Compromising Student Debt through Remediation

January, 2022

Washington — If I could set up a meeting at the U.S. Department of Education to address the student loan debt crisis, it would look something like this, with Secretary Cardona presiding.  Present would be his deputy and his undersecretary, along with the leadership of OGC, FSA, OPE and representatives from OMB and DPC.  

The Secretary:  "I've called you together because I believe I have the responsibility to act under statutory authority to uphold 'sound management and accountability' in our federal student loan programs.  That is what the statute requires, using words like 'duty' and 'obligation'.  The statute grants powers to the Secretary to accomplish this, including authority to waive, compromise, or release rights, claims, and demands related to loans.  

"Although there is some difference of opinion as to the extent of these powers, I believe there should be no doubt that they extend to matters of sound management and accountability, and to remediation where accountable management has been lacking.  It is distressing to read OIG, GAO, CFPB, and other reports that have identified specific management and accountability failures, only to learn that damages to borrowers have not been addressed.   

"Therefore, I ask you prepare for my consideration a variety of actions that can be applied to remediate documented shortcomings, with the goal of making borrowers whole and giving them confidence that the debt they have incurred has been reviewed and re-set to what it would have been but for the failures of program administration.  

"For example, if borrowers have systematically been victims of servicer 'forbearance abuse,' loan amounts should be automatically modified as a remediation.  Other examples are notorious delays in responding to borrowers, mishandling paperwork, and failures to advise borrowers of options to reduce debt.  

"For some borrowers whose remaining balances are the result of fees, penalties, capitalized interest, and other charges that would not have been incurred under sound management and accountability, the remediations may result in total loan cancellation.  How would this compare to other proposals to reduce debt by set dollar amounts?  I believe we have a special responsibility to borrowers who would have been well on their way to repaying their principal and interest, or actually have paid enough to cover both, yet still have large loan balances that they can never hope to repay because of administrative policies and practices that have operated to keep them in debt.  

"I also ask you to prepare analyses as to the effects of these remediations, to include breakdowns by various categories such as repayment status, principal amount borrowed, type of institution attended, age, race, and sex, so as to be able to evaluate how remediations would be targeted. 

"Please review as well the Secretary's powers under statute to adjust loan interest rates as an incentive to repayment, particularly in light of the upcoming end of the pandemic repayment pause on May 1st.  Include in the review the possible use of adjusting interest rates as remediation for past unsound management as well as the value of adjustments as an incentive in transitioning out of the pause.  Such a review should also take note of interest rate or origination fee adjustments previously made by Secretaries under these or other discretionary powers, as well as a view toward maximizing the economic benefits of loan cancellations and modifications that would result from various remediation actions.

"I am pleased that this meeting includes OMB and DPC representatives.  I intend to brief the President on this as part of what I believe to be my duty to uphold sound management and accountability in the loan programs.  I know he is also concerned about what to do going forward, to slow and reverse the growth of student loan debt.   That will necessarily involve cracking down on predatory lending, which I believe is also a duty and responsibility of the Secretary.

"Thank you, and I await your reports."



Secretary's Powers, Secretary's Duties

January, 2022

Washington — Much has been written and said about the Secretary of Education's existing statutory powers to compromise and modify student loans under 20 U.S.C. 1082.  Moving the discussion forward, it is time to consider the duties vested in the Secretary under that provision, and how the powers and duties fit together.

The Secretary, according to the plain language of the law, has the obligation to administer federal student loan programs with sound management and accountability and act as necessary to assure that the purposes of federal student loan programs will be achieved.  Note especially the use of the word obligation.   

Some economists have written, persuasively, that cancellation of student loan debt in various cases and amounts would result in many economic benefits for the nation.  But now comes a new paper that lays out an additional compelling case for the Secretary to act, based on the history of demonstrably bad management of the programs.  Put forth by three respected consumer protection organizations, the paper charts a plausible course for the Secretary to fulfill his statutory obligations, which would complement the economic arguments.*  Done correctly, these relief measures could equal or exceed several other cancellation proposals. 

