President Barak Obama

Obama Introduces “Student Aid Bill of Rights”

President Obama just announced another major initiative on the issue of student loan debt, and this time he’s taking aim at the companies who service Federal Student Loans, but that’s not all!

The new “Student Aid Bill of Rights” announced on March 10, 2015 is supposed to accomplish three major tasks:

  1. Create a state-of-the-art complaint system that allows those with Federal student loan debt to file official complaints about how their loans are being handled, ensuring quality service and accountability for the Department of Education, and the lenders servicing Federal student loans
  2. Create a series of new steps that will help college students and graduates repay their loans quickly, including a new system that is supposed to help make monthly payments more affordable for those having trouble making their payments
  3. Create a new Government task force that will focus on analyzing student debt trends, evaluating where there are problems, and recommending legislative and regulatory changes to overcome those challenges

There’s a lot of flowery language in the official “Bill of Rights”, but my personal opinion is that this thing is mostly fluff, and won’t do much to provide actual financial assistance to anyone with existing student loans.

My Thoughts on the Plan

To me, it sounds like the program’s best potential opportunity is allowing Federal borrowers to vent frustration with incompetent Department of Education personnel and shady loan servicers.

And while it may be helpful to blow off some steam by filing official complaints, and being able to track followup on those complaints, what most Americans with massive student loan debt really need is actual Debt Relief (like the ability to Refinance Federal Student Loan Debt, or to receive Federal Student Loan Forgiveness).

Anyway, here’s the the actual language of the new “Bill of Rights” as introduced just a few days ago.

The “Student Aid Bill of Rights”

Here’s what the official “Bill of Rights” actually says:

A Student Aid Bill of Rights

I. Every student deserves access to a quality, affordable education at a acollege that’s cutting costs and increasing learning.

II. Every student should be able to access the resources needed to pay for college.

III. Every borrower has the right to an affordable repayment plan.

IV. And every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans.

I think we can all agree that this sounds really nice, but how will these ideas operate in practice?

The official announcement explains each of those components in greater detail, so be sure to check that out, but feel free to continue reading for my own analysis of how the three components of the plan outlined above will actually operate.

1. Creating a Complaint System

Again, I’m not against the idea of this thing, I just think that the Federal Government could be spending their time and money in better ways, like by offering whatever funding is going to be spent on this thing as a tax refund to those with massive student loan debt, or by boosting the funding for one of the many Federal forgiveness programs, or even by simply relaxing some of the eligibility restrictions for those programs so that more people can take advantage of them.

I’d much rather see the Government offering true financial assistance, rather than moral support.

I don’t see the Federal Government’s role as being one of offering some kind of emotional support – their job is not to be our friend, or to make us feel heard, but to make sure that we aren’t getting screwed by predatory lenders and ridiculously overpriced loans!

Anyway, with that said, the Student Aid “Bill of Rights” proposes that the Secretary of Education create a new website by July 1st, 2016, which will allow anyone with federal student loans to file complaints about their federal lenders, servicers, collections agencies, and institutions of higher education.

What’s that mean? Hopefully people will take this thing seriously, lodge legitimate complaints, be realistic about their expectations and provide some real value to the community, but I’m concerned that this thing will turn into some sort of weird Yelp-like hybrid for lenders and colleges. Do we really need that?

According to President Obama’s administration, we apparently do. There may be one benefit to this thing though, which is that this system will be public facing, allow you to track followup to your complaints, and essentially ensure that your concerns are being addressed at some level.

And that is a serious improvement over the existing system, where’s there’s basically no way to lodge a complaint, nowhere to turn for resolution of concerns, and virtually no way to go over a problematic lender or debt collector’s head to get issues addressed.

The White House’s language on this component of the plan promises that “Students and borrowers will be able to ensure that their complaints will be directed to the right party for timely resolution…”, that “the Department of Education [will] study how other complaints about colleges and universities… should be collected and resolved to strengthen the process for referring possible violations of laws and regulations to other enforcement agencies… ensur[ing] more borrowers get fair treatment throughout the federal student loan process”.

Personally, I do like the sound of that. To me, it sounds like this is going to be the Federal Government’s way of injecting accountability into the equation, so that it’s easier for them to track abusive lenders and debt collectors, allowing them to more easily respond to them with legal consequences.

And while I still think that the efforts focused here could be better spent offering real financial relief, I would love to see a few of the shady lenders and criminal debt collectors out there get taken to task, or literally locked up for all the pain and suffering that they’ve been causing.

2. Helping Borrowers Repay Their Loans

Part II of the President’s new “Bill of Rights” initiative is supposed to be some new steps that are going to make it easier for borrowers to repay their loans, even if they’re facing serious financial difficulties with actually making monthly payments.

Components of this part of the plan include:

  • Requiring additional disclosures and stronger consumer protections during the repayment process, including during the time when loans are transitioned between servicers, when borrowers miss a payment, and when borrowers start, but don’t finish the application to change repayment plans
  • Requiring loan servicers to apply loan prepayments to the loans that have the highest interest rates first, unless the borrower specifically requests a prepayment be used for something else
  • Creating a single, centralized “point of access” (read: website) for all borrowers so that they can access account and payment processing details, regardless of which contractor is servicing their Federal student loans
  • Requiring student loan debt collectors to charge “reasonable fees”, and forcing them to help borrowers return to good standing when they’ve fallen behind in payments
  • Clarifying the rights of borrowers in bankruptcy (this could mean that we will finally have a clear indication of exactly how federal student loan debt is treated when filing for bankruptcy)
  • Simplifying the process of verifying income levels, which will help keep borrowers eligible for income-driven repayment plans
  • Forcing the Social Security Administration to ensure that disability insurance recipients who can discharge student loans will stop having their disability payments garnished to repay defaulted loans (this is a huge one, and it’s shocking that it hasn’t been addressed before)

Some of these definitely are useful, even if they only apply to small portions of the population of people holding federal student loan debt.

