TestimonyofAshleyC.Harrington

SeniorPolicyCounsel,CenterforResponsibleLending

BeforetheUnitedStatesHouseCommitteeonFinancialServices

A$1.5TrillionCrisis:ProtectingStudentBorrowersandHoldingStudentLoanServicersAccountable

September10,2019

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I. Introduction

GoodmorningChairwomanWaters,RankingMemberMcHenryandMembersoftheUnitedStatesHouseCommitteeonFinancialServices.Thankyoufortheopportunitytoprovidetestimonytodayabouttheneedtoaddresstheservicingissuescontributingtothisnation’s$1.5trillionstudentdebtcrisis.MynameisAshleyHarrington,andIamaseniorpolicycounselattheCenterforResponsibleLending.TheCenterforResponsibleLending(CRL)isanonprofit,nonpartisanresearchandpolicyorganizationdedicatedtoprotectinghomeownershipandfamilywealthbyworkingtoeliminateabusivefinancialpractices.CRLisanaffiliateofSelf-Help,oneofthenation’slargestcommunitydevelopmentfinancialinstitution.Forthirtyyears,Self-Helphasfocusedoncreatingasset-buildingopportunitiesforlow-income,rural,women-headed,andfamiliesofcolor,primarilythroughfinancingsafe,affordablehomeloansandsmallbusinessloans.Intotal,Self-Helphasprovided$6.4billioninfinancingto87,000homebuyers,smallbusinessesandnonprofitorganizationsandservesmorethan80,000mostlylow-incomefamiliesthroughmorethan40retailcreditunionbranchesinNorthCarolina,California,Florida,Illinois,SouthCarolina,Virginia,andWisconsin.Thegrowthofoutstandingstudentloandebtoverthelastdecadehasbeenstaggering.Today,morethan44millionpeople1carryover$1.5trillionofoutstandingstudentloandebt,anamountthatexceedsallothertypesofnon-mortgageloandebt.Twooutofthreegraduatesintheclassof2017borrowedfederalstudentloandebttofinancetheireducation.2Thisphenomenonisespeciallyconcerningforcommunitiesofcolor,astheexistingwealthgapmakestheburdenofstudentloandebtparticularlyheavyforAfricanAmericanandLatinocommunities.ItisimperativetoanypolicymakingprocesstofirstacknowledgethedejureracialsegregationthatAmericaninstitutionsofhighereducationwerebuilton.3Theresultsoflegalsegregationinhighereducationhavecreatedaninequitablelegacyforcommunitiesofcolorthatpersiststoday.EvenafterBrownv.BoardofEducation(1954),predominately-whiteinstitutions(PWIs)inmanystatesresistedintegrationandequaltreatmentfornonwhitestudents.4Andbytheendofthe20thcentury,justatthetimewhenstudentbodieswerediversifying,policymakerswereshiftingthecostsofhighereducationfromthepublictotheindividualstudent.5Inthepastdecade,thehighereducationlandscapehasbecomesignificantlymoreperilousforstudent

1See:https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/PortfolioSummary.xls.ReflectstotalsthroughtheendofJune20182See:http://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf//HHDC_2018Q4.pdf3Pierre,2012.HistoryofDeJureSegregationinPublicHigherEducationinAmericaandtheStateofMarylandPriorto1954andtheEqualizationStrategy.https://commons.law.famu.edu/cgi/viewcontent.cgi?article=1074&context=famulawreview.4Minor,J.T.2008.“SegregationResidualinHigherEducation:ATaleofTwoStates.”AmericanEducationalResearchJournal45(4):862-882.5Huelsman,Mark.2019.DebttoSociety:TheCaseforBold,EquitableStudentLoanCancellationandReform.WashingtonDC:Demos.Availableathttps://www.demos.org/research/debt-to-society.

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borrowers.WhenstatelegislaturesbegantotightentheirbeltsinthewakeoftheGreat

Recession,investmentsinpubliccollegesanduniversitiesbegantodecline.6Inresponse,public

collegesanduniversitiesraisedtuition,andcutstudentservices.7Asstatesslashedbudgetsand

schoolsraisedthecostofadegree,familiesexperiencedmassivewealthdeclinesfromasinking

economy.8Withforeclosures,jobloss,anddownturnsinthemarketfracturingfamilybalance

sheets,anentiregenerationofstudentsneededtoborrowmorethaneverbeforetoattend

college.Further,alargernumberofstudentsthaneverbeforechosetogotocollegetopursue

aneducationthatcouldhelpthemsecureasolidfuture.

Withinthiscontext,studentsfamiliesofcoloraremorelikelytoneedtoborrowforhigher

educationandinlargeramounts.Evenaftergraduation,AfricanAmericanandLatinopeople

facesubstantialjobdiscriminationandearnfarlessthantheirwhitecounterparts.9African

Americanscanalsofacemoredifficultypayingoffdebtandbuildingsavingstowithstandfuture

financialshocksbecauseofthisincomegap.Giventhesedisadvantages,thesestudentstendto

takelongertopaytheirloansbackcomparedtotheirwhitecounterparts.10Infact,recent

researchshowsthat,ratherthanhelpingcommunitiesofcolorbuildwealth,acollegeeducation

actuallydeepensthewealthgapduetothehighcostsandstructuralissuesinoursystem.11For

example,youngAfrican-Americanstakeon85%morestudentdebtthantheirwhite

counterpartsfortheireducationandthatdifferenceinindebtednessincreasesbyalmost7%

peryearafterleavingschool.12Despitethesefacts,formoststudents,especiallystudentsof

color,thepursuitofhighereducationisnotachoice.Indeed,postsecondaryeducationisa

necessity,notaluxury,fortoday’sworkforce.13

Womengraduate,onaverage,with$2,700moreinstudentloandebtthanmen,andbecauseof

thegenderpaygap,theyearnabout26%less,sopayingofftheirdebttakessignificantly

6Mitchell,Michael;Leachman,Michael;andMasterson,Kathleen.2016.FundingDown,TuitionUp:StateCutsto

HigherEducationThreatenQualityandAffordabilityatPublicColleges.CenteronBudgetandPolicyPriorities.

Availableathttps://www.cbpp.org/sites/default/files/atoms/files/5-19-16sfp.pdf.7Ibid.

82013Update:TheSpilloverEffectsofForeclosures.CenterforResponsibleLending(August2013).Availableat

https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/2013-crl-research-

update-foreclosurespillover-effects-final-aug-19-docx.pdf.9Quillian,Lincoln;Pager,Devah;Hexel,Ole;&ArnfinnH.Midtbøen.2017.“Meta-analysisoffieldexperiments

shownochangeinracialdiscriminationinhiringovertime.”ProceedingsoftheNationalAcademyofSciencesof

theUnitedStatesofAmerica114(41):10870-10875;Gaddis,S.Michael.2015.“DiscriminationintheCredential

Society:AnAuditStudyofRaceandCollegeSelectivityintheLaborMarket.”SocialForces93(4):1451-79.10Schultz,Sarah.2017.“ABlueprintforHigherEducationEquity.”WashingtonDC:YoungInvincibles.Availableat

https://younginvincibles.org/reports-briefs/blueprint-higher-education-equity/.11HouleandAddo,2018.“RacialDisparitiesinStudentDebtandReproductionoftheReproductionoftheFragile

BlackMiddleClass.”SociologyofRaceandEthnicity1-1612Id.

13Over95%ofjobscreatedsincetheGreatRecessionhavegonetothosewithatleastabachelor’sdegree.See

AnthonyCarnevale,etal.,"America'sDividedRecovery:CollegeHavesandHave-Nots"(2016)

https://cew.georgetown.edu/cew-reports/americas-divided-recovery/.By2020,65%ofalljobswillrequiresome

formofpostsecondaryeducation.AnthonyCarnevale,etal.,"Recovery:JobGrowthandEducationRequirements

Through2020."(2014)https://cew-7632.kxcdn.com/wp-content/uploads/2014/11/Recovery2020.FR_.Web_.pdf.

