The Effects of Student Loan Payment Plans

The immense scale of the student debt crisis is partly due to predatory practices by student loan servicers and providers. Minimal oversight has allowed these servicers to enact real damage and engage in practices that add significant amounts to student loan payment plans. Certain forgiveness and repayment programs, like income-based repayment (IBR) and Public Service Loan Forgiveness (PSLF), have not been administered reliably, leaving borrowers stuck with huge amounts of debt they could have avoided or they thought would be alleviated. Because black and brown students are more likely to borrow and to borrow more than any other group, they particularly feel the negative effects of poor lending practices.

Across the country, however, entities are acting where the federal government has steadily pulled back. States are adopting legislation to regulate student loan servicers, and organizations are coming together to combat this contributing factor to the student debt crisis.

Student Loan Lending & Repayment

Over 90 percent of student loans are federal loans. Because they represent so much of the industry, how they are serviced and implement has vast consequences on student debt. Once a federal loan is taken out and it’s time for repayment, two things occur: The borrower must select a student loan payment plan, and their loan is transferred to a servicer.

The default student loan payment plan is standard repayment, in which the payment on the loan is calculated by the size of the loan, interest rate, and term of the loan. To better help borrowers with limited incomes, income-driven repayment options are also available. The most common form of income-driven repayment is the Revised Pay as You Earn (REPAYE), which caps the minimum monthly amount of payments to 10 percent of an individual’s discretionary income. After 20 years for undergraduate loans and 25 years for graduate loans, if the borrower has made payments and the loans have not been paid off, the rest of the loan amount is forgiven.

All of the income-driven plans are also eligible for PSLF, which enables people who work full time in (almost) any public service occupation for 10 years and make 120 on-time payments to receive loan forgiveness for any outstanding loans amounts left at the 10-year mark.

The servicer is tasked with informing students of these student loan payment plans and programs, collecting payments, answering customer service questions, and generally addressing any other administrative tasks related to managing a loan. Furthermore, servicers must abide by certain requirements, which include:

  • Correctly recording and calculating interest rates and balances, applying payments to accounts, and granting forbrearances and deferments to borrowers
  • Following guidelines for delinquency notice letters, telephone calls, and skip tracing activities as they pertain to the collection of loans
  • Properly processing applications and correctly calculating monthly payments for income-driven repayment plans
  • Maintaining complete and accurate records to support borrower’s repayment plans

Predatory Servicing

Lawsuits, audits, and testimonies by borrowers have revealed that student loan servicers have been undercutting the positive components of these federal plans by steering students into less beneficial payment options and not adhering to the responsibilities described above.

The biggest revelations around these topics came in 2018 through a lawsuit filed against Navient, the largest servicer in the country. Navient was charged in the lawsuit for pushing students away from income-driven payment programs and towards plans that were simpler and more beneficial for the company, like forbearance, which lets borrowers delay payments for 12 months while interest accrues.

Forbearance is meant to be a temporary, short-term solution primarily for health-related issues. When a student’s financial inability to pay is a long-term situation, income-driven repayment programs are generally the best option because they limit needed monthly payments and allow for forgiveness of outstanding debt over the long run. By steering borrowers into forbearance instead of income-driven programs, Navient caused an additional $4 billion to be paid by borrowers.

In addition to steering borrowers into bad plans, student loan servicers like Navient were unclear or completely neglected to tell students about renewal deadlines for income-driven repayment plans. Borrowers in these plans must renew their eligibility every 12 months or else they are automatically converted back to a standard repayment plan. Between 2011 and 2015, Navient’s renewal notices failed to provide the actual date the application was due and during that time, about 60 percent of customers didn’t renew on time.

Since the Navient lawsuit, more controversial student loan practices have been discovered. Most recently, an audit of the Department of Education found lax oversight of federal student loan servicers might also have resulted in borrowers not having information that would allow them to access the most favorable repayment options available to them, exacerbating the amount of debt accumulated by borrowers.

From January 2015 to September 2017, an alarming amount of violations were recorded. Sixty-one percent of reports recorded instances of noncompliance, which included insufficiently informing borrowers of repayment plans available to them and incorrectly calculating income-driven repayment plans. Almost 92 percent of monthly reports disclosed at least one instance where the servicer neglected to inform the borrower about repayment options and 32 percent found servicers miscalculating repayment amounts. Only $181,000 in penalties was required of servicers to return for mishandling student loans, which has now grown to $2 million since September 2017. This amount is still a fraction of the $1.7 billion student loans servicing companies were paid by the Office of Federal Student Aid (FSA) between 2018 and 2019. The audit notes many of these issues have been occurring for years while FSA, seemingly, has looked the other way.

