House Panel Hears Tales of Student Loan Woes From State Regulators

WASHINGTON – State officials told the House Subcommittee on Oversight and Investigations Tuesday that questionable practices by the servicers of student loans are saddling a generation with enormous debt that if left unchecked could stifle economic growth across the nation.

Concerns about the ballooning of student loan debt is nothing new. About 1 in 4 Americans have some level of student loan debt. But according to the Federal Reserve, that debt, in aggregate, comes to some $1.5 trillion, a number that has increased by more than $100 billion since 2017.

And there’s a growing realization that this debt burden is not only a problem for borrowers, it’s creating challenges for states, cities and smaller communities.

According to a recent report in The Wall Street Journal, many borrowers finding themselves in financial straits due to their student loans are putting off major life events like marriage and buying a home, and that in turn is reducing, among other things, the property taxes and other money they contribute to their local economy.

During Tuesday’s hearing, witnesses and panel members alike suggested student loan service providers may be largely to blame for this situation.

BORROWERS FACE UNCERTAINTY

Today, a young person who finds themselves unable to make loan payments after leaving college or graduating has few options.

Except in rare cases of extreme hardship, discharging the debt through bankruptcy is not an option.

Some borrowers could choose to go the forbearance route, temporarily suspending payments until their financial situation improves, but that, ultimately, also extends the life of their loans.

Another vehicle for relief is enrolling in an income-driven repayment plan. Such plans assess the borrower’s income, that of their family, state of residence, and type of loan received and reset payments to reflect the former student’s current financial situation.

But for the borrower, choosing the right option for dealing with their student debt is made all the more difficult because the servicer of their loan — the entity to whom they make payments — is likely not the original entity that extended the loan.

Instead, it’s more likely to be a third-party firm that purchased the student’s debt from the original lender.

As a result, said Joanna Darcus, a staff attorney at the National Consumer Law Center, “Many borrowers are unable to speak up for themselves because their relationship with their servicer is indirect.”

Darcus, who is also a racial justice fellow with the Massachusetts Legal Assistance Corporation, went on to say that the hardships associated with student loan debt fall disproportionately on minorities and women.

“People of color disproportionately rely on debt [to advance their education],” and blacks and Latinos have a higher rate of defaulting on their loans than other borrowers, she said.

Darcus also noted that women, who outnumber men when it comes to completing degrees, account for about two-thirds of the nation’s student loan debt.

The attorney said the reality is that those who may be struggling or are in the most need of assistance borrow the most.

“Debt or education. You have to get both in order to get either at this point,” Darcus said.

Representative Katie Porter, D-Calif., also called out Buchanan and his organization’s members for allegedly not acting in the best interest of consumers.

Porter compared the alliance’s executive director to Angelo Mozilo former chairman of the board and CEO of Countrywide Financial, a company whose fast and loose lending practices are widely blamed for the subprime mortgage crisis of the early 2000s.

After reading several pieces of testimony from a congressional hearing on the subprime mortgage crisis, Porter told Buchanan the words were Mozilo’s.

“During the mortgage crisis, the witness from Countrywide claimed that the media reports of his company’s activities were inaccurate, and that they expect their lawyers to follow the law,” Porter said.  “I already have Netflix. I don’t need another crappy reboot. These are the exact same arguments that we have heard before. You sound just like Mr. Mozilo and you are doing the same exact harm to our economy.”

SERVICERS LIKE NAVIENT HARM BORROWERS

Much of the commentary at Tuesday’s hearing focused on a single student loan servicing company, Navient, the largest holder of federally-guaranteed student loans.

The Department of Higher Education contracts student loan servicers to manage the loan accounts of borrowers. The private, for-profit entities are supposed to help students with repayment plans and loan consolidation.

Witnesses told the panel Navient awarded employees for short call times with borrowers with cash and gift cards.

The quickest way to shorten a call is to refer forbearance instead of an IDR plan, they said.

A 2017 audit by the Federal Student Aid division of the Department of Education found that Navient representatives indeed failed to mention other options to borrowers that were not forbearance.

A lawsuit from the Consumer Financial Protection Bureau alleged that Navient’s overuse of forbearance has added almost $4 billion in interest to student borrowers’ loans from 2010 to 2015.

During the hearing, Representative Al Green, D-Texas, turned his attention to allegations that the U.S. Department of Education is withholding important information about servicers from borrowers.

Some students are not being made aware by their servicer that their public service can get them a more favorable loan repayment system such as the Public Service Loan Forgiveness Program, he said.

Nicholas Smyth, assistant director of the Bureau of Consumer Protection in the Pennsylvania attorney general’s office, said an investigation by his office found “the Department of Education is telling servicers not to turn over information regarding federal loans.”

COST OF HIGHER ED ASSAILED

Several representatives reminded the room that the root of the problem is the astronomical cost of higher education. Lower tuition costs would lead to less borrowing and therefore less student debt.

Especially concerning is the high cost of tuition for in-state schools, which had traditionally been an alternative for students who hoped to save money by staying close to home.

Institutions of higher education were also called into attention for their involvement in the debt crisis.

“Under federal law if schools have too many borrowers default within the first three years of repayment they [schools] could lose access to federal student aid,” said Joe Sanders, the student loan ombudsman for the Illinois Attorney General’s office. “Depending on how long the violation goes on it could be all student aid.”