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longer.17Thisisespeciallytrueforwomenofcolor.African-Americanwomengraduatewith

almost50%morestudentdebtthanwhiteandLatinawomenat4-yearinstitutions.18

Approximately57%ofAfricanAmericanwomenand42%ofLatinawomenwhowererepaying

studentloansreportedthattheywereunabletomeetessentialexpenseswithinthepastyear

comparedto34%ofallwomen.19

Further,whilestudentloandebtisoftenseenasaMillennialissue,thecrisisleavesnoage

groupuntouched.TheAARPisincreasinglyconcernedaboutstudentloandebtaffectingthe

financialstabilityofolderAmericans.20Infact,$66.7billionoftotaloutstandingstudentloan

debtwasowedby2.8millionborrowersage60andolderin2015.21Nationally,themedian

studentloanbalanceofolderborrowersincreasedbymorethan$1,000,andthetotal

outstandingstudentdebtheldbyborrowersoverage60increasedbymorethan50percent

between2012and2017.22AccordingtotheGovernmentAccountabilityOffice,theincreasein

studentloandebtamongseniorshasledtomoreseniorsspendingtheirwould-begoldenyears

strugglingtomakeendsmeetbecauseofthefederalgovernment'sabilitytogarnishseniors'

socialsecurityincomeforrepaymentoffederalstudentloandebt.23

Asaresultoftheirneedtoborrowmore,alongsidetargetingandfinancialdeceptionbyfor-

profitinstitutionsandoftenabusiveservicers,adisproportionatepercentageofstudentsof

colorandthemajorityofblackstudentsareunabletopaystudentdebtandwilldefault.24

Delinquencyanddefaultsonstudentloansoccurdisproportionatelyforstudentsofcoloras

wellasforwomen.Adegreeisnotashieldfromracialdisparities:AfricanAmericanbachelor’s

degreegraduates’defaultatfivetimestherateofwhitebachelor’sdegreegraduatesandare

morelikelytodefaultthanwhiteswhoneverfinishadegree.25Latinobachelor’sdegree

graduates’defaultattwicetherateoftheirwhitepeers.26Eventhosewhocanpayare

17AmericanAssociationofUniversityWomen.(2018).Women’sstudentdebtcrisisintheUnitedStates.Retrieved

fromhttps://www.aauw.org/research/deeper-in-debt/.18Ibid.

19Ibid.

20Trawinski,Lori,Montezemolo,Susanna,&Williams,Alicia.2019.TheStudentLoanDebtThreat:An

IntergenerationalProblem.WashingtonDC:AARPPublicPolicyInstitute.Availableat

https://www.aarp.org/ppi/info-2019/the-student-loan-debt-threat-an-intergenerational-problem.html.21OfficeforOlderAmericans&OfficeforStudentsandYoungConsumers.2017.SnapshotofOlderConsumersand

StudentLoanDebt.ConsumerFinancialProtectionBureau.Availableathttps://www.consumerfinance.gov/data-

research/research-reports/snapshot-older-consumers-and-student-loan-debt/.22MichaelStratford,WhytheAARPisworriedaboutstudentloans,Politico,June7,2018,

https://www.politico.com/agenda/story/2018/06/07/student-loans-debt-aarp-000666.23GovernmentAccountabilityOffice.2016.SocialSecurityOffsets:ImprovementstoProgramDesignCouldBetter

AssistOlderStudentLoanBorrowerswithObtainingPermittedRelief.Availableathttps://www.gao.gov/assets/690/681722.pdf.24Scott-Clayton,Judith.2018.“Theloomingstudentloandefaultcrisisisworsethanwethought.”Washington,DC:

BrookingsInstitution.Availableathttps://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-

report.pdf.25BrookingsInstitution,Theloomingstudentloandefaultcrisisisworsethanwethought,January10,2018,

https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf26Id.

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struggling.Today,nearlyhalfofAfricanAmericangraduateswithabachelor’sdegreeowemore

ontheirundergraduatestudentloanafterfouryearsthantheydidatgraduation,comparedto

17%ofwhitegraduatesandapproximately23%ofLatinos.27Thisderailstheirfinancialand

personallivesandsubjectsthemtoharshcollectionpracticesthatcankeepthemfrom

achievingthewealthgainspromisedbyacollegeeducation.Meanwhile,theirdebtkeeps

growingduetounlimitedinterestaccrualandnostatuteoflimitationsonstudentdebt.

Theinterplaybetweenstudentloanpaymentsandothermajorlifeinvestmentsand

responsibilitiesiswelldocumented.ResearchfromtheNationalAssociationofRealtorsshows

thattheusualstudentloanborrowerdelaysthepurchaseoftheirfirsthomebyanaverageof

sevenyearsbecauseofstudentloandebt.28Thus,thishasseriousimplicationsforthehousing

marketaswell.Movingforward,themarketfornewhomeownershipwillbepredominately

borrowersofcolor,andlong-termstudentloandebtthreatenstoshrinktheavailablepoolof

buyers.Unlessbold,newactionsaretaken,agenerationwillbetrappedindebtundertakento

trytoadvancetheirlives.

Giventhesefactors,thereisarealneedformeaningfulpolicychangesthathelpthosemost

impactedbythestudentdebtcrisis.Thesechangeswillhaveimpactbeyondindividualstudents

andwillboosttheoveralleconomy.Acriticalcomponentofthisisservicingreformandthe

creationofaborrower-centeredstudentloansystemthatensuresconsumerprotectionsforall

borrowersandstrongaccountabilityatallstagesofrepayment.Tothatend,mytestimony

todaywill:

• Describethecurrentstateoftheeducationloanmarketandthesystemicfailuresthat

makeithardforborrowerstosucceedinrepaymentandaddtothegrowingstudent

debtcrisis;

• HighlightthefailuresofthecurrentDepartmentofEducationtoprotectstudent

borrowersandtheeffortsofstatesandadvocatestomitigatethem;and

• Providerecommendationsforstatutoryrequirementsandimprovementstoensureloan

servicersandprivatecollectionsagenciesmeetbasicconsumerprotectionstandards

andhelp,ratherthanprevent,studentspayofftheirloansandpursuetheintended

benefitsofhighereducation.

27BrookingsInstitute,Black-whitedisparityinstudentloandebtmorethantriplesaftergraduation,Oct.2016,

https://www.brookings.edu/research/black-white-disparity-in-student-loan-debt-more-than-triples-after-

graduation/28NationalAssociationofRealtors,StudentLoanDebtandHousingReport,Oct.2017,

https://www.nar.realtor/research-and-statistics/research-reports/student-loan-debt-and-housing-report.�

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II. Theimportantroleofstudentloanservicing

A. Backgroundonthecurrentsystem

Thoughthefederalgovernmentisthelenderforthevastmajorityofstudentloans—over

90%—ithasoutsourcedtheworkofmanagingtheseloanstoprivatestudentloanservicers.

ThesesameservicersalsohandlestudentloansmadebyprivatelenderssuchasDiscoverand

SallieMae.Currentlytherearenineprimarystudentloanservicers,withfourofthese,Navient,

FedLoanServicing,GreatLakesandNelnetdominatingthemarket.Moststudentsdonothave

achoiceofwhoservicestheirloans,andthereforecannot“votewiththeirfeet”iftheyare

unhappywiththeirservicerbyswitchingtoanother.

Oncestudentsgraduateorleaveschool,theybegintopayontheirfederalloansafterasix-

monthgraceperiod.Borrowersmayenrollinoneofseveralrepaymentplansdependingon

theircircumstances,rangingfromthestandardrepaymentplanwithlevelpaymentsover10

years,graduatedpaymentandextendedtermplans,andincome-drivenrepaymentoptions

thatlowerthemonthlypaymentbutextendthetermoveralongerperiodof20to30years.29

Whilereformstotheseoptionareneeded,30theimportanceofincome-drivenrepayment(IDR)

planscannotbeoverstated.Theirpurposeistoprovideborrowersaccesstoaffordableand

reasonablestudentloanpaymentsbytyingloanrepaymenttopost-collegeearnings(generally

10%ofdiscretionaryincome)andforgivinganybalanceontheloanafter20to25years,

dependingonthetypeofloan.EnrollmentinIDRhasbeenshowntosignificantlyreduce

delinquencyanddefault.AccordingtodatafromtheDepartmentofEducation,among

borrowersenrolledinthestandardten-yearrepaymentplan,18%arenotcurrentlymaking

paymentsontheirloans,whereasforborrowersenrolledinoneofthefiveincome-based

repaymentplans,thedelinquencyrateisjust8%.31

Thesedifferencesinstudentloandistressbetweenplansaresignificantintheirimpact.Defaults

cancauseborrowerstospiralintopovertybyharmingaborrower’screditscoreandmakingit

moredifficulttoaccessjobsandhousing,asemployersandlandlordsroutinelyconductcredit

checkswhenassessingapplicants.Insomestates,defaultedborrowerscouldlosetheirdrivers’

licensesandspecialtyworklicensesrelatedtotheiremployment.Defaultedborrowerscanhave

theirwagesgarnishedandtaxrefundsoffset.Forseniors,defaultingcouldmeangarnishment

oftheirSocialSecurityincome,reducingfundsavailableforbasiclivingneedssuchasfood,

shelter,andmedications.

