In this edition of Money Mondays, Mellody Hobson covers the latest news surrounding student loans.
What’s the latest in the student loan front?
Just over a week ago, Secretary of Education Betsy DeVos, rescinded some Obama-era memos aimed at reforming the way student loan borrowers interact with their servicing agents, the companies charged with collecting on federal student loans. The Department of Education administers $1.3 trillion of those loans for nearly 43 million borrowers. The servicing agencies are notoriously difficult to work with, and the Obama administration had proposed to change the way the contracts were award to prioritize service. But DeVos appears to be scrapping the whole effort.
What had President Obama’s administration proposed?
As numerous problems bubbled up in recent years, and after a reshuffling of the student loan system to move away from banks, the Department of Education under the Obama administration undertook a series of research efforts. In the wake of all of this, in 2016, as it prepared to the next round of servicing contracts, the Obama administration proposed a to fix the system. They planned to create a single online platform, designed and run by one company, that all borrowers could use to manage their loans. Other servicing companies could play supporting roles, and those who were part of the new system would be both required and incentivized to assist borrowers to make the best financial choices for themselves, rather than for the companies’ bottom line. As a part of this proposal, the Department of Education announced that servicers’ past performance was going to be the single most important factor beyond cost when deciding who should be awarded contracts.
Why is the current system so bad?
Currently, the government contracts with nine companies and nonprofits to help borrowers understand and choose their repayment options and then collect their monthly checks. But these organizations are widely recognized to be very bad at what they do. So bad in fact that the Consumer Financial Protection Bureau published a report in 2015 on the industry’s various failings. The job of the servicers the government awards contracts to is to ensure borrowers know their repayment options. In reality, many of these organizations are focused on their bottom long, and customer service support for borrowers costs money. The Consumer Financial Protection Bureau is even suing the country’s single largest servicer, Navient, saying the company encouraged them to push borrowers into quick fix solutions like deferment or forbearance rather than telling them about long-term solutions that could have saved them money or prevented default. At present, without oversight and improved systems, the incentives for servicers to help student loan borrowers simply are not there.
What is the Department of Education proposing now?
So far, there has been very little information about what, if anything, Secretary DeVos or the White House propose in the wake of these decisions. Mrs. DeVos has said that program cost is the most important issue, so we might see contracts given to the lowest bidder, rather than the best service provider.
What does this mean for people who have federal student loans covered by the servicers?
It is hard to know what it means in the long term. In the short term, it means that student loan holders will continue to have to deal with the current servicers and their practices. This means the onus is on the borrowers, not the servicers, to investigate and understand your student loan repayment options. This means you should do some digging before signing up for a repayment plan that you are offered. If you have questions, contact the Consumer Financial Protection Bureau, or go to their website. And be very wary of private companies or services that offer repayment plans that sound too good to be true, because you might be sacrificing your access to flexible repayment options in the future.
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
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