NEW YORK (MainStreet) — As it drew to a close, student loan observers were saying 2014 would go down as the year of regulation. The White House, the Senate HELP Committee, the Consumer Financial Protection Bureau (CFPB) and activist state attorneys general went after loan servicers and for-profit colleges that abused borrowers, the pawns that this game couldn’t be played without.
Will this trend continue in 2015?
With Republicans in control, Congress is unlikely to pass a flood of laws that favor borrowers. Senator Lamar Alexander (R-Tenn.), chair of the Senate HELP committee, which is at the center of legislation that affects students, is generally a proponent of reduced regulation. His plan to simplify the Free Application for Student Aid (FAFSA) might pass as a position that favors students, but it will likely be one of the few.
“It’s not a secret that that Congress is unlikely to focus on a proactive, borrower-friendly agenda,” said Deanne Loonin, a Boston-based attorney at the National Consumer Law Center (NCLC). “The Republican leadership so far has talked mainly about relief for the higher education sector.”
That relief may come in the form of reduced regulation.
The Obama administration is generally working the other side of the street. Loonin notes that they have scheduled a number of rulemaking sessions, including one that would expand income-based repayment of student loans.
“I wouldn’t say that regulation necessarily comes into its own this year,” Loonin said, “but the administration has been doing a lot on the rulemaking for the past few years. We can expect this to continue and maybe even expand.”Since the Republicans control Congress and the Democrats control the White House, compromise may be the magic word. “Senator Alexander does have a strong record of working with politicians of all persuasions,” noted Mark Kantrowitz, senior vice president and publisher of Edvisors.com, “so we might see more progress in passing legislation in this session of Congress.”
Senate Republicans also don’t have the two-thirds majority needed to overturn a presidential veto.
Total new federal loan volume will decrease slightly from 2014, mostly because of a decline in demand as people find work and pass up school.
“The students who borrow will continue to borrow more,” said Kantrowitz. “Private student loan volume will grow slightly, since demand exceeds supply and federal loan limits will remain stagnant unless the capital markets thaw.”
The end of the Federal Perkins loan program won’t have much on an impact, as it represents 1% of the new loan total.
Finding a better way to pay off student loans will be top-of-mind. Will income-based repayment (IBR) be the solution?
“There will be increased attention this year on income-based repayment,” said NCLC’s Loonin, “as well as on automatic payroll deductions of student loan payments.”
There is a movement afoot—funded mainly by the Bill and Melinda Gates Foundation—to enroll people in income-based repayment as soon as they leave school and get a job. Which IBRs would be affected—there are four—and how this could be enforced remains unclear. But as the Gates foundation money flows, so do the position papers.
“The proposal is to make loan repayment mandatory, collecting loan payments through the (payroll) withholding system,” said Kantrowitz. “That would necessarily require some form of IBR, since employers know about their employees’ income but not student loan debt. The argument is that this would eliminate the need for debt collection and would eliminate most defaults, saving significant money. It would also be better for the borrowers, most of whom want to repay their debts but just have trouble managing money. Such provisions would likely be restricted to new borrowers only, as Congress cannot retroactively impose such a change on existing borrowers.”
"The thing with all these income-driven options is you have the flexibility to pay even less than the interest that is accruing every month but that is a mixed bag," says Heather Jarvis, an attorney specializing in student loan education and founder of AskHeatherJarvis.com. "It can be good if you need a reduced monthly payment, because you don't have sufficient income, but it can be expensive over time because the longer it takes you to repay your debt, the more you pay."
And interest accrues fast. A graduate with $30,000 in loans at a 6.8% rate will add more than $2,000 to the cost of the loan if the interest isn’t paid for a year.
Kantrowitz predicts that Obama’s pay-as-you-earn repayment plan, known as PAYER, an analog to income-based repayment, will shrink.
“Only Congress can appropriate funds, so the Obama administration must find savings elsewhere to cover the increased cost of an expanded PAYER program,” he said. “Since they currently have no idea where they will find the savings, the proposal will have to be scaled back.” Unveiled last summer, PAYER caps monthly payments at 10% of a borrower’s disposable income after 20 years of repayment. Income-based repayment caps payments at 15% of disposable income and forgives loans after 25 years of repayment.