29See:https://studentaid.ed.gov/sa/repay-loans/understand/plans

30CRLandothercivilrightsgroupsadvocateforstreamliningIDRoptionsdowntooneplanwithpaymentsbased

on8%ofdiscretionaryincomeandarepaymenttermofnotmorethan15years.See:CenterforResponsible

Lending,theNationalAssociationfortheAdvancementofColoredPeople,UnidosUS,theNationalUrbanLeague,

andtheLeadershipConferenceonCivilandHumanRights.2019.Quicksand:BorrowersofColor&theStudent

DebtCrisis.Durham,NC:TheCenterforResponsibleLending.Availableat

https://www.responsiblelending.org/research-publication/quicksand-borrowers-color-student-debt-crisis.31See:https://www.forbes.com/sites/prestoncooper2/2018/08/07/income-based-repayment-reduces-student-

loan-delinquency-but-dont-oversell-it/#3301fbc937d0

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Becausestudentloanservicerslinkfederalloanborrowersandtheirrepaymentoptions,they

playacrucialroleinhelpingstrugglingborrowersstayoutofdefaultandontracktorepaytheir

loans.Amongotherresponsibilities,theseservicersaretaskedwithcollectingstudentloan

payments,educatingborrowersaboutrepaymentplans,andprocessingapplicationsand

annualre-certificationsforincome-drivenrepaymentplans.Servicersareinapositiontoknow

ifaborrowerisindistresswhentheymakelatepayments,andwhenborrowerscontactthem

toaskabouttheiroptions.Savvyborrowersmayinformthemselvesoftheirrepaymentoptions,

butmostborrowersrelyontheirservicerstohelpthemnavigateaconfusingsystem.Despite

thefactthatservicersareinthebestpositiontoproactivelyhelpenrollborrowersinIDRand

preventdefault,borrowersarestillconfused–whichindicatesthatservicerscandomoreto

assiststudentborrowersinrepayment.32

B. Loanservicersarenothelpingborrowersmanagetheirstudentdebt

It’sincreasinglyclearthatservicershaveconsistentlyfailedtofulfilltheirobligations,engaging

inavarietyofabusivepracticesthathavelong-termnegativeconsequencesforborrowers.

Auditsandborrowercomplaintshaveshownthatservicersarefailingtofulfilltheseobligations

consistently,resultinginlong-termnegativeconsequencesforborrowerswhousuallydonot

haveachoiceinwhoisservicingtheirloans.Indeed,fromthetimetheConsumerFinancial

ProtectionBureau(CFPB)begantakingcomplaintsaboutstudentlendinginlate2011until

February2017,thereweretensofthousandsofcomplaintsaboutloanservicers.Otherfederal

agencieshavereportedonpoorservicingpracticesaswell.AnauditconductedbytheUSOffice

oftheInspectorGeneralfoundthat,from2015–2017,FederalStudentAidrarelyenforced

servicercompliancewiththeircontractsanddidnotfollowpolicywhenevaluatingservicer

performance.Thefailureofservicerstodotheirjobcontributestothegrowingdebtburdenas

theirpracticesresultinunnecessarilylongerandlargerdebtloads.

DocumentedcomplaintsbyborrowersreceivedbytheCFPBreflectservicersmisapplying

payments,reportingincorrectinformationtocreditbureaus,givingincorrectinformationabout

PublicServiceLoanForgivenessandplacingborrowersinpausepaymentplans,suchas

defermentandforbearance,thatovertimecausestudent’sdebttoballoonandleadto

delinquenciesanddefaults.33Studentloanservicersarenotoriousforputtingborrowersinto

defermentorforbearancewhenincome-drivenrepaymentplansaremoresuitableandless

costlyforborrowers.Infact,theCFPBinitiatedalawsuitinJanuary2017againstNavient,then

thenation’slargestservicerofstudentloans,forcheatingandmistreatingstudentloan

32Inaseriesoffocusgroupswithstrugglingstudentloanborrowers,theNewAmericaFoundationfoundthatfew

borrowershadenrolledinIDR.ThosewhowereunfamiliarwithIDRwere“confused,perplexed,andoften

suspicious”oftheoption.Theresearchersfoundthat“[t]herewasagenerallackofawarenessaboutincome-

basedrepaymentplans,andeventhosewhowereusingthemseemedtobeconfusedaboutplandetails.”See:

https://www.newamerica.org/education-policy/edcentral/studentloansaredifferent/33See:https://www.consumerfinance.gov/about-us/newsroom/cfpb-monthly-snapshot-spotlights-student-loan-

complaints/

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borrowers,includingroutinelyfailingtoputmanyoftheirmillionsofborrowersintothe

income-drivenrepaymentplanstheywereentitledtobylaw.Thesepracticesledtoupto$4

billioninextrainterestandfeesbeingaddedtotheprincipalbalancesofalreadyindebted

studentloanborrowers.34

Unfairandsubstandardservicingpracticesalsoopenthedoortoscammerspurportingto

adviseborrowersabouttheiroptionsandmisleadthemintothinkingtheyneedtopaylarge

upfrontfeestoenrollinfreeincome-drivenrepaymentplansortoconsolidatetheirloans.State

attorneysgeneralandtheCFPBhavesuedfraudsterstakingadvantageofborrowers–butthe

practicewillcontinuetoflourishaslongasstudentloanservicersfailtoadequately

communicatewithandassistborrowers.

Recently,concernshavealsobeenraisedthatservicersareprovidingaccesstoaffordable

income-drivenrepaymentinanunequalway,withadisproportionateimpactbyraceandsex.35

Borrowersofcolorarealsomorelikelythantheirwhitepeerstoexperienceservicer

misrepresentation.First,historicalpracticespreventinginter-generationalwealthbuilding

meanthatborrowersofcolorgraduatewithmorestudentloandebt.Second,theover-

representationofstudentsofcolorinthestudentbodiesofpredatory,for-profitschoolsand

ongoingworkplacediscriminationmeanthatborrowersofcoloraremorelikelytostrugglewith

repaymentofthoseloans.Servicermisrepresentationsincreasethecostsofthoseloansand

erectyetanotherbarriertowealthbuilding,perpetuatingthecycle.

C. Problemswithprivatecollectionagencies

Currently,theDepartmentofEducationreassignsloansthatare365dayspastduefrom

studentloanservicerstoprivatecollectionagencies(federalloansaretechnicallyindefaultat

270dayspastdue).36Likeallcollectionagencies,thepriorityistorecovermoneyfrom

strugglingstudentloanborrowersratherthanprovidesustainablesolutionsforloan

management.Additionally,studentloandebtcollectionhasbeenshowntobeveryexpensive

relativetotheamountofrecoveries,withtheCFPBestimatingthattheseagenciesreceive$40

incompensationforevery$1recoveredfromsomeborrowerswhoseloansareplacedback

intorepaymentthrougharehabilitationprogram.37TheCenterforAmericanProgressstudied

studentdebtcollectionsin2017andfoundthatthefederalgovernmentspentabout$700

millionforfewerthan7millionborrowersindefault,almostthesameamountitspentonloan

servicingformorethan33millionborrowersnotindefault.38

34See:https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-

navient-failing-borrowers-every-stage-repayment/35See:https://www.responsiblelending.org/research-publication/protect-student-loan-borrowers-discrimination

36See:https://studentaid.ed.gov/sa/repay-loans/default/collections

37See:https://beta.washingtonpost.com/education/2019/02/28/billions-dollars-defaulted-student-loans-are-

going-uncollected-lawsuit-says/38Ibid.

