Monday, August 8, 2016
The Feds Don't Care If You Dropped Out of College. They Want Their Money Back
Half of recent dropouts are delinquent on their student debt.
By Shahien Nasiripour
August 8, 2016
When it comes to collecting on student loans, the U.S. Department of Education treats college dropouts the same as Ivy League graduates: They just want the money back. New data show the perils of that approach.
Dropouts who took out loans to finance the degrees they ultimately didn't obtain often end up worse off for attending college. Unlike their peers who earn degrees, dropouts generally don't command higher wages after leaving school, making it harder for them to repay their student debt. The typical college dropout experienced a steep fall in wealth from 2010 to 2013, figures from the Federal Reserve in Washington show, and an 11 percent drop in income—the sharpest decline among any group in America.
It should therefore come as no surprise that half of federal student loan borrowers who dropped out of school within the past three years are late on their payments, according to Education Department figures provided to Bloomberg. More than half of those delinquent borrowers are at least 91 days behind. By comparison, just 7.2 percent of recent college graduates are more than three months late on their debt.
These debtors are struggling despite the widespread availability of repayment plans meant to prevent distress. That doesn't need to be the case. "Many borrowers believe that getting a better payment plan with their servicer is like buying a car—a high stake, pulse-pounding negotiation they are likely to lose," said Legal Services NYC, which represents low-income New York City residents with student loan problems.
Treasury Deputy Secretary Sarah Bloom Raskin has publicly questioned whether the government's loan contractors are doing right by borrowers. The consequences—ruined credit scores, the loss of occupational licenses, and wage garnishments—"can have a serious impact on our economy," she said last month.
There are two immediate takeaways from the figures. Higher education experts eager to put families at ease about the increasing cost of college are likely to conclude that whatever crisis exists in student loans is concentrated among college dropouts, so graduates needn't worry. This is largely how the Education Department and the White House view the issue. The department recently focused its efforts on improving graduation rates, hoping it will lead to fewer loan defaults. But it's unlikely that approach will yield benefits soon. Graduation rates have increased by less than five percentage points over the past dozen years, federal data show.
The second takeaway is that it's time for the Education Department and its loan contractors to pay special attention to the groups of borrowers most likely to struggle with their debt.
The Education Department outsources the work of collecting payments and counseling borrowers on their repayment options to loan contractors such as Navient Corp. and Nelnet Inc. The government pays these contractors about six times more for accounts that are current rather than seriously delinquent, regardless of the costs the companies incur to help borrowers resolve their delinquency. Loan companies say they simply don't get paid enough to help the neediest borrowers.
The Education Department has known for years that the typical borrower who defaults on her debt didn't graduate with a credential, federal records show. Yet its Federal Student Aid office—the somewhat independent unit that runs the government's student loan program—doesn't mandate special procedures for its contractors' dealings with borrowers most at risk of default. Instead, FSA gives its loan contractors "broad latitude" to handle borrowers' accounts.
To their credit, some of the government's loan contractors (including Navient) have urged FSA and the department to change its approach. After all, dropouts and borrowers who graduated from low-quality schools are more likely to default than peers who attended highly selective colleges. Yet under FSA's contracts, everyone is treated the same. Last year, Navient told the feds that the contracts encourage servicers such as itself to pay little attention to the borrowers that are most likely to struggle paying back their loans.
Despite the contracts, Navient spokeswoman Patricia Christel said the company tailors its outreach to borrowers most at risk of default. Michele Streeter, a spokeswoman for Education Finance Council, a Washington trade group that represents student loan companies, said some of its members do the same. Representatives for the Education Department and the government's three other major loan contractors—Pennsylvania Higher Education Assistance Agency, commonly known as FedLoan Servicing; Nelnet; and Great Lakes Educational Loan Services Inc.—didn't respond to several requests for comment.
It may be years before the department makes any changes. Its contracts with its four major loan servicers expire in 2019. Last month, the department directed FSA to structure its next round of contracts in a way that guarantees that dropouts would quickly get help with their loans from specially trained customer service representatives. It's up to FSA to carry it out.