Address Post-Default Issues

Yesterday the White House hosted a call together with the Department of Education (ED) and the Consumer Financial Protection Bureau (CFPB), to announce actions to ensure that student loan borrowers are aware of their options for repayment, and that they are guaranteed strong consumer protections. Here is a link to the full announcement.

Those speaking on the call were:

Liz Allen, Deputy Assistant to the President and Deputy Director of Communications
Secretary John B. King, Jr., Department of Education
Richard Cordray, Director of the Consumer Financial Protection Bureau

And joining for the Q&A was Seth Frotman, Assistant Director of the Office of Students & Young Consumers at the CFPB.

New initiatives announced include:

New Goal to Enroll 2 million More Borrowers in Plans like Pay As You Earn (PAYE). The President’s PAYE and related income-driven repayment plans are available to help borrowers who may be struggling to manage their debt effectively.
Launch of StudentLoans.gov/Repay. To help borrowers easily navigate the complexity of student loan repayment options, the U.S. Digital Service and ED’s Office of Federal Student Aid have launched StudentLoans.gov/Repay to help drive students to their best repayment option in five steps or less.
Strengthening Consumer Protections through New Standards for Student Loan Servicing. ED and the Department of Treasury (Treasury) have developed student loan borrower rights and protections in three areas: (1) providing accurate and actionable information about account features, borrower protections, and loan terms; (2) establishing a clear set of expectations for minimum requirements for communication and services provided by student loan servicers, including adequate and timely customer service; and (3) holding servicers accountable for fixing errors, being responsive to borrowers, and resolving problems by ensuring that borrowers, federal and state agencies and regulators, and law enforcement officials have access to appropriate channels of recourse when violations of federal or state consumer financial laws occur.
Better Information to Help Borrowers Take Action on their Debt: CFPB Prototype Student Loan Payback Playbook. The CFPB is seeking comment on a new set of student loan servicing disclosures—a student loan Payback Playbook – that provides borrowers personalized information to better understand their repayment options and find a monthly payment they can afford. A copy of the CFPB public request for information is available here.
Ensuring Effective Student Loan Counseling. ED will work to improve the timing and content of current loan counseling efforts, including statutorily required entrance and exit counseling, to help students make better borrowing decisions, increase college completion, promote successful loan repayment, and reduce delinquencies and defaults.
Leveraging Research to Drive Better Student Outcomes. ED will pilot Advancing Insights through Data (AID), a research partnership program that will offer other federal agencies and affiliated researchers data access to conduct research that can inform and advance policies and practices that support students’ postsecondary success and strengthen repayment outcomes for borrowers.
Modernizing Credit Reporting for Student Loans to Ensure Fair Treatment Of Borrowers. ED and Treasury, in consultation with the CFPB, are working collaboratively with the credit reporting industry to develop guidance for servicers, lenders, and others who furnish data to the credit bureaus to determine how best to report student loan data so that it is fair, consistent, and accurately reflects repayment activity.
Over 40 new student debt challenge takers. Earlier this month, the White House issued a call to action for colleges, universities, non-profits, businesses, state and local governments, and other employers to help more borrowers better understand their options, and to take action to enroll those borrowers in PAYE and related plans so they can manage their monthly payments and avoid delinquency and default. In the few short weeks since the Debt Challenge was launched, there have been over 40 commitment makers, and we are encouraging more colleges, businesses, non-profits to take action.

insideARM Perspective

insideARM spoke with experienced ED collection executives for reactions to the above. They offered these thoughts:

The very easy to read and understand format is impressive. The concern from an industry perspective is that this addresses pre-default servicing only, and it does not address communication issues with the borrowers. For instance, as a consumer gets used to this level of easy to understand communication, what happens when they default? Will they expect same communication standards they had when it was in pre- default? Will they be waiting for texts and emails from their collection agency that will not be forthcoming due to FDCPA and litigation risks?
This doesn’t address the issue that this is a complicated repayment process and it will take multiple borrower contacts. If new debt collection rules affect “first party,” restricted call attempt rules would hamper the ability for servicers to effectively communicate this information.
The proposed Playbook isn’t so forthcoming about the “costs” and negatives of lower payments in higher overall interest costs, or the fact that forgiven debt is taxable. In fact, the Department of Education would come down hard on collection agencies for not giving full disclosure to consumers about these consequences.
Nowhere does ED address the fact that loan forgiveness is taxable to the borrower.

Indeed, during the Q&A, one reporter asked several insightful questions, which in my opinion, weren’t answered.

First, is the goal to get only defaulters into income driven repayment plans, or all borrowers? The reporter highlighted the risks both to taxpayers (in the form of lost revenue) and to borrowers (in the form of increased interest payments on an outstanding balance that remains higher for a longer period). The answer to this, and most other questions asked, was that the administration wants to be sure all borrowers are aware of all of their options, and that they make the choice that works best for them.
Second, the reporter said he’d been told by many companies that students simply don’t respond to their calls, texts, etc. So how does the administration propose to reach students with this information? The answer to this, essentially, was that they’ve created this great website. And because it’s so accessible to everyone, and because it’s so user friendly, it will draw people.

Another asked whether there would be a parallel effort to reduce the cost of education, which is what drives the need for such excessive borrowing in the first place. The response included an explanation of some of the drivers of the cost of education, including:

The systematic reduction in the investment by states in higher education, which pushes more of the burden onto students.
[Author’s commentary: I gather this means that the tuition bill had been kept artificially low – however this doesn’t explain the outrageous increase in tuition at private schools, which has significantly outpaced inflation.]
Students who start but don’t finish college.
[I see how this can make it hard to pay back loans, when you didn’t get a degree, so don’t get the benefit of better job opportunities. But I don’t see how this affects the cost of tuition in the first place.]

It was mentioned that President Obama is working to implement America’s College Promise, which provides tuition-free community college for two years for “responsible students.”

[This may be a terrific idea for many, but it also doesn’t address what is driving the cost of tuition – in this case, it just means the taxpayers – rather than students — will cover this cost. I gather the argument here is that the government recovers this money in the form of future taxes from people who can now get better jobs because of their education.]