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Studentdebtcollectorshavebeenshowntorepeatedlyviolatedebtcollectionandother

consumerprotectionlawsasreflectedinnumerousborrowercomplaintsaboutsuchabuses.39

Theseabusesincludecallingconsumersmultipletimesperdayevenafterbeingaskedtostop,

callingearlyinthemorningorlateatnight,callingconsumers’workplacesdespiteknowingthat

theemployersprohibitedsuchcalls,leavingphonemessagesthatdisclosedthedebtor’sname

andtheexistenceofthedebttothirdparties,andcontinuingcollectioneffortswithout

verifyingthedebt,evenafterconsumerssaidtheydidnotoweit.40

TheDepartmentofEducationhasannounceditsintenttofolddebtcollectiondutiesinto

studentloanservicingunderNextGenerationFinancialServicesEnvironment,orNextGen,a

broadoverhaulofhowstudentloanservicingandcollectionarehandledandcontracted.It

remainstobeseenwhetherthisoverhaulwillreducedefaultsandimproveservicefor

strugglingborrowers.

D. PrivateeducationloansIn2015–2016,5%ofundergraduatesutilizedprivateeducationloanstofundtheir

education.41Mostofthisgroupdidnotmaximizeavailablefederalaid.Whiletheuseofnon-

federalstudentdebtbegantodecreaseaftertheGreatRecession,theloanvolumeisnow

trendingupwards.TheCFPBhasidentifiedtroublingpracticesinprivatestudentloanservicing

andorigination,whichcanmaketheseloansveryriskyforborrowers.Privatestudentloans

mayhavehighinterestrates,andborrowershavenoaccesstoreliefopportunitiesofferedon

federalstudentloans,suchasincome-basedrepaymentprograms.Duringtherunuptothe

financialcrisis,privatestudentloans,likemortgages,weremadeusingquestionable

underwriting,trappingborrowersinunaffordabledebt.For-profitcolleges,incooperationwith

financialinstitutions,haveatrackrecordofmakingharmfulprivateloanstotheirstudents.

CongressinstructedtheCFPBtopayspecialattentiontoprivateloanspreciselybecausethey

haveaproblematichistoryofcausinglong-termfinancialdistresstoborrowers.Intheearly

2000s,privatestudentloansfollowedapathsimilartomortgagelending.Securitizationledto

mushroominggrowthofquestionablyunderwritten,variable-andhigh-interest-rateloans,

whichsufferedhighdefaultratesaftertheeconomycrashed.Manyborrowerstodaysuffer

fromtheloansmadebeforethemarketcorrected.

Recentdatadoessuggestthatsomelendershaveimprovedtheirprivatestudentloan

underwritingstandards,butproblemsremain.Federalstudentloansoffergreaterconsumer

protectionsthanprivateloans,yetmanyofthestudentswhotakeoutprivateloansdonotfirst

exhausttheirfederaloptions.Thismeansthattheyareunabletoaccesssuchoptionsas

39SeeDeanneLooninandPersisYu,NationalConsumerLawCenter,PoundingStudentLoanBorrowers:TheHeavy

CostsoftheGovernment’sPartnershipwithDebtCollectionAgencies(Sept.2014),availableat

http://www.nclc.org/images/pdf/pr-reports/report-sl-debt-collectors.pdf.40Ibid.

41See:https://ticas.org/wp-content/uploads/2019/08/pl_facts_trends.pdf

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guaranteedincome-basedrepaymentandloanforgivenessplans,assistanceforgettingoutof

defaultanddischargesfordisabilityordeath.Sincebothfederalandprivatestudentloansare

muchmoredifficulttodischargeinbankruptcythanotherkindsofdebt,theseprotectionsare

crucial.

Collegescanandshouldplayaroleinhelpingstudentsaccuratelycompareprivateloansto

federalloans.Strongerschoolcertificationprocesses,whichensurethatstudentsreceivefull

informationabouttheirfederalandprivateoptions,wouldrequirecollegesandlendersto

coordinatewithoneanothertohelpstudentschoosewisely.

Privateloanstakenoutbystudentsatfor-profitcollegesalsodeserveparticularattention.As

indicatedbytheCFPB'srecentlawsuitsagainstCorinthianCollegesandITTTech,theprivate

studentloanprogramscreatedbyfor-profitcollegesinconcertwithlendersandotherthird

partiesafterthecreditmarketconstrictedwereoftenbasedondeceptionandotherillegal

practices.42Similarprogramsmaystillbemakingloanswithveryhighdefaultrates.

III. Thecurrentadministrationhasrolledbackimportantconsumerprotectionsforstudentloanborrowers

DuringtheObamaadministration,contractnegotiatorsforstudentloanservicerswere

instructedtoincludeimportantconsumerprotectionsandincentivesinthecontracts.43

Unfortunately,theDepartmentofEducation’sactionssinceSecretaryDeVostookofficeinearly

2017havenotaddressedtheexistingchallengesand,instead,haveexacerbatedadynamicthat

alreadyfavoredprivateservicingcompaniesoverstudentloanborrowers.Despitethecrisis

thatstudentloandebtpresentsto44millionborrowers,theircommunities,andoureconomy,

thecurrentDepartmentofEducationrefusestoadequatelyholdservicersaccountable.The

DepartmentofEducation’sactionscanbesortedintothreeprimarycategories:(1)revoking

existingpoliciesthatweremeanttoprotectstudentloanborrowers,(2)actingtothebenefitof

privatecompaniesoverstudentsandtaxpayers,and(3)attemptingtopreventfederalandstate

enforcement.

A. TheDepartmentofEducationhasrevokedseveralpoliciesandguidancesputinplacetoprotectstudentloanborrowersfromservicingabuses.

In2016,thenUnderSecretaryofEducationTedMitchellrolledoutasetofpolicydirectives,

calledthe“StudentAidBillofRights,”thatinstructedDepartmentofEducationemployees

negotiatingservicercontractstoincludeimportantconsumerprotectionsandincentivesinthe

42https://www.responsiblelending.org/media/new-cfpb-report-finds-troubling-practices-private-loan-servicing-

and-origination43Mitchell,Ted.2016.PolicyDirectiononFederalStudentLoanServicing.U.S.DepartmentofEducation.Available

athttps://www.consumerfinance.gov/documents/2313/20160620_US-Department-of-Education_loan-servicing-

policymemo.pdf.

10

newcontracts.44InoneofherfirstactsasSecretaryofEducation,BetsyDeVosreversedthe

guidelinesforthenewcontracts.45Thecontractnegotiatorswouldnolongerbeaskedtohold

studentloanservicerstohighstandardsofconsumerprotection.InMarch2017,theDeVos

Departmentrevokeda2015guidancethatbarredguarantyagenciesfromchargingcollection

feestoborrowerswhodefaultbutquicklyenterrepaymentplans.46Thedecisiontorevokethis

guidancecould,infact,costborrowersmillions.47A2017settlementreturned$23millionto

borrowersinacaseregardingcollectionfeesthatwerechargedafterborrowershaddefaulted

buthadquicklyenteredrepaymentplans.48

TheEducationDepartmenthasalsoignoredseveralcallstostandardizeservicingguidelinesand

holdservicersaccountablefornoncompliance,eventhoughthesecallscamefromwithinthe

TrumpAdministrationandevenwithintheDepartmentitself.Forinstance,theDepartmentof

EducationhasnotaddressedanAugust2018reportfromtheTreasuryDepartmentthat

recommendedstandardizedguidelinesforfederalstudentloanservicers.51TheDepartmentof

Education,similarly,hasnotadequatelyaddressedaFebruary2019internalauditthatraised

concernsrelatedtothehighriskofservicernoncomplianceandcalledformoreeffective

mitigationbyFSA.52ThesameFebruary2019auditfoundthatFSArarelyheldservicers

accountablefornoncompliance,andinsteadneglectedtoeventrackerrorsaslongasservicers

fixedtheminindividualinstances.53Theauditfurtherreportedthattheagency“reliedonthe

memoriesoftheemployeesresponsiblefortheoversightactivitiestorecognizerecurring

instancesofnoncompliance,”andthattheDepartmentrarelyheldservicersaccountablefor

theirmistakes.54ThesedetailsindicatethattheDepartmentofEducationisneithercommitted

toholdingservicersaccountablefortheirmistakesonanongoingbasis,noraretheycommitted

torewardingservicerswithhistoriesofadequatecompliance.

