Student Loans - Part 1
by Doyle Ranstrom on May 1, 2019
In 1957 the Soviet Union launched Sputnik, the first man-made satellite in space. I was only six at the time so I do not remember much, but I do remember hearing adult talk about Sputnik because, at the time, the US was going into full panic mode. The reason was fear of falling behind the Soviet Union, especially in the area of technology and losing the Cold War to the Soviet Union.
In response to Sputnik, in 1958 Congress passed and the President signed the National Defense Education Act. The NDEA was a massive influx of federal dollars into education which included federal student loans. The purpose was to enable more students to have the opportunity for a quality education, which among other things, was felt to be necessary to win the Cold War. In other words, it was an investment for the future.
Student loans have gone from being an investment for the future of the US, to what I believe to be a National economic burden and a significant obstacle preventing many families from obtaining personal financial security.
Today, student debt is almost $1.6 Trillion, yes that's trillion, dollars. This amount exceeds total credit card debt and is actually the second largest type of debt in the US behind mortgage debt. The average student loan debt of college graduates is about $37,000. There has been numerous research which states student debt has led to borrowers delaying buying a new car, purchase of the first house along with related large ticket consumer purchases, and even starting a family. In addition, paying off student loan debt has reduced the ability of borrowers to save and invest for the future.
Making life more difficult for student loan borrowers are changes made in the Consumer Financial Protection Bureau under the current administration. Under the previous administration, CFPB was a primary advocate for students directed by a specific office, The Office of Students and Younger Consumers. Since 2011, The Office of Students and Younger Consumers handled more than 60,000 student loan complaints and returned more than $750 million to aggrieved borrowers. However, the current administration has eliminated this Office.
Seth Frotman, who was the student loan ombudsman at the CFPB, in August of 2018 resigned and in his resignation letter said student loan borrowers were being harmed by the change in direction of the CFPB. He and other former employees of the CFPB started a new nonprofit, Student Borrower Protection Center which is an advocate for holders of student loan borrowers.
A major problem for student loan borrowers is dealing with loan service providers. Initially, loan service providers are assigned by the Department of Education. Complaints about loan service providers were being addressed by The Office of Students and Younger Consumers, with as outlined above, impressive results. In addition, the CFPB along with several states has sued the largest loan service provider for predatory loan practices. Under the previous administration, the Department of Education cooperated with the CFPB regarding this and related lawsuits. However, the current administration has reversed this policy. In his resignation letter, Frotman stated the CFPB now “serves the wishes of the most powerful financial companies in America”.
Another alarming failure is the administration of the Public Service Loan Forgiveness program which was initiated in 2007 and promised loan cancellation for applicants who had completed 10 years of public service and made 120 payments. Many holders of student loans met the requirements for loan forgiveness and were relying on this program to eliminate their student loan debt. However, of the 32,601 applications received by June of 2018, only 96 had actually had their loans canceled. This is an unbelievable failure of administration by the Department of Education and a total breach of trust with loan borrows who qualified for forgiveness.
Today, student loan debt consists of almost 45 million borrowers. The initial objective of student loans was to increase the financial and global security of the US by enabling more students to obtain a higher education. It needs to be the same now. To do so going forward, I would suggest the following:
- Student loan servicers first and primary objective is to help students repay debt, not generate profits thru abusive practices. The CFPB must only restore a student loan division but increase, not decrease its supervision and regulation of loan servicers. Loan service providers are welcome to make a profit, but not at the expense of loan borrowers.
- Processing applications for borrowers who have met the requirements for Public Service Loan Forgiveness must be immediate. In addition, borrowers who have counted on this program to forgive the loan must be assured the Department of Education is meeting its responsibilities. Finally, the Loan Forgiveness program needs to be expanded providing more borrowers to qualify.
- Most important, we need to elect National politicians who support policies that will not only help current borrowers manage their student loans but also enable more students in the future to graduate from vocational institutions, colleges and Universities with low, if any, student loan debt. National politicians in 1958 understood education is an investment by the US in its future. Our National politicians should be expected to understand the same.
Finally, when I started looking into this issue, I considered myself to be quite knowledgeable about student loans. I had a student loan in college, was the director of the financial aid for a college, and as a financial planner, worked with many families who used student loans to help finance post-secondary education for their children. However, when I begin looking into student loans, even I was surprised at the depth of this problem and its possible long-term consequences. This is the first to two blogs on student loans. The second one will be more personal and follow shortly.