Regulators and student loan advocates will likely continue to put pressure on for-profit colleges.
”For-profit colleges are already contracting and we hope this trend continues,” said Loonin. “It’s hard to say whether there will be more involvement from state attorneys general.”
Student advocates viewed the blow up of Corinthian Colleges as a victory on one hand, since half of its campuses were being sold, but a defeat on the other, as it was made possible by a bailout from the Department of Education. Then the buyer was identified: Education Management Credit Group--ECMC, a notorious student loan debt collector. Since ECMC is a non-profit, no one was surprised by their plans to turn the 56 Corinthian campuses they bought into non-profits also, through its newly created Zenith Education Group.
The transition of Corinthian’s 56 campuses to ECMC could re-define the for-profit space. If the company can re-invent Corinthian as non-profits, other for-profit colleges may follow this lead.
”ECMC might be successful at turning around the school,” said Kantrowitz. “If they are, they might acquire other colleges after they refine their strategy. But transitioning of for-profit colleges to non-profit status might be a new trend. Aside from Corinthian/ECMC, there’s Keiser University, Stevens-Henager College, Remington College and perhaps soon Grand Canyon University.”
The Obama College Rating proposal, which was supposed to have a big impact on Federal aid awarded to schools, may also need a do-over.
“President Obama’s college ratings proposal will be a complete failure and may devolve into a set of proposals for new minimal performance requirements for institutional aid eligibility,” said Kantrowitz. “Creating a new ratings system that works well is incredibly difficult. It will be met with opposition by post-secondary institutions and policymakers and will be ineffective at influencing consumer behavior.”
What can loan servicers except from regulators? If borrowers weren't getting a fair shake in 2014 from their servicers, could things improve this year? What would drive this?
“There is unlikely to be much change in the Direct Loan program now that those servicing contracts are final,” said Kantrowitz, referring to the William D. Form Direct Loans which has been the sole source of Federal student loans since 2010. “CFPB will continue to highlight servicing problems as they occur, but without a scandal or pervasive problems, is unlikely to take any actions. More likely, they will continue to look at businesses that charge advance fees to consolidate student loans--something borrowers can do on their own for free.”
They also will probably address rules surrounding time-barred debt, which is debt that becomes uncollectible once the statute of limitations expire. Campus-branded credit and debit cards will be scrutinized as well.
How student loan servicers -- which often create problems when they botch the collection and servicing process -- are managed is key for the Consumer Financial Protection Bureau to borrower advocates alike. The NCLC wants to open up the competition beyond the same old players, where the main ones are Navient, formerly known as Sallie Mae; Great Lakes; NelNet; and the PHEAA, or the Pennsylvania Higher Education Assistance Agency.
Obama’s ambitious plan to make two-year college free to most students who maintain a 2.5 GPA is the kind of high-minded proposal that, from the standpoint of public good, will score with his constituents. Even if Obama cribbed at least part of the idea from the program in Lamar Alexander’s home state, getting money out a Republican dominated Congress will be difficult. And the most salient point is this: only about a third of community college students currently enrolled on at least a half-time basis and maintain a 2.5 or higher grade point average (GPA) on a 4.0 scale, based on data from the 2011-12 National Postsecondary Student Aid Survey. That may make it cheaper but less comprehensive as well.
The high balances of student loans continue to define the lives of many borrowers. Millennials with student loans are driving a generational shift from George W. Bush’s Ownership Society to Generation Rent. The National Association of Realtors notes that nearly half of Americans said student loan debt is a huge obstacle to buying a home. First-time home buyers are an important part of the U.S. economy. If they can’t land that starter house, they are less likely to pay for appliances or renovations to property they don’t own. Home builders aren’t building for them and products aren’t moving as quickly at Lowes, Home Depot or Restoration Hardware as they might otherwise.
“We hope that in the waning years of the Obama Administration, there will be more transparency about servicer and collector performance and about their guidance to contractors,” said the NCLC's Loonin. “The pilot project at Treasury could be a step in the right direction.”
Last year the U.S. Treasury Department announced a plan to take some student borrowers' accounts away from private debt collectors and give them to federal workers, eliminating the middlemen—who are profiting on broke borrowers—and giving a blow to tax payers.
--Written by John Sandman for MainStreet