College debt, which more than 43 million Americans carry, is among the reasons for widespread economic anger in this vitriolic election year. Many of those who are saddled with this $1.3 trillion albatross are barely moving ahead economically. Congress is doing almost nothing to help them. And neither Donald Trump nor Hillary Clinton has proposed specific plans for a much-needed overhaul of the entire student loan system.
Many graduates who should be saving for retirement, buying homes and starting families are unable to do so because of the financial anchor of college loans. Most of them should be able to refinance or lower their borrowing burden, but they don’t know about government programs designed to help them.
In reviewing more than 5,500 complaints against student loan servicing firms in a recent report, the Consumer Financial Protection Bureau (CFPB) found that borrowers were uninformed on how they could reduce their loan payments and avoid default, which damages their credit ratings.
“Too many student loan borrowers are being left behind due to breakdowns in the federal programs designed to provide them a fresh start, including an affordable monthly payment and a path to long-term success,” said Seth Frotman, CFPB student loan ombudsman, in a statement accompanying the report.
“This report offers further evidence that industry practices and needless red tape can turn a student loan into an unbearable burden,” Frotman added.
Where is the government failing when it comes to student loans? Here are some glaring trouble spots:
- Communications with borrowers on how they can avoid defaults is awful. “The Department of Education estimates that more than 8 million student loan borrowers have gone at least 12 months without making a required monthly payment and have fallen into default,” the report found.
- Borrowers don’t know how to “rehabilitate” their loans. Under the federal program, you can choose up to nine different repayment programs to lower monthly costs and avoid default. “Consumers have complained to the CFPB about every step of the process for getting out of default and into an affordable repayment plan.”
- Servicers aren’t fully informing borrowers about how to lower repayments. The CFPB “estimates over 200,000 struggling borrowers will needlessly re-default over the next two years despite qualifying for a zero-dollar payment under income-driven plans … these borrowers will rack up over $125 million in unnecessary interest charges because of lost interest subsidies they would have access to under an income-driven plan.”
- Debt collectors are hounding borrowers in default based on faulty information. “Borrowers report debt collectors setting incorrect monthly payment amounts and having problems verifying income levels.”
- Billing errors are common. “Borrowers report problems resulting from collectors’ and servicers’ failure to communicate when transferring a borrower out of default.”
In the interim, the brutal effects of student loan debt will continue to haunt the U.S. economy and bedevil an entire generation.
According to a recent report by Aon Hewitt, a global benefits consulting firm, Americans with student debt are less likely to participate in retirement plans or have a healthy financial well being. Regarding the latter, Aon Hewitt found that those with college debt are hurting. Some 51 percent say “debt is ruining their quality of life, compared to just 28 percent of those without loans,” while more than half of those surveyed “spend time at work dealing with financial issues compared to 47% without student loans.”
The federal student loan system is broken, but it can be fixed with a number of reforms. Fortunately, many of these repairs can be made on the administrative level, which the Obama Administration has gradually been addressing.
Yet the entire program of granting, processing and repaying student loans still needs a massive overhaul. Counseling, communication, outreach and automation on every level are sorely needed.
And if any reformers wanted to look at the larger problem, they should tackle the ever-rising cost of higher education, which neither Trump nor Clinton has directly confronted.
Should students even pay finance charges on federal loans when banks are paying almost no interest to borrow from the Federal Reserve? Should the government withhold federal research grants from major institutions if they don’t lower their tuition bills? Should students choosing public service professions receive grants that cover all of their education expenses, thus completely avoiding loans?
While Trump and Clinton have both noted the need to reduce the cost of college, neither has offered tough reforms to fix the federal loan repayment system.
So far, Clinton has proposed a debt-free public college education for families earning under $125,000 annually, college debt refinancing options and free community college. Trump has offered to raise income caps for repayment plans, but he wants to abolish the Department of Education and privatize education loans.
At the very least, all candidates for federal office should review the CFPB’s findings. Meantime, if you need immediate help in repaying your loans, check out the the CFPB’s repayment tool.