THE BLOG
08/02/2011 04:33 pm ET Updated Oct 02, 2011

Student Loan Consolidation: Even the Best and Brightest Are Befuddled

Economic consequences of defective loan consolidation programs puts many students even further in debt and destroys their confidence in government

Despite President Obama's quick and decisive focus on improving the terms of student loans -- as he said in his 2010 State of the Union address, "one of the most significant investments in higher education since the G.I. Bill," student borrowers are faced with a maze of complexity when they consolidate their student loans through the federal government's lending arm -- Direct Loans. The Kafka-esque reality of the process that leads to severe financial problems for many students and their families could not be what he envisioned.

Student debt now totals $800 billion according to a May 17, 2011 NBC-TV broadcast -- surpassing the total credit card debt of all Americans -- and is the one form of debt that cannot be discharged by bankruptcy. Thousands of young professionals like one masters' degree graduate of Carnegie-Mellon University's Information Design Program find themselves caught in a costly, time-consuming bureaucratic snafu as they navigate debt consolidation under the federal student loan program Direct Loans. Her saga exemplifies the inefficiency of government and belies the Administration's repeated commitments to transparency and efficiency. We'll call her Lena -- a die-hard supporter of President Obama but now also a disillusioned student borrower.

Lena applied in May 2010 to consolidate 6 student loans totaling $123,000. After taking 25 hours to gather relevant information and complete the almost unintelligible Direct Loans application, she then fell into a protracted cycle of silence and mistakes. Her loan servicer, American Education Services, erroneously informed Direct Loans that she had 17 loans totaling more than $200,000 with the result that the actual consolidation didn't occur until September 2010. During those four months, she spent more than 100 hours trying to coordinate communication between Direct Loans and the loan servicer, all the while continuing to pay $2,700 per month (65% of her after tax pay) to the original lender because she was afraid that not paying would ruin her credit. Convinced that she had protected her credit rating, she was horrified to "get late notices and calls every day" once the actual loan consolidation took place -- it seems that the payoff amounts that had been finally sent to Direct Loans were out-of-date -- this took another 3 months to resolve. In all, it seems she spent an extra $8,000 due to bureaucratic ineptitude, over 200 hours, trying to cope with 180 pieces of correspondence and 120 emails.

Lena is not alone -- a quick web search finds others saying largely the same thing:

I consolidated with Direct Loans and have run across the most useless, ill informed, nasty, rude and purposely dense groups of employees I have ever dealt with. No one will give me their name, I imagine to avoid accountability. I don't know who to complain to as I already wrote and called my Congresswoman and several other Senators.

Comments on the web routinely characterize the debt consolidation as a "nightmare," accuse the student loans of business practices that are deceiving and illegal, and in another common refrain recall examples of being treated as "villains" by customer service representatives. Virtually all of the web comments echoed the economic consequences Lena encountered -- significant extra interest payments ranging from $8,000 to $14,000.

Even if the process had moved more quickly and smoothly, the supporting paperwork and "explanatory information" is mind numbing. The most critical decision that the borrower must make is which type of repayment plan to select -- if they understand the following, they certainly earned their degrees:

You must choose the same repayment plan for all of your Direct Loans, unless you have both parent Direct PLUS loans (Direct PLUS Loans you received as a parent to pay for the education of a dependent student) and one or more of the other types of Direct Loans listed below (Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans, and student Direct PLUS Loans (Direct PLUS Loans you received to pay for your own graduate or professional education), and you want to repay your Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans and/or Direct PLUS Loans under the Income Contingent Repayment (ICR) Plan or Income-Based Repayment (IBR) Plan. In that case...

The Paperwork Reduction Notice that appears at the end of the form has this gobbledygook sentence that says "the time required to complete this information collection is estimated to average .33 hours (20 minutes) per response, including the time to review instructions, search existing data resources, gather and maintain the data needed and complete and review the information collection." Really? This is preposterous given the totally dysfunctional system.

The benefits promised by the student loan program are completely undermined by the gross inefficiencies in the processing system, lack of professionalism and empathy from customer service representatives and the severe economic consequences that result. This is inexcusable.

The people running this program need to re-connect with the students to gain their trust, loyalty and respect in the government so that interactions are more informed, more personal, more helpful and more efficient.