44Pressrelease:EducationDepartmenttoImplementImprovedCustomerServiceandEnhancedProtectionsfor

StudentLoanBorrowers,DeptofEd.(July20,2016)retrieved:https://www.ed.gov/news/press-

releases/education-department-implement-improved-customer-service-and-enhanced-protections-student-loan-

borrowers45Pressrelease:MemorandumfromSecretaryofEducationBetsyDeVostoFSAChiefOperatingOfficerJames

RuncieRegardingStudentLoanServicerRecompete,Dept.ofEd.(April11,2017)Retrieved:

https://www.ed.gov/news/press-releases/memorandum-secretary-education-betsy-devos-fsa-chief-operating-

officer-james-runcie-regarding-student-loan-servicer-recompete46Availableathttps://www.insidehighered.com/quicktakes/2017/03/17/us-rescinds-guidance-collection-fees.

47Availableathttps://www.insidehighered.com/quicktakes/2017/03/21/usa-funds-ties-education-department-

adviser;Availableathttps://ifap.ed.gov/dpcletters/GEN1702.html.48Availableathttps://www.insidehighered.com/quicktakes/2017/01/31/usa-funds-settle-suit-loan-collection-fees.

51Availableathttps://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-

Opportunities---Nonbank-Financi....pdf;Availableathttps://www.nasfaa.org/news-

item/15846/Treasury_Department_Pushes_for_Federal_Loan_Servicing_Standards.52Availableathttps://www2.ed.gov/about/offices/list/oig/auditreports/fy2019/a05q0008.pdf.

53Availableathttps://www.nytimes.com/2019/02/14/business/student-loans-education-department.html.

54Ibid.

11

B. TheDepartmentofEducationhastakenmanyopportunitiestoenrichprivatebusinessesattheexpenseofstudentloanborrowers

EvidenceshowsthattheDepartmentofEducationhasrepeatedlyactedinwaysthat

improperlybenefiteducationloanservicingcompanies.Asmentionedpreviously,theCFPB

suedNavientinearly2017forwidespreadservicingmistakesthatcostborrowersalmost$4

billioninunpaidinterestduetoinappropriatesteeringofover1.5millionborrowersinto

multipleforbearancesinsteadofincomedrivenrepaymentoveraperiodof5years.Rather

thanprovidingcriticaldocumentsrelatedtothecasetotheanotherfederalgovernmentactor,

theDepartmentprovidedthemtoNavientandwithheldthemfromtheCFPB.55

InanotherinstancethatsuggeststhattheDepartmentofEducationwasactinginappropriately

inordertoprotectloanservicersattheexpenseofstudentloanborrowers,theDepartmentof

EducationcompletedaninternalauditofNavientinMay2017butdeclinedtoreleaseittothe

publicuntilNovember2018,welloverayearlater.Thestatesthathadactivelawsuitsagainst

Navientdidnotreceivecopiesoftheaudituntilitwasreleasedpublicly,despitethefactthat

theauditwasrelevanttotheircasesagainstNavientforbreakingstateandfederalconsumer

protectionlaws.Beforetheauditwasmadepublic,theDepartmentofEducationmaintained

thatNavient“wasnotimproperlysteeringborrowersintoforbearance.”However,accordingto

theAssociatedPress,theauditappearedto“supportfederalandstatelawsuitsthataccuse

Navientofboostingitsprofitsbysteeringsomeborrowersintohigh-costplanswithout

discussingoptionsthatwouldhavebeenlesscostlyinthelongrun.”56Aftertheauditwas

releasedpublicly,Navientcitedtheirservicingcontractandclaimedthattheywerenotaware

“ofanyrequirementthatborrowersreceivealloftheirrepaymentoptions…oneachandevery

call.”57

Insomecases,possibleconflictsofinteresthavealsoraisedredflagsabouttheDepartmentof

Education’sconductvisavisprivatecompanies.InanotherearlyactionbytheDeVos

DepartmentofEducation(August2017),datasharingagreements(MOUs)withtheCFPBwere

terminated,reducingoversightofprivateloanservicers.58TheseMOUsencompassed

informationsharing,acriticalelementofCFPBenforcementefforts,andthusweakenedthe

possibilityoffederaloversightofbothstudentloanservicersandfor-profitcolleges.Inthis

case,thedaybeforetheMOUtermination,morethan872,000sharesofNavientwere

purchasedand,afterthetermination,thestockpricerose.59

55Availableathttps://www.americanoversight.org/nsldn-and-american-oversight-sue-education-department-for-

navient-emails-and-records.56Availableathttps://www.apnews.com/eeebf667026a420c9893220215e542cb.

57Ibid.

58Availableat

https://www.insidearm.com/documents/673/Letter_from_ED_to_CFPB_terminating_MOUs_between_ED_and_CF

PB.pdf.59TheAFL-CIOcalledontheSecuritiesandExchangeCommission(SEC)toinvestigatethetrades“tofindout

whetherthestockpurchasesweredoneillegally,inviolationofinsidertradinglawsortheSTOCKAct,a2012law

thatmakesclearitisillegalformembersofCongressortheirstafftopersonallyprofitonprivateinformation

12

In2014,theObamaadministrationbeganaprocesstosimplifyandstreamlinethestudentloan

repaymentandcollectionprocess.Becausesimplificationwouldrequireanewservicingsystem,

NextGen—asinglewebsiteforallfederalstudentloanborrowers,itwasexpectedtorequire

newanddifferentservicingcontractsthatcouldincludeborrowerprotectionsandbetter

customerservicefeatures.Basedonproblemswithsingleservicersinthepast,bipartisan

electedofficialsandindustrygroupsagreedthatcontractsshouldbeawardedtomultipleloan

servicersonthebasisofpastperformance.61Inthespringof2017,FSAamendedtheplanand

weakenedborrowerprotections,customerservicefeatures,andevencalledforawardingall

servicingcontractstooneprivateservicer.62Afterbipartisanopposition,FSAwithdrewtheplan

entirely,andre-releasedanewonethatincludesasingleonlineplatform,returnstotheideaof

multipleprivateservicers,butdoesnotincludeaccountabilitymeasures.63Infact,thenewplan

proposeshiringaprivatecontractortomanagecomplianceandoversightinsteadofrelyingon

federalgovernmentoversightagenciessuchastheCFPB.64

RelatedchangesintheprocurementdocumentssuggestthattheDepartmentofEducationmay

betippingthescalesinfavorofparticularcompanies.Inoneexample,theDepartmentof

Educationdeclaredthattheywouldmaketheircontractorselectionsbasedonfiveyearsof

complianceinsteadofseven(thenumbercitedinObama-eraprocurementdocuments)inJune

2019,whichmanyconsumerrightsgroupsfeltwasamovemeantto“tipthescalesfor

Navient,”giventhatthenewtimetablewouldmakealargelawenforcementactionagainst

NavientbytheCFPBtoooldtocountintheprocurementprocess.65

C. TheDepartmentofEducationhasattemptedtopreventfederalandstateenforcement

ThroughoutSecretaryDeVos’tenure,theDepartmenthasundertakenseveralactionsaimedat

curtailingfederalandstateentities’abilitiestoregulateandsuperviseeducationloanservicers

andprotectconsumers.

Atthefederallevel,theDepartmentofEducationhasrefusedtoshareinformationwiththe

CFPB.Ashasbeenmentioned,theDepartmentterminatedtwoMOUswiththeCFPBthat

encompassedinformationsharingandfederaloversightofstudentloancompaniesandfor-

obtainedintheirwork.”59Availableathttps://www.reuters.com/article/us-usa-sec-navient/afl-cio-wants-sec-to-

probe-trading-in-shares-of-loan-servicer-navient-idUSKBN1CF2UV.61Availableathttps://www.americanprogress.org/issues/education-

postsecondary/news/2017/06/14/434403/sides-agree-single-servicer-bad-move/;Availableat

https://slate.com/business/2017/04/betsy-devos-is-wasting-no-time-screwing-over-student-borrowers.html.62Availableathttps://www.americanprogress.org/issues/education-

postsecondary/news/2018/01/08/444641/education-department-proposes-major-changes-student-aid/.63Ibid.

