Democrats and Republicans on the House Financial Services Subcommittee on Oversight and Investigations came to agreement on Tuesday in their view that there is a problem with student loan debt in the country. But while Democrats viewed the issue stemming more from lapses in customer service and oversight of loan servicers, Republicans claimed the problem had more to do with federal overreach.
In a hearing on the topic Tuesday, the subcommittee discussed ways Congress, loan servicers, and the broader higher education community could work together to improve the process of receiving and repaying federal student loans.
Rep. Al Green (D-TX), chairman of the subcommittee, said in his opening remarks that the “macro-economic impact” of the more than $1.5 trillion in outstanding student loan debt is “quantifiable and ought to be a resounding wakeup call to everyone within the sound of my voice.”
Green went on to say that while student loan debt can cause many hardships in general, such as potentially delaying homeownership or creating financial problems should a borrower fall behind on payments, borrowers face different outcomes depending on which servicer the federal government assigns to them.
“It seems to be that the luck of the draw can make a difference in one’s life,” he said, noting that recent reports from agencies such as the Government Accountability Office, the Department of Education’s (ED) Office of Inspector General (OIG), and state law enforcement agencies “reveal a disturbing picture of an industry that is rife with misconduct, errors, and negligence that become a monetary cost to the borrowers.”
Rep. Andy Barr (R-KY), ranking member of the subcommittee, however, said that servicers are not solely to blame for the problems with student loan debt. Servicers, he said, have no control over which institutions students choose to attend, which programs they enroll in, how much they borrow, or the interest rates of the loans taken out.
Rather, he said, the growth in student loan debt became an issue “when President Obama nationalized the student lending industry” in 2010 when the direct lending from the federal government was introduced.
“Because Democrats nationalized student lending in 2010, taxpayers are left holding the bag,” he said. “So we must address major issues facing the current system. There are currently no underwriting standards to measure the level of risk for student loans. The federal government must become a more responsible lender. And schools must be honest about the cost and the value of their degrees so that students can make decisions that will set them up for long-term success.”
The panel of witnesses—Joe Sanders of the Illinois Attorney General’s Office, Nicholas Smyth of the Pennsylvania Office of Attorney General, Arwen Thoman of the Massachusetts Attorney General’s Office, Joanna Darcus of the National Consumer Law Center, and Scott Buchanan of the Student Loan Servicing Alliance—had differing views on the root cause of the issue.
Darcus, in her written testimony, said that misconduct on the part of loan servicers can worsen the situation for student loan borrowers already in distress.
“Our work with individual clients has taught us that many borrowers struggle to repay because they never learn about or access the benefits of the federal loan program that would make smooth repayment feasible,” she said. “With the assistance of a competent and efficient servicer, financially distressed borrowers may avoid default by accessing flexible repayment plans, loan cancellation programs, or deferments or forbearances—mechanisms that temporarily stop payments—appropriate for their circumstances. Federal data shows that nearly a quarter of the more than 43 million federal student loan borrowers are in distress on their loans. These borrowers need high-quality, timely assistance. Unfortunately, as has been extensively documented, the student loan servicing industry has long been rife with misconduct.”
The Consumer Financial Protection Bureau (CFPB) has over the years released several reports detailing complaints on federal and private student loans, many of which related to the repayment process and issues with loan servicing, such as trouble enrolling in an income-driven repayment plan.
Loan servicers have also come under fire for allegedly steering borrowers toward deferment and forbearance rather than an income-driven repayment plan, or giving them inaccurate information about options for loan forgiveness.
“Unfortunately, unchecked servicer error and misconduct that steers borrowers into forbearances leads many borrowers to default,” Darcus said. “Although in some circumstances, forbearances and deferments can be useful, they offer borrowers only a temporary reprieve. Ultimately, when borrowers who are unable to afford standard payments are led to believe that their only option is forbearance or deferment, and their available forbearances or deferments are exhausted, default—and its consequences—may become unavoidable.”
Buchanan, on the other hand, said it is important to keep in mind “what a servicer does and what a servicer does not do.”
“Servicers are on the front lines every day talking to and working with borrowers and being their first and best conversation to understand and navigate their options. We send recent graduates letters and statements outlining their repayment options. We provide online interactive web experiences, where videos and calculators help break down and simplify what different choices will mean in practice,” he said in his written testimony. “... And most importantly we talk with borrowers on tens of millions of phone calls each year. And those phone calls are handled by thousands of employees scattered across the United States, many of whom themselves have loans or children with loans, who are specially trained to get people from A to Z to answers.”
The parameters for student loan eligibility, the interest rates on student loans, and the repayment options available are out of the servicer’s control, he said, nor do they have control over fees or penalties, default debt collection, or “payment application rules or process.”
“Servicers take very seriously, as demonstrated by the actual metrics and facts of our performance, our role to help borrowers be as successful as possible in repaying their loans so the federal student loan program can continue to serve future generations of students – the millions of future college students whom the Higher Education Act was enacted to assist,” he said. “While what we do is often misunderstood, so is the timing of when we step in to help borrowers.”
Buchanan said that since 2013, loan servicers have increased enrollment in income-driven repayment plans by 400%, and that unverified complaints about loan servicing declined by nearly 50%.
He also laid out several steps to help improve loan servicing, related to education, simplification, standardization, and protection. States could, for example, create resources to help educate borrowers on loan repayment options and conflict resolution. He added that loan servicers would like to work with lawmakers to allow for data sharing between ED and the IRS to simplify loan repayment.
Still, the overall root of the problem, Green said, is much more widespread than issues with loan servicing.
“The root of the problem doesn’t start with the birth of a poor person today. It doesn’t start with the adversities that they encounter today. They start with a system of systemic discrimination … that has been in place in this country since its inception,” he said. “If we want to truly get to the root of the problem, is it fair to say that we have to deal with systemic, invidious discrimination? … Let the record show that my time has expired. But my desire to end invidious discrimination will only expire when I expire.”
Publication Date: 6/12/2019