The suggested course builds on actions the Secretary has already taken to straighten out the Public Service Loan Forgiveness program, which actions have been well received by borrowers and the public.  Broad PSLF waivers are based on the conviction that the programs should operate as promoted to, and understood by, borrowers, not as woefully, negligently, and sometimes corruptly administered by lenders and loan servicers.  The same rationale, the paper argues, should be applied to all federal student loan programs, not just PSLF.  Borrowers across the board are often in trouble through no fault of their own.  The paper proposes automatic, retroactive relief based on debt reduction opportunities denied to borrowers, implemented through the Secretary's power to compromise and modify loans.  The necessary data to provide the relief, the authors point out, is already available to the Secretary in the NSLDS database.    

Last week I participated in a panel on the student debt crisis sponsored by the USC Casden Institute and centered around the film "Scared to Debt."  As a way forward, I suggested attention to five words:  recognition of the complicity of the Department of Education in amassing $1.8 trillion of student debt; the obligation of the current Secretary to remediate it; making the relief proportionate to the mismanagement; application of the limitation, suspension, and termination powers of the Secretary to slow current and future debt growth; and restoration of bankruptcy protections similar to those with other consumer debt.** 

It is regrettable beyond words that a dispute over the powers of the Secretary has become a partisan issue, particularly in the context of the repayment pause due to the Covid pandemic — set to expire in May — and the politics of the November 2022 elections.  Instead of arguing over the powers, I believe, it would be in the nation's interest to look foremost at the duties of the Secretary, those he is sworn by oath to uphold, and to see that they are performed.  Such action would provide much needed and justifiable relief to millions of borrowers, and get them back into making productive contributions to the nation's economy. 


*The National Consumer Law Center (NCLC), the Student Borrower Protection Center (SBPC), and the Center for Responsible Lending (CRL) focus initially on how a repayment plan known as Income Driven Repayment (IDR) has failed, but the paper moves on to realize that this is only symptomatic of deeper problems, including repayment forbearance abuse of borrowers and even more systemic issues.  The paper's conclusions also recommend an earlier work by NCLC and CRL, the Road to Relief.  

**Complicity of Department of Education officials is not difficult to demonstrate.  For example, many lenders made false claims against the Department, which were paid; the funds soon found their way into new student loan programs, the terms and conditions of which violated consumer protections and left the borrowers deeply in debt; the Department then provided the lenders with reviews to whitewash the activities before they could be uncovered by the Inspector General.  Eventually, the IG identified and recommended actions against several lenders, but the Department, with rare exception, did not act on them.  Abundant evidence of the complicity exists in the audits of the IG, reports of the Iowa attorney general, conclusions of the Pennsylvania auditor general, litigation discovery, and primary source research published in Dan E. Moldea's Money, Politics, and Corruption in U.S. Higher Education (2020), p. 115ff.         

The "568 Cartel" and the Secretary of Education

January, 2022

Washington — For those following the nation's student loan crisis, and the role of colleges and universities in it, a new lawsuit illuminates how financially needy students are shortchanged by what is called "enrollment management."

The lawsuit, against sixteen institutions called the "568 Cartel," is receiving much national attention.  The plaintiffs describe enrollment management as a "largely secretive practice" the purpose of which is to raise the net price of tuition for those with financial need.

What the lawsuit does not mention — perhaps because it is obvious — is that the institutions expect students to pay higher tuition with student loans. Nor does it mention that enrollment management is widely practiced throughout higher education and is a major contributor to borrowers' current (and counting) $1.7 trillion student loan debt.    

I'm hopeful that subsequent media coverage will recognize that under federal law, these practices must be disclosed to students under the Student Right to Know law, and the Secretary of Education has the power to bring institutions into line through limitation, suspension, or termination of institutions' participation in federal student aid programs — the "L S & T" powers.  

In Senate testimony in 2007, I addressed these problems in considerable detail and recommended that they be resolved.  The testimony is still available on the webpage of the committee that heard it.   

Subsequently, in a later blog post entitled "'Enrollment Management' is Out Of Control," I again pointed out the problems and identified the Secretary of Education's powers to deal with them.

But nothing happened, which brings us to the current litigation, which is directed to just the tip of the iceberg. 

The whole imbroglio could be straightened out by the Secretary of Education, whom I believe has an obligation to act against illegal enrollment management practices, wherever they exist.   This mess did not happen on the current secretary's watch, but he is now in a position to take decisive action.  There is no excuse to say no one knew what has been happening.