64Ibid.

65Availableathttps://www.politico.com/newsletters/morning-education/2019/06/18/trump-backs-west-virginia-

governor-at-odds-with-devos-448037;Availableathttps://protectborrowers.org/navient-free-pass/.

13

profitcollegesinAugust2017.68InresponsetoquestionsfromSenatorWarren,Director

KraningeroftheCFPBwroteinMay2019thattheDepartmentofEducationwasblockingthe

CFPB’seffortstooverseestudentloanservicers.69Kraininger,aTrumpAdministration

appointee,wrotethat"SinceDecember2017,studentloanservicershavedeclinedtoproduce

informationrequestedbytheBureauforsupervisoryexaminations"relatedtofederalstudent

loans.70

Stateactorsarealsoresponsibleforholdingstudentloanservicersaccountableforunfair,

deceptive,andabusivepractices.Thus,severalstateattorneysgeneralhavepursuedlawsuits

againststudentloanservicersforviolationsofstateandfederalconsumerprotectionlaws.One

lawsuitfromMassachusettsAGMauraHealey,allegedthatPHEAA,thelargeststudentloan

servicer,overchargedstudentborrowersandpreventedthemfrommakingqualifiedpayments,

underminingthePublicServiceLoanForgivenessandTeacherEducationAssistanceforCollege

andHigherEducationGrantprograms.71InJanuary2018,EDsidedwithPHEAA,arguingthatthe

StateofMassachusetts’claimswerepreempted.72Later,inMarch,theDepartmentof

Educationattemptedtodeclarethatfederallawspreemptstatelawsgoverningstudentloan

servicers.73

IV. Despitefederalrollbacks,manystateshaveenhancedprotectionsforstudentloanborrowers

Therecentrollbacksatthefederallevelemphasizetheimportanceofsimultaneouseffortsat

thestateleveltoholdservicersaccountableandenforcebasicconsumerprotections.With

theirtraditionalpolicepowers,stateshavetheauthoritytoensureservicersarenotengagingin

unfairandabusivepractices.Justasmanystateshadlongoverseendebtcollectors,recognizing

theimpactdebtcollectionpracticescanhaveontheirresidents,statesrespondedto

widespreadconcernsaboutstudentloandebtandpoorservicingpracticesbyimplementinga

regulatoryframeworkthatwouldallowthemtoensuretheirborrowersweretreatedfairlyby

theirservicers.

In2015,Connecticutbecamethefirstlegislaturetopassthe“StudentLoanBillofRights,”abill

thatrequiredstudentloanservicerstobelicensedbythestate,createdanOfficeofthe

StudentLoanOmbudsman,andprohibitedstudentloanservicersfromengaginginactionsthat

68ThepublicannouncementoccurredinastatementfromRepresentativeVirginiaFoxx(R-NC),whowas,atthe

time,theheadoftheHouseofRepresentativesEducationandWorkforceCommittee.69Availableathttps://www.npr.org/2019/05/16/723568597/cfpb-chief-says-education-department-is-blocking-

student-loan-oversight.70Availableathttps://www.npr.org/documents/2019/may/042319-letter.pdf.

71Availableathttps://www.bostonglobe.com/metro/2018/01/10/feds-say-healey-can-sue-student-loan-

servicer/AgBmFKp0rYySyH92J24hUM/story.html.72Availableathttps://www.nasfaa.org/news-

item/14616/Federal_Guidance_Escalates_Struggle_Between_ED_States_Over_Loan_Servicing_Oversight.73Since,multiplecourtshaverejectedthisassertion.Forexample,inJune2019,afederalappealscourt

unanimouslyheldthatstudentloanservicerscanbesuedunderstatelaw,despiteDeVos'sassertionthattheyare

onlyheldtofederallaw.

14

wouldviolatecertainbedrockprinciplesofconsumerprotection.Asthebill’sauthorand

sponsor,RepresentativeMattLesser,notedatthetime,theStudentLoanBillofRights

representedashiftfromthinkingaboutstudentloansasanissueofhighereducation“toa

systemicproblemforthefinancialsectoroftheeconomy.”Otherstatestooknotice,and

California77,Illinois

78,andWashingtonDC

79followedtoenactnewlawsin2016.

Earlyin2017,theConsumerFinancialProtectionBureau,theIllinoisAttorneyGeneral,and

WashingtonAttorneyGeneralannouncedalawsuitagainstNavientCorporation,atthetimethe

largeststudentloanservicerinthecountry.80Thelawsuitsallegedthattheservicersroutinely

underminedborrowersbymisapplyingpayments,reportingincorrectinformationtocredit

bureaus,andplacingborrowersinplansthatcausedtheirdebttoballoon.TheBureau’s

complaintconfirmedwhatmanystudentloanborrowershadexperienced–loanbalances

increasingafterbeingplacedintoforbearanceratherthananincomedrivenrepaymentplan,

paymentsthatweremisapplied,andevendisabledveteranswhoweredeniedcreditaftertheir

studentloanservicingcompanyfailedtocorrectlyreportthedischargeoftheirloanstothe

creditbureaus.

Facedwithconstituentsstrugglingtogaintheirfinancialfootingastheydealtwiththeirstudent

loandebt,morestatesbecameinterestedinexertingtheirtraditionalpolicepowerstoprotect

studentloanborrowers.Predictably,however,theindustrygroupsthatlobbyonbehalfof

servicersandstateguarantyagenciessteppeduptheireffortstoprotectcorporateinterests.As

mentionedabove,inlateFebruary2018,aftermonthsoflobbyingbystudentloanservicers,

includingtheCEOofNavient,theDeVosAdministrationreleasedaNoticeofInterpretation,

outliningtheDepartment’sbeliefthatstatestudentloanservicinglawsarepre-emptedby

federallaw.81ThedocumentoutlinestheDepartment’sbeliefthatfederallawcompletely

preemptsallstatelawsthatimpactfederalloanservicing–notonlystatelicensingregimesbut

evenprohibitingservicersfrommisleadingborrowersandassertinggeneralprinciplesfoundin

eachstate’slawsprohibitingcompaniesfromengaginginunfairanddeceptiveactsand

practices.82Whilethememohasbeengivenvirtuallynolegalweightandfoundtobe

unpersuasivebymultiplecourts,ithadtheeffectofclearlyestablishingtheDepartmentof

Educationasafoeofstudentloanservicingreform.

77Studentloanservicers:licensingandregulation:StudentLoanServicingAct.

https://leginfo.legislature.ca.gov/faces/billCompareClient.xhtml?bill_id=201520160AB225178StudentLoanServicingRightsAct:http://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=3830&ChapterID=18

79StudentLoanOmbudsmanEstablishmentandServicingRegulationAmendmentActof2016:

http://lims.dccouncil.us/Download/36411/B21-0877-SignedAct.pdf80Douglas-Gabriel,Danielle“StudentLoanServicerNavientHitWithThreeGovernmentLawSuitsinOneDay”

WashingtonPost(Jan.18,2017)https://www.washingtonpost.com/news/grade-point/wp/2017/01/18/student-

loan-servicer-navient-hit-with-three-government-lawsuits-in-one-day/81FederalRegister“FederalPreemptionandStateRegulationoftheDepartmentofEducation'sFederalStudent

LoanProgramsandFederalStudentLoanServicers”(March12,2018)

https://www.federalregister.gov/documents/2018/03/12/2018-04924/federal-preemption-and-state-regulation-

of-the-department-of-educations-federal-student-loan82Id.