Of the student loan payment plans available to help repay debt,  PSLF is one of the better ones. This program was designed to help borrowers, and yet unclear guidance on how to implement or monitor the program has led to thousands of students being defrauded. In 2018, of the over 28,000 borrowers who had submitted applications, only 96 were approved. Of the 99 percent of applications that were rejected, 28 percent were because of clerical mistakes, and 70 percent were because applicants didn’t meet the program requirements. This often meant eligible payments weren’t counted toward the 120 needed toward forgiveness.

It’s important to note the seeming simplicity of the program actually hid a complex system of flaws. In particular, FedLoan — the federal government’s chosen servicer to implement the program — had undercounted, miscounted, or made other errors on borrower’s qualifying payments. FedLoan asserted it counted on borrowers to catch these mistakes, and when borrowers made a request for a review, they were told it would take up to a year to resolve this quagmire. These administrative errors have led to few borrowers being able to take advantage of PSLF.

With the addition of President Trump’s proposal to dismantle the PSLF program entirely, it’s easy to understand why so many borrowers have a bleak outlook on paying back their loans. One borrower says, “Not only is there no end in sight with our loans, but the balance will be so inflated that we will be buried forever. I borrowed $35,000 from the federal government. I’ve now paid back $7,000, but I also now owe them $43,000. So what’s that going to look like in 2025 when the government tells me, ‘No, sorry, you did everything we asked, but we aren’t holding up our end of the agreement’?”

Federal & State Action on Student Loan Payment Plans

In the face of this mayhem, there are solutions at both the federal and state level. There is potential for the Higher Education Act (HEA) to be reauthorized for the first time since 2008, and many are hopeful that this time, Congress will address many of the issues with repayment and oversight. Ideal provisions include ending collections agencies, codifying standards for servicing, and revamping regulations and transparency over the Office of Federal Student Aid.

Reviving the relationship between the Consumer Financial Protection Bureau (CFPB) — the body that ensures consumer protections relating to federal student loans — would also be a helpful move at the federal level. Since the new administration was put in place, the Department of Education stopped collaborating with CFPB, and its former student loan ombudsman Seth Frotman stepped down on grounds that leadership had turned their backs on the very consumers they were tasked with helping.

Since leaving the CFPB, Frotman has founded a new organization to take on the role of consumer protection and advocacy, policymaking, and litigation to help fight the student debt crisis. The Student Borrower Protection Center (SBPC) is essentially acting as a sort of replacement to the work CFPB does, especially since it was founded primarily by a team of people who left CFPB.

Currently, SBPC is working on the Student Loan Law Initiative (SLLI), which would be the nation’s first academic project focused on student debt and the law. It would produce policy-focused scholarships, help fill in gaps in data (i.e., there is very little if any data on for-profit schools), and pursue reform. SBPC is also partnering with cities and states across the country to provide data and support to develop solutions, and empower local leaders to fight for borrowers.

The Colorado Model

States like Colorado are stepping up to the plate to fill the void the federal government left lacking in terms of regulations over student loan servicers. States can use their licensing authority to ensure student loan servicers meet certain standards of service with which other financial contracts comply, but that aren’t guaranteed by federal law. They can do this with a comprehensive piece of legislation called a “borrower’s bill of rights” (BBOR) designed to preserve consumer protections through several facets: servicer state licensing, standards for servicing, data reporting, and the establishment of an ombudsman.

The benefits of this legislation are many. There is the potential for borrowers to pay off their debt more efficiently with an ombudsman who can help them navigate the system and advocate on their behalf. BBOR holds servicers accountable to the best practices enshrined in other forms of lending, reducing the chance for predatory and deceptive actions that abound in the student loan servicing market.

In the 2019 legislative session, Colorado introduced SB19-002. This bill includes BBOR, would set up an ombudsman position, and would create a fund for licensing student loan servicers. States that are taking this crucial step are acknowledging the predatory practices of student loan services are a big contributor to the student debt crisis.