ED Offers Recommendations To Improve Student Loan System, Better Protect Borrowers
By Brittany Hackett, Communications Staff
The Department of Education (ED) last week released a report on ways to strengthen the student loan system and better protect student borrowers.
The report stems from the Obama administration’s Student Aid Bill of Rights directive and was developed in consultation with the Consumer Financial Protection Bureau (CFPB) and the Department of the Treasury (Treasury). The recommendations in the report cover a wide array of statutory, regulatory, and administrative aspects of the student loan system and, generally, fall into four categories:
- Increasing borrower protections in the federal student loan programs;
- Updating debt collection and offset;
- Enhancing federal data-sharing with the goal of improving the experience for federal student loan borrowers; and
- Strengthening federal loan servicing.
Increasing Borrower Protections
Among the recommendations to increase borrower protections, ED recommends enacting the Obama administration's proposal to create one, simple income-driven repayment plan that would “allow for easier selection of a repayment plan, while reducing program complexity and targeting benefits to ensure program effectiveness.” ED also recommends requiring student borrowers to undergo entrance loan counseling before they sign the Master Promissory Note (MPN), and according to the report, ED is “exploring” annual counseling requirements and requiring students to more frequently sign an MPN.
This category also includes several recommendations for new statutory requirements for potential borrower defense legislation that are designed to “hold colleges and their executives – not taxpayers – responsible for fraudulent acts.” ED also recommends legislative provisions that would strengthen its efforts to protect students and taxpayers from waste and fraud through program integrity regulations like gainful employment, state authorization, and credit-hour regulations. Other recommendations related to borrower defense include statutory requirements to provide students more consumer information on college costs and outcomes, to limit marketing that is deemed deceptive and aggressive, and to close loopholes that allow for-profit institutions to target military veterans and servicemembers for recruitment. ED also recommends changing current law to allow students with successful borrower defense claims to have their Pell Grant eligibility reinstated, which was addressed in the Pell Grant Restoration Act recently introduced by Sen. Boxer (D-CA) and Rep. Scott (D-VA).
Other recommendations under the first category include:
- Eliminating the requirement that servicemembers who consolidate their FFEL and Perkins loan into Direct Loans relinquish their 6 percent interest rate provided by the Servicemember Civil Relief Act (SCRA);
- Eliminating the tax liability on certain student loan discharges, such as those related to income-based and income-contingent repayment and borrower defense to repayment;
- Streamlining the discharge process for Total and Permanent Disability (TPD); and
- Strengthening protections for borrowers who are charged high fees by third-parties for services they can access for free at studentaid.gov, including a statutory change that would require such companies to disclose such information.
Updating Debt Collection and Offset
In the second category of recommendations, ED recommends updating laws around the collection of defaulted student loan debt through the offset of other federal benefits, such as Social Security benefits. This recommendation is in line with a proposal in President Obama’s 2016 Budget that “for debt owed to federal government, including student loans, to index that amount to inflation so that the lowest income borrowers are protected by the threshold amount,” according to ED’s report.
Enhancing Federal Data-Sharing
Recommendations for the third category focus on statutory changes that will allow ED and other federal agencies to more efficiently share information. One recommendation is to streamline the process for borrowers who are eligible to have their loans discharged because of a disability. Another is to create an electronic, multi-year certification system for income-driven repayment plans, though ED noted that Congress would need to provide the funding for this initiative.
Strengthening Federal Loan Servicing
ED’s recommendations for the fourth category would strengthen the servicing of federal student loans in part by creating limits on marketing for federal loans and servicers and to improve credit reporting for student loans. The goal of the revised credit reporting is to “reflect the intricacies of the current federal repayment options, recognize borrowers who are in good repayment status, and ensure fairness and transparency for all borrowers.” ED also recommends allowing loan servicers to contact borrowers via their cell phones and other modern technologies to inform them of things like repayment plans and other repayment obligations. It is also recommended that the Office of the Ombudsman be moved from Federal Student Aid to ED, to ensure that the role remains independent from the agency it oversees, and that the Ombudsman role be updated to have a more “borrower-centric focus.”
Protections for Private Student Loans
In the report, ED also makes several recommendations related to private student loans, which lack many of the consumer protections of loans offered through the federal program. These recommendations include:
- Allowing private student loans to be discharged in bankruptcy if they lack sufficient repayment flexibility;
- Prohibiting the practice of placing borrowers in default for circumstances they cannot control, such as death or bankruptcy; and
- Improving the transparency around co-signer agreements.
Publication Date: 10/5/2015
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