The Best Student Debt Relief? Redeem loans that have already been paid out

Photo Credit: Poster used at the 2010 Tax Day Tea Party demonstration in Washington, DC Public Domain / Smithsonian National Museum of American History

Although 43 million Americans (26 percent of the labor force) $1.9 trillion in accumulated student debt, we know little about the composition of the debt: what is the principal, what is the interest, and what is the negative amortization of capitalized penalties? This last category, draconian penalties imposed on myriad student loan debtors, is particularly important. Because of these penalties, a very large cohort of borrowers have sometimes double-paid their loans. Yet they still owe double or triple the amount originally borrowed.

Congressional testimony is full of stories like Maryland social workers Deborah Harburgerwho was wrongly denied government loan forgiveness due to mismanagement of her account by her service provider. “2017, after 10 years in public service,” she testified:

I was stunned when I received a rejection telling me that my federal student loans were ineligible even though my payments were on time and my employment was qualified. Additionally, my credit service providers and the Department of Education have never informed me of this issue. Instead I’ve now been told I could move my loans to another program and restart the 10 year and 120 payment clocks.

Deborah Harburger

Borrowers like Deborah Harburger are far from alone, but American college students and their families have never borrowed $1.9 trillion. Rather, this amount was accumulated because the Department of Education allows unregulated, profit-seeking student lenders and service providers such as Naviant, Sallie Mae, and NelNet to impose penalties, fees, and processing fees at their discretion. These penalties and fees are capitalized, which means they are added to the loan amount and borrower balances grow.

Currently the best estimates from The Center for Responsible Lending and Student Loan Justice suggest that at least half of all student loan borrowers, some 20 million, would be debt-free if arrears interest, penalties and other predatory charges were simply abolished.

Yet if all of these predatory fees were simply abolished, we’d still have two groups of student borrowers who have suffered serious economic damage because both Congress and the Department of Education have protected the loan servicers and not the students, a classic example of what economists “Regulatory capture.” That’s because lenders have had uncontrolled collection power since the 1980s. in the five statessuch powers include the right to have state or federal licenses revoked for unpaid student loan balances, and Prior to 2019, there were at least thirteen states where student loan debt could result in loss of professional license.

Today, in some states, you can lose the driver’s license because of unpaid student debt. Seniors on Social Security can have their monthly checks garnished by student loan debt collectors without a court order, a unique authority. Other borrowers have had their wages, alimony, or IRS tax refunds confiscated from student lenders.

What do we know about this group? Nearly nothing. But surely this information is somewhere. The injured persons could be found and some kind of reparation could be made.

This still leaves behind millions of other borrowers whose lenders or service providers have placed them on income-based repayment plans (IBR) or Public Service Forgiveness (PSF) only to actually deny them the forgiveness they are due. Under these plans, loan balances should be canceled after a specified number of years of consistent payment. But because the Department of Education has failed to curb abuse by service providers, 98 percent of those enrolled in IBR or PSF have been denied not only the forgiveness they were promised and entitled to — but in the case of loans at IBR – also more interest accrued.

Megan Bailey from Montana is a social worker and has never missed a payment. But I was still denied PSF. “I’ve never made more than $45,000 a year working in community behavioral health.” she said:

I owe $177,526.06 in student loans in 2016, I have worked my entire adult life including military service and live a very modest life. I worry about the pipeline into the health and behavioral medicine careers and whether today’s high school students will continue to choose careers in mental health and behavioral medicine, with such exorbitant tuition, low salaries, and difficult working conditions. I can’t imagine encouraging my children to follow in my footsteps.

Megan Bailey

The good news is that Biden’s Department of Education is preparing sweeping changes to both of these programs that will allow borrowers wrongfully denied IBR or PSF to seek forgiveness again. This change is long-awaited but may not reflect the thousands of dollars in payments made while Bailey’s Servicer failed to comply with the law.

Until the Biden administration, education secretaries were unwilling to release the data needed to solve the student debt crisis. Without this data, it is impossible to devise equitable processes for solving the many faces of the student loan crisis other than simply forgiving parts of it, as Joe Biden recently did. Here is a list of never-before-seen information – undoubtedly incomplete – that would be essential to helping borrowers across the board, especially those being harassed by predatory loan servicers.

(1) The amounts the students originally signed and the total of all payments for all loans. We know how much is currently owed, but neither policymakers nor the public know the total amount of the original loans. In other words, how much of the $1.9 trillion was actually borrowed – and how much of that sum is due to uncontrolled predatory lending and lending practices? The best “guestimate” of Student Loan Justice and The Center for Responsible Lending is that at least half of the $1.9 trillion owed is made up of late fees and other service and capitalization fees. We also do not know how much of the billions in payments to lenders and service providers were offset against the capital and how much was offset against interest fees, reminder fees and default costs. These numbers should also be broken down.

(2) What are the actual default rates on student loans? The Department of Education claims only about 15 percent of accounts are in forbearance or forbearance. In contrast, CNBC reported in April 2022 that “an estimated one-fourth of student loan borrowers — or 10 million people — were in default or defaulted.”

In any case, the size of the cohort at risk is a concern – but not for lenders, who are rewarded with public dollars when borrowers default. According to Alan Collinge of Student Loan Justice:

The credit servicers (who also typically own collection agencies) would like to see a mass default event. They face a 16 percent commission if they force defaulting borrowers to “rehabilitate” their loans into good standing. For a loan that defaults and is inflated to, say, $100,000 with additional collection costs, these companies can immediately bring the taxpayer $16,000 in payday if the loan is rehabilitated. These “rehabilitated” loans will default about 75 percent of the time, but the collection agencies don’t care, they get paid anyway.

Alan Collinge

It’s clear that taxpayers’ money has already been pouring into the pockets of the student loan industry, but a mass default would dramatically increase the cost to the public. Congress must direct the Department of Education to release this information as well. But if Congress fails to do so, the information could still be obtained through a Freedom of Information Act request, followed by a lawsuit if that request is denied. There is precedent for this. in August 2009, Bloomberg won its lawsuit against the Federal Reserve to find out what the Fed did with $13 trillion Distressed Asset Relief Scheme (TARP) Fund.

Most importantly, if this information were public, it wouldn’t be difficult to find out how much each borrower owes after all penalties, fees, and late fees have been eliminated; Estimate and apply an average interest rate based on the Treasury Rate over the life of the loan; and then deduct what they have already paid. If they overpaid this reality based repayment amount, they would get a refund.

How many of the 43 million borrowers would then be left? Who knows? But the Department of Education should help us find out.

Susan F. Feiner recently retired from the University of Southern Maine, where she was Professor of Economics and Women’s Studies.

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