15

DespitetheattemptbytheDepartmentandservicerstothwartstateinterests,Washingtonand

MarylandstillpassedsomeversionoftheStudentLoanBillofRightsduringthe2018legislative

season,andthepowerofstatestoregulatetheabusivepracticesofstudentloanservicers

remainedclear.Infact,abi-partisangroupof30stateattorneysgeneralaffirmedtherightof

thestatestooverseeandenforcestudentloanlaws,signingaletterstating,inpart:

Given the states’ experience and history in protecting their residents from all

manneroffraudulentandunfairconduct,theyplayanessentialroleinconsumer

protectioninstudentloansandeducation.Statesareuniquelysituatedtohearof,

understand,confront,and,ultimately,resolvetheabusestheirresidentsfacein

theconsumermarketplace.Abuses inconnectionwithschoolsorstudent loans

arenodifferent.Aswithotherissuesfacingtheircitizens,stateregulatorsbringa

specialized focus to, and appreciation for, the daily challenges experienced by

students and borrowers. Far from interfering with the Department and other

federalefforts to rein inabuses, therecordoverwhelminglydemonstrates that

statelawsandstateenforcementcomplementandamplifythisimportantwork.83

ApolldonebytheCenterforResponsibleLendingandtheMaineCenterforEconomicPolicyin

October2018revealedanothercauseforconcernforstateofficials–studentloanborrowers

whomoveoutofstatetofindjobsthatpayenoughtohelprepaytheirdebts.InMaine,more

than40%ofthosepolledknewsomeonewhohadleftthestateinordertopayfortheirstudent

loandebt.84

Thepollalsorevealedthedeeprippleeffectsofstudentdebt.Themajorityofstudentloan

borrowerswhowerepolledreportedthattheyhadstruggledwithpayments,reducedthe

amounttheyweresavingforretirement,andunabletopurchaseacar.Morethan30%of

respondentsreportedthattheyhadputoffpayingrentortheirmortgagetopayastudentloan,

failedtopayanotherbill,orevenhavebeenunabletoaffordfoodorclothing.

AsimilarpollfromMaryland,whichCenterforResponsibleLendingcommissionedwiththe

MarylandConsumerRightsCoalition,foundthatborrowersoverwhelmingly(85%)support

licensingandoversightofstudentloanservicersintheirstate.85

Inthe2019session,statesworkedtostrengthenthebillsthatwouldbefiledacrossthe

country,expandingontheprinciplesfirstcreatedbythepassageoftheConnecticutbillin2015.

ThenewversionsoftheStudentLoanBillofRightsnotonlyrequiredstudentloanservicersto

belicensedbythestateandenumeratedcertainprohibitedacts,butalsocreatedaffirmative

dutiesforservicersand,importantly,includedaprivaterightofaction,enablingborrowersto

83SignOnLettertoCongressreStudentLoanPreemption,Mar.15,2018,

https://nj.gov/oag/newsreleases18/2018-0315_AG-Letter-to-Congress-Opposing-Student-Loan-Preemption.pdf84https://www.mecep.org/new-poll-mainers-struggle-to-pay-down-student-debt-say-loan-servicers-are-making-

matters-worse/85https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/gonzales-poll-student-

loan-debt-apr2018.pdf

16

enforcethesenewservicinglaws.NewYork,86Colorado,

87Maine,

88RhodeIsland,

89andNew

Jersey90passedthesecomprehensivebills,whileMarylandpassedanupdatetotheir2018bill,

addingprohibitedacts,affirmativeduties,andaprivaterightofaction.AndNevadatookafirst

steptowardsaStudentLoanBillofRights,passingabilltoestablishtheOfficeoftheStudent

LoanOmbudsman.

V. Improvementstothestudentloanservicingsystemareessential

A. Recentlitigationeffortsillustratetheextentoftheproblem

Incourtsacrossthecountry,casesfiledbystudentborrowersandstateAttorneysGeneral

illustrateapatternofpoorservicingpracticesthatpreventborrowersfrommakinginformed

decisionsaboutrepayingtheirloansortakingadvantageofprogramsenactedbyCongress.

Fundamentally,thesystemisbroken,withservicersseeminglyonlyconcernedaboutreducing

costsandshorteningcustomerservicecalls.Farfromengaginginrobustoversight,the

DepartmentofEducationhassoughttofrustrateattemptstoprotectstudentborrowers.

Since2017,theConsumerFinancialProtectionBureauandtheStatesofCalifornia,Illinois,

Massachusetts,Mississippi,Pennsylvania,andWashingtonhavebroughtactionsagainst

studentloanservicers.Thecomplaintsprovidealitanyofabusiveservicingpractices.91Private

litigantshavealsosoughttoenforcestateconsumerprotectionlawsagainstservicers.92The

claimsrangefrommishandlingprocessingrelatedtothePSLFprogram,mishandling

recertificationforTEACHgrants,tosteeringborrowersintoforbearance,providinginaccurate

information,andengaginginabusivecollectionpractices.

Asnoted,theDepartmentofEducationhasrespondedtothislitigationallegingserious

servicingmisconductbyseekingtoshieldtheservicersfromstatelaw(whilealsofailingto

enforceitsownrulesagainstservicers).However,severalcourtshaverightlydismissedthe

Department’sMarch2018noticepurportingtoclaimthattheHigherEducationActbroadly

preemptsstatelaw.93Unfortunately,theDepartment’smessagehasempoweredservicersto

claimpreemption,tyingupstateandprivatelitigation.Ifservicerscanshieldthemselvesfrom

statelaw,withtheaidofafederalagencythatcannotanddoesnotexerciseadequate

86NYBankingLaw,Article14-A:

87ColoradoStudentLoanServicersAct:https://leg.colorado.gov/sites/default/files/2019a_002_signed.pdf

88TheStudentLoanBillofRights:https://legislature.maine.gov/legis/bills/bills_129th/billtexts/SP028501.asp

89StudentLoanBillofRightsAct:http://webserver.rilin.state.ri.us/BillText/BillText19/HouseText19/H5936A.pdf

90AnactconcerningtheappointmentofaStudentLoanOmbudsman,regulatingstudentloanservicers,amending

P.L.2005,c.1991,andsupplementingTitle17oftheRevisedStatutes:

https://www.njleg.state.nj.us/2018/Bills/PL19/200_.PDF91Seee.g.,Illinoisv.NavientCorp.,17-CH-761,IllinoisCircuitCt.CookCounty;Washingtonv.NavientCorp.,No.

17-2-01115-1SEA,Wa.Sup.Ct.;CommonwealthofMassachusettsv.PennsylvaniaHigherEducationAssistance

Agency,MassachusettsSup.Ct.,SuffolkCounty,CaseNo.1784CV02682;Pennsylvaniav.NavientCorp.,No.17-cv-

1814,M.D.PA;ConsumerFinancialProtectionBureauv.Navient,No.17-cv-00101,M.D.PA.92Seee.g.,Nelsonv.GreatLakes,Hylandv.Navient,Lawsonv.GreatLakes.

93Seee.g.,Nelsonv.GreatLakes,No.18-1531,7thCir.,June27,2019),SLSAv.D.C.,Dist.Ct.ofD.C.(Dec.2018).

17

oversight,thenstudentborrowerswillhavenowheretoturnandwillloseoutontheprograms

createdtoeaserepaymentandtorewardpublicservice.

B. Theconsequencesofpoorservicinghavealreadybeenillustratedbytheforeclosurecrisis

AkeylessonfromtheGreatRecessionisthatskillfulloanservicingcouldhavedramatically

mitigatedtheimpactofforeclosuresandtheirspiralingspillovereffectsonneighborhoodsand

theeconomy.Duringtheforeclosurecrisis,policymakersandserviceproviderstofamilies

facingforeclosurerepeatedlycalledforcorrectionstoineffectiveandabusiveservicing.Many

ofthesameproblemsweseetodayinstudentloanservicingwereraisedinthemortgage

context—homeownershadtroublereachingtheirservicerbyphone,andcontactsdidnothave

theauthorityorabilitytohelpthehomeowners.Acustomermightcallandreachadifferent

contacteachtime.Servicersmisappliedpayments,failedtofollowprocessesrequiredaround

noticefordebtors,andfailedtofollowinvestors’lossmitigationrequirements.Servicersalso

lackedcapacity,adequatemanagement,andsufficientqualitycontrol.Atthetimeofthe

foreclosurecrisis,itwaswidelyacknowledgedthatbetterservicingcouldhaveconverted

distressedmortgagesintostableloansinwhichthemortgageedidpaysomething,generating

revenueforinvestors,andcontributingtoastronger,stableneighborhood.Instead,aslarger

numbersofmortgageesfellintodistress,servicerswereoverwhelmedandunabletokeepup

withgrowingdefaults.Worse,asonefamilyinaneighborhoodfacedforeclosure,the

foreclosureaffectedneighboringpropertyvalues,eventuallydepressingthewholeeconomy

andforeclosuresgrew.

