According to recent reports from both the U.S. Government Accountability Office and the Congressional Budget Office, the federal student loan program will continue to turn a profit through at least 2024. The GAO reports that federal student loans originated between 2007 and 2012 will bring in $66 billion in revenue for the federal government, while the CBO projects that student loan interest revenue will result in an additional $9 billion in profit over 10 years.
So just who benefits from all that profit? Surely not the student loan borrowers. With a student loan system that emphasizes reactive collections over proactive delinquency prevention, those conscientious students who did the right thing and pursued higher education are getting the short end of the stick. If there’s extra money to be had in the student loan program, let’s put it to good use and give student borrowers better and timelier information and counseling services so they can retire their debt more successfully, avoid delinquency before it starts, and lessen the negative impact on themselves and on our economy.
Approximately 40 million Americans right now are struggling under the weight of student loan debt. The good news is that a hefty portion of those borrowers have the opportunity to make payment a more manageable percentage of income, repair their credit or even have some of their student debt wiped out entirely. If only they knew how.
Instead, borrowers today receive little in the way of support as they try to self-navigate the complex web of repayment. Congress has supplied student loan borrowers with plenty of options and tools to help them manage their debt, but no one has effectively communicated these options to them — and it shows.
Nearly 15 percent of borrowers who started repaying their loans in 2010 have already defaulted. Further, the Federal Reserve Bank of New York reports that once loans that are in deferment and forbearance are excluded from the equation, nearly 30 percent of student loan borrowers are past due or having trouble with their repayment. Since that number is not cumulative but represents just those in delinquency at a given point in time, the actual number of borrowers whose credit has been damaged by their education debt is much higher.
The borrower confusion that results in delinquency and default can be alleviated by meaningful and timely conversations between a student loan repayment counselor and borrower. Unfortunately, the U.S. student loan system isn’t built for good counsel. It’s built for collections. It’s built to deal with delinquency and default, not prevent them.
In 2012 alone, the federal government spent $545 million on student loan servicing, which includes student loan payment processing and collecting on loans in delinquent status (independent of the federal funds spent on the recovery of defaulted student loans). Ostensibly, some of those servicing dollars go toward borrower “counseling.” But in reality, the low-cost efficiency of student loan servicers demands that they keep true borrower contact to a minimum.
Borrowers who receive no counseling intervention are at a much higher risk of slipping into default. The nonprofit American Student Assistance found it could cut student loan delinquency rates by approximately 50 percent by simply reaching out to educate borrowers in the early stages of borrowing and repayment.
Imagine the positive impact on our nation’s student loan delinquency problem if we implemented that line of attack across the board and focused on prevention instead of the cure of collections. Such an approach would lessen the overall cost of the federal student loan program because more default prevention means fewer fees that need to be paid by the government on student loan collections. This saves a borrower’s credit and saves the federal government money. A win-win.
Lawmakers reauthorizing the Higher Education Act should look to divert some of the profit from the federal student loan program to expanded financial literacy and debt management programs that will stop student loan delinquency before it can even set in. Let’s help student loan borrowers understand a repayment landscape dotted with jargon, bureaucracy, and payment plans with distressingly similar names but very different benefits and outcomes. Let’s give them an advocate who’ll take the time with phone calls, online chats and/or multiple e-mail exchanges to examine their whole financial picture and help them find the best long-term payment solution. Simply put, as long as our nation’s higher education policy relies on loans to provide college access and choice, let’s give our student loan borrowers what they deserve.
Paul Combe is president and CEO of American Student Assistance.