April, 2021
Washington – A new warning from five nonprofit higher education organizations about an impending student loan servicing meltdown is as ominous as it is true:
To mitigate the challenges facing borrowers during the pandemic, the Biden Administration extended the pause on payments, interest, and collections for most federal student loan borrowers through September 30, 2021. When the pause ends, tens of millions of borrowers will move back into repayment simultaneously. The difficulties borrowers face are likely to persist even as the economy re-opens and the COVID crisis subsides. The impending transition out of the repayment pause is an unprecedented challenge for the Education Department (ED), the Office of Federal Student Aid (FSA), and its contracted loan servicers. In fact, recent survey work indicates that as many as nine million borrowers could reach out for help at the same time, potentially overwhelming the system. [emphasis added]
There is no good reason for confidence that the Education Department's current servicers will be up to the task. Some of them have failed miserably at simpler tasks; two of the three primary servicers have been sued for their failures by the Consumer Financial Protection Bureau and by several state attorneys general under state consumer protection laws.
What would help in this situation is to reduce the number of loans the servicers must handle. Much ink has been spilled about whether loans should be forgiven up to $10,000, or $50,000, or entirely, based on various rationales, some compelling and some less so, and if the Secretary can do this by executive authority or if it takes an act of Congress. Such loan forgiveness in any amount would reduce the number of loans outstanding significantly. The Biden Administration has asked the Department of Justice for an opinion on the question, but many people familiar with DOJ's borrower-unfriendly history expect the opinion to say any such loan forgiveness requires legislative, not executive, action.
There is another alternative, short of outright forgiveness, that would reduce the number of loans. The Secretary could start now to offer borrowers the option of repaying immediately a discounted value of their loans, to get the loans off the books for the benefit of both the borrowers and the U.S. government. Many loans have already been discounted heavily in the federal budgeting process because they are in default, or the borrowers are already eligible for discharges, or borrowers will be eligible for future forgiveness under various programs such as the Public Service Loan Forgiveness program.
The federal treasury is never going to see much revenue from these loans, so it would make sense to get rid of the burden of administering them.
If I were a borrower in the PSLF program, which has poor prospects* of ever being straightened out, I might gladly repay an appropriately discounted loan amount and be done with it, rather than holding out hope for competently-administered cancellation of my loan in exchange for my public service.
Another option would be for the Secretary to offer borrowers who have been faithfully in repayment for a certain number of years the opportunity to pay off their loans at principal plus interest at the government's cost of borrowing. As I am reminded by those who know, federal student loan interest rate formulas (and fees and capitalizations) were established decades ago in an environment requiring equity between different federal loan programs, not on the basis of otherwise prevailing interest rates. That time has long since passed.
These options to reduce the number of loans are consistent with a plain reading of the Secretary's authority to settle and compromise loans under 20 U.S.C. 1082. This is what a private business would likely do in similar circumstances. And DOJ had no objections when, several years ago, a Secretary of Education wrote off hundreds of millions of dollars of lenders' liability to repay false claims, because the Secretary said it was in the government's interest to do so. If that was the case then**, it is much more the case now, when the entire credibility of federal student loan administration hangs in the balance.
These options would also meet with fewer objections from those who allege that any outright loan cancellation is unfair and inequitable. The relief would come largely to borrowers for whom the federal student loan system has failed, as many were short-changed by schools that should never have been in business and prepared students inadequately to pay back their loans; by servicers that could not keep their paperwork straight or gave borrowers bad advice as to their best repayment options; and by four most recent years of a borrower-hostile federal Education Department that too often actually denied borrowers their rights under law.***
The benefits of substantially reducing the number of student loans will accrue to the government, to borrowers who need a fresh start without student loan debt, and to taxpayers generally who will benefit by a significant boost to the economy as student debt burdens are lifted.
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* The Massachusetts attorney general recently reached settlement with the PSLF servicer PHEAA to compensate that state's borrowers for deficiencies in loan administration. If this proceeds on a state-by-state basis, rather than being resolved at the federal level, it is likely many borrowers will never see the benefits they are entitled to under law.
** In May, 2007, Secretary Margaret Spellings told the House Committee on Education and Labor, and later reiterated, that the Education Department itself had partial culpability for lenders' overcharges, and that the best course was to forgive the corporations' obligation to repay rather than to litigate the matter.
*** Of late there have been allegations of racial discrimination in the distribution of student debt burden. This is not a surprise; in 2003 in a working paper for the Institute of Education Sciences, I found that public and nonprofit colleges' financial aid packaging practices placed higher debt burdens on the black low-income. This was even without inclusion of for-profit colleges in the dataset and is another reason the Secretary should craft debt relief to include this demographic.
