Obama To Announce Student Loan Reforms As Education Department Stalls

03/10/2015 12:36 am ET | Updated Mar 10, 2015
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President Barack Obama on Tuesday will announce sweeping borrower-friendly recommendations to fix the $1.1 trillion federal student loan system that, taken together, amount to an indictment of the U.S. Department of Education's inability to protect borrowers from ever-increasing burdens.

For a department under siege by student advocates, borrower groups and lawmakers such as Sen. Elizabeth Warren (D-Mass.), Obama's recommendations may bolster calls for another federal agency to take charge of the federal student loan system.

Obama's "Student Aid Bill of Rights" includes recommendations for a new Education Department complaint system so grievances filed by students and borrowers are referred to regulators and law enforcement agencies; mandatory disclosures by the Education Department when borrowers' accounts are shuffled between loan companies; and a directive that the Education Department increase its cooperation with White House offices and other government agencies when it comes to understanding borrower behavior, identifying trends in student debt, and improving its interactions with its loan contractors.

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. For example, a group of former students at colleges owned by for-profit chain Corinthian Colleges Inc. recently announced they'll refuse to repay their federal loans as part of a "debt strike" against the Education Department's failure to protect them from allegedly misleading claims about their future job prospects.

"The president is rightly prioritizing much-needed consumer protections for borrowers, and we urge the actions he's calling for are taken as quickly as possible," said Lauren Asher, president of the nonprofit Institute for College Access & Success. "It's incumbent on the agencies to follow through as quickly as they can."

In a fact sheet on Obama's impending announcement, the White House said the new actions "will help borrowers responsibly manage their debt, improve federal student loan servicing, and protect taxpayers’ investments in the student aid program." (The fact sheet was provided on an embargoed basis to some reporters. The Obama administration did not provide it to this reporter, who obtained it from other sources, so The Huffington Post is not bound by the embargo.)

The Education Department's cozy relationship with its loan contractors may be among White House targets for a shakeup. In 2009, the department's inspector general recommended it recoup some $22 million in alleged overpayments to student loan giant Sallie Mae. Some six years later, that money hasnt been collected from the company, which has since spun off its loans operation and renamed it Navient Corp.

The department's treatment of Navient stands in sharp contrast to its treatment of borrowers who fall behind on their payments. The Government Accountability Office recently found that tens of thousands of seniors in 2013 were forced into poverty as a result of the Education Department's efforts to recoup money on defaulted federal student loans.

In May, after the Department of Justice alleged that Sallie Mae and Navient intentionally violated the Servicemembers Civil Relief Act by cheating active-duty troops on their private and federal student loans over nearly a decade -- actions alleged to that occurred while the company was collecting troops' payments on the Education Department's behalf -- the Education Department said its own investigation would be complete in 120 days. The department missed its deadline, and only recently hired Ernst & Young to review Navient's compliance with the law, federal records show.

Federal regulators have warned that a company's failure to provide active-duty troops the protections they're afforded under the law could be a "canary in the coal mine." In 2013, Rohit Chopra, the Consumer Financial Protection Bureau's top student loan official, told Congress that if a company fails to abide by the servicemembers law "it raises questions about whether it is agile enough to deal with the complexities of the larger population of borrowers facing hardship."

The Education Department recently awarded Navient's loan servicing unit a new contract potentially worth hundreds of millions of dollars.

Obama wants the Education Department to "invite expertise from across the government to review best practices for performance-based contracting that could further improve outcomes for borrowers," according to the White House fact sheet.

The White House also wants federal agencies to team up with further recommendations on how to fix the nation's student loan market. One such recommendation may be a reform of federal bankruptcy laws, which make it nearly impossible for borrowers in distress to discharge either their federal or private student loans.

The federal consumer bureau has previously suggested to Congress that it consider reforming how student loans are treated in bankruptcy. Aside from interest among a few congressional Democrats, the issue has yet to be seriously considered.

With loan defaults rising and delinquencies in the main federal program at nearly 17 percent, according to the Education Department, Wall Street executives and policymakers from across the federal government have joined student advocates to warn of a potentially looming economic disaster as borrowers unnecessarily devote ever higher portions of their earnings to paying back their student loans.

Researchers at the Federal Reserve Bank of New York, for instance, have found that young Americans with student loans are retreating from the housing market. The Treasury Department is among a group of federal agencies concerned about households' ability to spend, save and invest given their growing student debt burden.

At the Education Department, where lenders, loan companies and debt collectors have long enjoyed a special status relative to Americans with student loans, borrowers recently have made some strides. The department recently ended its relationship with Pioneer Credit Recovery -- a Navient subsidiary -- over allegations it mistreated borrowers in distress.

The department also has focused its attention on helping borrowers avoid default and manage their loan obligations by directing its loan contractors to improve how they treat borrowers and communicate their repayment options to them. As a result, enrollment in repayment plans that cap monthly payments relative to borrowers' incomes has significantly increased.

But Tuesday's expected White House announcement is a signal that the department hasn't done enough. Obama has repeatedly urged the Education Department to increase the number of eligible borrowers enrolled in the income-driven repayment plans, most recently in June.

In 2013, Obama said it was his “personal mission” to make a college education more affordable for middle-class families. Tuesday's announcement, some two years later, is a sign that progress has been uneven.

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