The Time for a Fresh Start

Lots of uncertainty is ahead for student borrowers, with loan repayments scheduled to restart in October and two loan servicers announcing their federal contracts will be over at the end of the year. That means now is the perfect time to wipe the slate clean and start over, say those frustrated with the administration of the student loan system.

The need to take advantage of the “rare opportunity for a fresh start” was a common theme of the comments made by lawmakers and witnesses during a Senate Banking, Housing and Urban Affairs subcommittee hearing held Tuesday on protecting student borrowers. Senator Elizabeth Warren, a Massachusetts Democrat who is chair of the economic policy subcommittee, said in her opening remarks that with the student loan program at a crossroads, it must be rebuilt to work in the best interests of borrowers.

“This is our best chance in years to build strong guardrails into student loan servicing contracts and to hold student loan servicers accountable if they screw things up,” Warren said. “It is also a chance to fix the Public Service Loan Forgiveness program to make sure that our hardworking public servants get the relief that our nation promised them.”

Warren has been vocal about her displeasure with the student loan system and is currently holding up a confirmation vote for James Kvaal, the nominee for under secretary at the Department of Education, until she receives clarity about how the program will continue to be administered.

As one reform, the department needs to implement comprehensive federal servicing standards to curb misconduct by loan servicers, said Letitia James, attorney general for the state of New York. James specifically referenced the Pennsylvania Higher Education Assistance Agency, operating under FedLoan Servicing, which her office sued for its mismanagement of the Public Service Loan Forgiveness program. That lawsuit hasn't been settled, but PHEAA didn't admit to wrongdoing in a separate but related lawsuit.

Though PHEAA was one of the two servicers that announced it wouldn’t renew its federal contract, James noted that misconduct extends beyond one servicer, and robust standards are necessary to stop it. According to James, those standards should include:

• Requiring servicers to provide accurate and timely information about income-driven repayment plans and eligibility for Public Service Loan Forgiveness.
• Requiring servicers to act in the best interests of borrowers.
• Imposing robust quality-assurance measures.
• Implementing mechanisms for borrowers to appeal servicer actions.
• Requiring timely processing of borrower submissions.
• Penalizing servicers who violate state and federal consumer protection laws, including by reallocating the federal student loan portfolio to other servicers.

Additionally, there should be a federal standard requiring servicers to provide borrowers with their payment history, said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.

Now is also a good time for the administration to “restore the promise of PSLF” -- before student loan payments resume, said Randi Weingarten, president of the American Federation of Teachers.

“Most AFT members are eligible for Public Service Loan Forgiveness, but after three and a half years, the Education Department is still rejecting 98 percent of applications and has nearly 150,000 PSLF applications in backlog,” Weingarten said. “Borrowers need real relief, not a mirage. They need help from a government that promised to forgive the remainder of any debt still unpaid after 10 years of payments if they went into public service.”

A spokesperson for PHEAA, Keith New, told Inside Higher Ed that as a servicer, it’s required to adhere to the laws written by Congress and the rules directed by the department.

“While the promise of loan forgiveness may seem simple, the process is not -- and the vast majority of applicants simply have not yet qualified for forgiveness according to the federal rules,” New said, adding that PHEAA expects to see a steady increase in borrowers successfully achieving forgiveness due to an enhanced application process and a “more borrower-friendly interpretation” of the program.

PHEAA has been accused of bungling its administration of Public Service Loan Forgiveness by inaccurately counting PSLF-qualifying payments, failing to provide explanations of their determinations and failing to inform borrowers that they could challenge the servicer’s mistakes. To rectify this, James said, the department should retroactively credit PSLF borrowers with qualifying payments and provide broad relief to those affected by systemic errors revealed in state and federal investigations.

Weingarten said the department should go a step further and cancel debt for borrowers who have completed at least a decade of public service while paying their federal loans, adding that millions of them will have to transfer loans currently serviced by PHEAA to “new servicers that will inherit loans with paper trails that can never be untangled.”

But all the witnesses, along with Warren, said the best way to reset is to broadly cancel student debt for all borrowers, either through executive or congressional action.

Yu noted that if debt is canceled before repayment begins, it would provide relief to the borrowers who are hardest to reach, freeing up servicers’ resources to dedicate to the remaining borrowers.

“Widespread administrative debt cancellation is needed to remedy the failures of our student loan system,” Yu said. “The student loan system has failed borrowers for too long. While they have waited, their debt has ballooned, and their financial futures have grown more bleak.”