Student loans: Will Obama's plan bring changes? (+video)(Read article summary)
President Obama on Tuesday signed a presidential memorandum directing federal agencies to overhaul the way US students repay their loans. He was also to talk about the changes in a speech at the Georgia Institute of Technology in Atlanta.
It is no secret that most graduating seniors leave college saddled with debt. In 2013, 7 out of 10 seniors left school with an average of $28,400 in debt from student loans, the nonprofit Institute for College Access and Success has reported. And repaying student loans can be complicated, with many borrowers complaining that they don’t know how much they owe or who their lenders are. Now, President Obama aims to bring change to the system.
On Tuesday, Mr. Obama signed a presidential memorandum directing federal agencies to overhaul the way US students repay their loans. He was also to talk about the changes in a speech at the Georgia Institute of Technology in Atlanta.
"It's our responsibility to make sure that the 40 million Americans with student loans are aware of resources to manage their debt and that we are doing everything we can to be responsive to their needs," Ted Mitchell, undersecretary of Education, said on a conference call with reporters, according to Reuters.
The memorandum will highlight these principles:
- Every student deserves access to a good, affordable education at a college that’s cutting costs and increasing learning.
- Every student should be able to access the resources needed to pay for college.
- Every borrower has the right to an affordable repayment plan.
- Every borrower has the right to good customer service, reliable information, and fair treatment, even if he or she struggles to repay the loans.
Coined as a Student Aid Bill of Rights, the plan aims to change the way loan servicers, who function as middlemen to collect and apply payments to federally backed student loans, interact with borrowers. The companies will now be expected to warn borrowers automatically when they fall behind on payments or when their loans are transferred to another company. Servicers will also be required to automatically apply payments to loans with the highest interest rates, unless the borrowers themselves instruct otherwise.
The plan also calls on the Education Department to use technology to provide borrowers with a simple way to file complaints and provide feedback. The department is expected to create a website by July 2016 that will allow it to collect comments from borrowers about student lenders, servicers, collection agencies, and schools. The department is to then use the platform to respond quickly to all complaints.
In addition, a central point of access is to be created so that those repaying federal loans can check their accounts and track payments.
For years, staggering levels of student debt have widely been considered something that America needs to address, but solutions have proved elusive.
In 2010, Congress approved an overhaul to the student loan program, in which private banks were to no longer handle federally backed student loans. In 2013, Obama said it was his “personal mission” to make college more affordable for middle-class families.
"Tuesday's announcement, some two years later, is a sign that progress has been uneven," writes Shahien Nasiripour in The Huffington Post.
The plan being announced Tuesday is, in fact, making adjustments now that the 2010 overhaul has had time to take effect.
One concern that student advocates have raised about the existing system: Loan servicers, they worry, are attempting to maximize profits by deceiving borrowers.
A recent study by the Consumer Financial Protection Bureau found that some servicers intentionally triggered late fees by spreading out payments across multiple loans. The CFPB also reported cases of servicers inflating the minimum payment due by including loans in deferment.
Last week, the Education Department canceled contracts with five private collection agencies for apparently tricking borrowers into thinking they could revamp their credit rating if they paid their debt immediately, The Washington Post reported.
“Obama's directives are intended to counter complaints about a system rife with abuse that gives borrowers few protections from companies that process their monthly payments or schools that mislead them into taking out federal student loans,” Mr. Nasiripour wrote.
Now, the White House is calling for servicers to work with borrowers to make the repayment process more transparent.
"Repayment rates improve when servicers work well and work directly with borrowers, helping them understand the terms of their loans," said Sarah Bloom Raskin, deputy secretary of the Treasury Department, on a conference call, according to Reuters.
The new rules will apply only to federal student loans and not to the loans made by banks and other private entities.