Twokeylessonsemergedfromthemortgagecrisisthatshouldnowbeappliedtoreforming

studentloanservicing.First,servicerincentives,funding,andaccountabilitymatteragreatdeal.

Servicerswillfocusoncost-reductionandfollowincentivestopushborrowerstosolutionsthat

suittheservicer.Ifwewantservicerstoworkwithborrowersonincome-drivenrepaymentor

otherpaymentsolutions,andtofollowbasicproceduresforapplyingpayments,providing

information,ordocumentingefforts,incentivesandaccountabilitymustdrivethoseefforts.

Second,overtime,theforeclosurecrisisandensuingresponseshowedthatitiscriticalto

minimizethecomplexityofany“application”or“certification”processthathelpsdistressed

borrowersmodifytheirloan.Themortgagemarkethasmovedtosimplifiedprocessesthat

automaticallymodifyloansfordistressedborrowers,assumingthataffordablereduced

paymentsbenefitboththeborrowerandinvestorsmorethanthehighcostof

foreclosure/pursuingdefault.

Applyingtheselessonstostudentloanservicingisactuallymuchsimplerthanithasbeeninthe

mortgageservicingcontext.Withmortgages,loanshadbeenpooledandsecuritized.Investors

inthemortgagepoolshadconflictinginterests,evenmoreinthevastmajorityofcaseswhere

mortgageeshadmultipleloans,heldinseparatepools,andthefirstlienholderhadaninterest

atoddswithmodifyingthesecond.Here,theDepartmentofEducationistheoverwhelmingly

predominantinvestorandcouldprovideglobaldirectionandaccountabilityforservicers.If

servicersweredirectedtoprioritizeworkingwithborrowerstomanagetheirdebt,avoid

18

default,and/ormodifyloans,andheldaccountableforbasicstandards,theywouldnotfacethe

sameconflictinginstructionsthatmortgageservicersstruggledwith.Hereareexamplesof

ideasproposedduringthemortgagecrisisthatcouldbeappliedmoreeasilyinthestudentloan

servicingcontext:

• Lossmitigationmustbeconductedpriortoforeclosure(defaultcollectioninthecase

ofstudentloans)

• Lossmitigationagreementsmustbeaffordablefortheborrowers

• Latepayingcustomersmustbereferredtocounseling

• Basicservicingstandardsshouldbeimplementedandmonitored,suchasrequiringa

responsetoinquiriesandrequestsforinformationinatimelywayandrequiring

servicerstoreportlossmitigationeffortsbyactivityandgeography;

• Defaultshouldbedelayedifborrowerentersalow-costrepaymentplanandmakes

timelypayments;;

• Dischargeofstudentloansinbankruptcyshouldbepermitted;

• Loanservicersshouldbepaidadequatelyforthetime-intensiveworkofloss

mitigationandloanmodification(i.e.puttingborrowersinrepaymentplans);and

• Forgivenstudentloandebtshouldnotbetreatedastaxableincome.

VI. Towardsanew,improvedborrower-centeredstudentloanservicingsystem

Fivekeyfixestostrengthenservicingstandardsandoversightcouldgoalongwaytoward

helpingstudentloanborrowersandensuringabetterreturnonourinvestmentinhigher

education.

1. Reformstudentloanservicingabusesbysettingclearconsumerprotectionstandards.Theseincluderequiringservicerstoactinthebestinterestsofborrowers,prohibiting

abusivefeesandpractices,andensuringthatvoluntaryoverpaymentsareallocatedto

principal.Feesshouldbeminimized,paymentsprocessedefficiently,anderrorsshouldbe

resolvedquicklyandwithdocumentation.Loandocumentsandhistoryshouldbeeasierto

understandandaccess.Preventthereportingofinaccurateinformationtocreditbureaus.

Preventfraudandabusethroughdebtreliefscamsandotherpredatoryschemesbylimiting

thebehaviorandholdingservicersliableforscamsthataresuccessful.Commonsense

affirmativedutiesandclearprohibitedactscanensurethatservicerscommunicatewith

borrowersinatimelymannerandthattheyprovideconsistentinformation.

2. Restructureservicercompensationtoencourageandcompensateservicersforspendingtimewithborrowersatriskofdelinquencyanddefault,includingenrollingborrowersinincome-drivenrepayment.Today,wespendmoretoputborrowersintocollectionthanwe

dotohelpthemgetmoreaffordablepaymentsandstaycurrentontheirloans.

Compensationratesencourageservicerstopushforbearancebecauseservicersarenot

compensatedoncealoanisindefaultandarecompensatedprogressivelylessasa

borrowergetsfurtherintodelinquency.

19

3. AffirmandassertthepoweroftheCFPBandstateattorneysgeneralinservicingoversightandenforcementbyexplicitlymakingviolationsofservicingstandardsenforceableunder

stateUnfair,Deceptive,orAbusivePractices(UDAP)lawsandtheCFPBAct.Today,the

DepartmentofEducationisignoringitsowndutytoeffectivelyoverseestudentloan

servicersandsimultaneouslytryingtoblockstatesfromexercisingoversight.Affirmthat

stateshavearighttooverseeandsanctionabusivestudentloanservicers.Requirethe

DepartmentofEducationtocooperatewiththeCFPBandstateentities.Capgeneralfederal

debtcollectionamountstonomorethantheamounttheborrowerwouldpayunderIBR.

4. Empowerborrowerstoenforcetheirownrightsandprotecttheirownfinancialfutures.Banmandatoryarbitrationclausesandrecognizeaprivaterightofactionbyborrowers

againststudentloanservicersanddebtcollectorswhoviolateconsumerprotectionlawsor

contractrequirements.Allowdischargeofstudentloansinbankruptcy.

5. Increasetransparencyandstemthenegativecollateraleffectsofthestudentdebtcrisis.Collectandpublishdatafromservicerstotrackservicingmetricsforallloans.Require

regularreportingonstudentloanservicerperformanceandactivity.Worktoensurethat

theburdenofstudentdebtisnotaninsurmountablebarriertootherwealth-building

activitiessuchashomeownershipandentrepreneurship.

VII. Conclusion

Ratherthanliftingpeopleoutofpovertyandprovidingaccesstothemiddleclass,studentdebt

isfurtherentrenchingtheracialwealthgapandperpetuatingthecycleofpovertythatresults

fromsystemiclackofaccesstoresources,capital,andaffordablecredit.Ourshort-sighted

approachisleavingjobsunfilled,moneywasted,andhumanpotentialsquandered,threatening

ournationalsecurityandeconomicwell-being.94With$1.5trillioninstudentdebtandwith

defaultsontherise,goodservicingisvital.

In2008,wesawfirsthandthatindividualsandtaxpayersareleftpayingthebillwhenwefailto

holdindustryaccountableforcomplyingwithbasicrulesoftheroad.Thestudentloandebt

crisisisontracktodecimateoureconomyandourcommunitiesinmuchthesamewaythe

mortgagecrisisdid.Reformingthestudentloanservicingandcollectionsystemcouldhavea

majorimpactontheabilityofstudentstoachievefinancialsecurity,thecoreintentofour

studentloanandhighereducationsystem.Skillfulstudentloanservicingcouldconvert

distressedloansintostablerepaymentplansthatgeneraterevenueandenableborrowersto

contributetostronger,morestablecommunities.Ineffectiveservicingcanproducethe

oppositeresults.Ratherthanrepeatmistakesfromthemortgagecrisis,weshouldlearnlessons

fromthatexperienceandworktoachieveasounderandmoreeffectivestudentloansystem

today.

94CouncilonForeignRelations.2012.“U.S.EducationReformandNationalSecurity,”IndependentTaskForce

Reportvol.68.Availableathttps://cfrd8-

files.cfr.org/sites/default/files/report_pdf/TFR68_Education_National_Security.pdf.