Popular news sites regularly post articles about the “student loan bubble” or “student loan crisis” with varying degrees of alarm at the problem and differing perspectives on the causes and solutions. Recent governmental reports from the U.S. Government Accountability Office and the Consumer Financial Protection Bureau provide some excellent hard data that will likely entice many journalists enduring slow news days to write another batch of articles on the topic (like this excellent article):
- Student loan debt (currently about $1.2 trillion) trails only mortgages for the largest class of consumer debt in the United States.[1]
- Estimates indicate that more than 25% of student loan borrowers are delinquent on their loan payments or already in default.[2]
- Relative to other kinds of consumer debt, student borrowers report higher distress levels concerning their student loan debt.[3]
- Data indicates approximately 50% of federal student loan borrowers are eligible for income-based repayment options, but only about 20% of eligible individuals participate in income-based plans.[4]
- From fiscal year 2010 to 2014, borrowers with standard repayment plans defaulted at a 14% rate, but borrowers enrolled in income-based repayment defaulted less than 1% of the time.[5]
Thus, it appears that income-based repayment options are effective in preventing delinquency, default, and possibly even undue distress for those who enroll. The data (and much public outcry) suggests that loan servicers may be significantly blameworthy for the student loan crisis because loan servicers are not properly informing borrowers of opportunities to enroll in income-based repayment plans.[6] Certainly loan servicers may deserve some of the blame, but placing too much blame with servicers is like holding roofers accountable for a house’s leaking roof and its crumbling foundation: just as a roofer was not involved in laying a faulty house foundation, loan servicers are inheriting loans that have previous foundational problems due to other issues that have nothing to do with servicing shortcomings.
My contention is not that journalists are wrong for shedding light on the legitimate shortcomings of loan servicers. Rather, the issue is that the national conversation about the student loan crisis is often so narrowly focused on one part of the loan problem that it overlooks the greater systemic issues that have laid an unstable foundation for the entire loan industry. It is [arguably] somewhat easy to fix the loan servicer problem (i.e. require servicers to provide borrowers the necessary information in multiple formats and provide appropriate incentives). It is not so easy to fix the student loan crisis as a whole.
This is a non-comprehensive list of significant factors contributing to the student loan crisis:
- The rise of [predatory] for-profit colleges that often target low-income, minority, and veteran student populations for academic programs with low earning potential.
- Historically unprecedented borrowing trends for students at 2-year institutions.
- Skyrocketing tuition costs at virtually all higher education institutions.
- The lingering general effects of the financial crisis of 2008.
- Unreasonably high maximum borrowing amounts.
- The dizzying number of confusing and complicated repayment options.
- States have been reducing their funding for higher education.
The lack of information from loan servicers about income-based repayment plans is just one–though admittedly very important–additional item for this list.
The 2008 financial collapse should serve as a historical lighthouse cautioning against ignoring important fiscal issues before they become unavoidable economic hazards. The multiple underlying causes of the 2008 financial collapse warn us that problems of great magnitude cannot be oversimplified to villainize just one class of industry actors: a comprehensive approach to reform is necessary.
Unfortunately, I lack confidence the student loan crisis will become measurably better before 2017. The political posturing for the 2016 presidential election year has already begun, and the current White House likely wants to avoid making potentially unpopular waves the Democratic presidential candidate might have to ride out until election day. Additionally, the recent resignation of U.S. Department of Education Secretary Arne Duncan (who will not technically be replaced) could be a signal the department may avoid taking any new controversial positions throughout the remainder of the current presidential term.
Further, it is no bold prediction that Congress is unlikely to fix the problem. With anti-regulatory attitudes prevalent in both the House and Senate, it is doubtful Congress will overcome its anti-regulatory bent to enact substantive legislation to combat the root issues of the student loan crisis.
There are, however, small glimmers of hope:
- The recent government studies mentioned above provide excellent data to aid in forming solutions to the student loan crisis.
- Media outlets are regularly addressing the problem, even if just in passing.
- The general public seems to be growing in awareness of the issues.
- The abuses of many for-profit colleges are increasingly drawing public scrutiny and some government action.
- Congressional representatives like Sen. Elizabeth Warren are demanding that change occurs.
- Presidential candidates are, at a minimum, giving lip service to student loan reform. Perhaps some of them are serious about it.
This much is clear: loan servicers are part of the problem, but “fixing” loan servicing issues will not rectify the student loan crisis as a whole. Disproportionately low income and minority students are bearing the highest burden of the student loan crisis, and something must be done to address the underlying causes of the faulty student loan industry before any more economic damage is done to individual families and the national economy.
[1] CFPB, Student Loan Servicing: Analysis of Public Input and Recommendations for Reform 8 (2015).
[2] Id. at 3.
[3] Id.
[4] U.S. Gov’t Accountability Off., GAO-15-663, Federal Student Loans: Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options 13 (2015).
[5] Id. at 20.
[6] Loan servicer responsibilities include day-to-day management of student borrower accounts, processing payments, and providing borrowers information about their various repayment plan options.