I like the idea of having a single website to access information, regardless of who your loan servicer is, because under the current system, this part of the process can be extremely confusing (especially when loans are transferred, like when Sallie Mae became Navient).

Some of these updates should also help to prevent the predatory scams I constantly hear about, where debt consolidation companies and debt relief companies convince people with Federal student loans to pay them for services like getting them a Direct Consolidation Loan, or for setting up a Federal Forbearance or Federal Deferment, all of which could easily be done by the borrower themselves at no cost!

3. Figuring Out What Else is Needed

The third major tenet of the President’s new Student Aid “Bill of Rights” creates something like a new task force made up of Department of Education personnel who will:

  • Coordinate with the White House Office of Science and Technology Policy team to find innovative, effective ways to communicate with borrowers, leverage new research identifying factors that influence student loan repayment, and come up with ways to help borrowers remain in repayment (avoiding Default)
  • Coordinate with the Office of Management and Budget to monitor trends in the Federal Government’s student loan portfolio, improving loan servicing, budgeting, and reviewing potential policy changes that could increase repayment rates
  • Invite other Federal Government experts to review best practices, implement performance-based contracting, and enhance borrower repayment rates

I’m not all that excited about this third tenet, because all it really does is promise that the Federal Government will continue looking into the situation, and considering new options.

That’s something we’ve been promised for years, and a it’s a promise that I don’t think has materialized into a whole lot of assistance in the past, no one that’s likely to lead to much real change any time soon.

Additional Support from President Obama

In addition to the three major tenets outlined above, President Obama’s administration is also working on some very specific initiatives to support each of the four statements from the “Bill of Rights” itself, including:

Access to Quality, Affordable Education

  • America’s College Promise – In January, 2015, President Obama proposed making two years of community college free for “responsible students”, allowing them to earn the first half of their bachelor’s degree at no cost
  • First in the World Grants – In September of 2014, the Department of Education awarded $75 million to colleges and universities to encourage them to adopt new innovations and proven strategies that will improve student learning and reduce costs. President Obama has promised to award $200 million for the same purpose in 2015!
  • Call to Action on College Opportunity – In December of 2014, President Obama, Vice President Joe Biden and First Lady Michelle Obama met with college and university presidents, K-12 superintendents, and a large group of nonprofits, foundations, and businesses to announce the adoption of 600 new commitments designed to help students better prepare for college, and more likely to graduate from their higher education programs
  • College Ratings – The Department of Education plans on releasing a college ratings system during the 2015-2016 school year, which will help students compare different schools to determine which one provides the best education at the most affordable price

The most important element of this tenet is probably the promise to provide 2 free years of community college, which would save millions of students tens of thousands of dollars in potential higher education debt.

It’s especially useful because the first two years spent at a four year college are mostly a waste anyway, considering the vast majority of that work is focused general education requirements, often having very little to do with the student’s actual focus of study.

Access to Resources Needed to Pay For College

  • Increasing Pell Grants Funding – Last year, President Obama increased the maximum Pell Grant award to $5,730 for the 2014-2015 school year, increasing it by nearly $1,000, and making college more affordable for 8 million Americans each year. President Obama has proposed increasing it again this year at a rate equivalent to inflation.
  • Simplifying the Federal Student Aid Applications Process – The Department of Education streamlined the Free Application for Federal Student Aid (FAFSA) process so that it now takes just 20 minutes, when the old version took over an hour. President Obama has proposed making it even easier by removing additional questions from the application process.
  • Simplifying and Improving Education Tax Benefits – President Obama created the American Opportunity Tax Credit (AOTC) to offer families up to $10,000 in tax credits over the four year college experience, and he has proposed increasing the tax benefits for more than 25 million families by making AOTC available for up to five years, and by eliminating taxes on student loan debt forgiveness under income-driven repayment plans (this one would be HUGE if it were to get approved!)

I just want to point out that last note in specific detail – under the current Federal Student Loan Forgiveness Programs, whatever debt gets forgiven once you do finally qualify for forgiveness isn’t simply wiped out – the balance of your loan is reduced to $0, but the amount of money forgiven gets added to your income for that year’s tax filings.

What that means is that anyone who has a great deal of debt forgiven will end up facing a huge tax bill, placing them in potentially an even worse place than before for two reasons:

  • The tax bill is all due at once, rather than spread out like monthly student loan payments
  • It’s better to owe money to a Federal student loan servicing company than the IRS (I’d rather owe money to anyone other than the IRS…)

If this tenet of President Obama’s proposal were to get approved, the amount of money forgiven would simply be wiped out, saving many people thousands to tens of thousands of dollars when their eventual loan forgiveness conditions are satisfied.

The Right to an Affordable Repayment Plan

  • The Pay As You Earn Repayment Plan – President Obama’s introduction of the “Pay As You Earn” (PAYE) student loan repayment plan in 2010 is one of the most useful changes to Federal student loan laws in recent years, as it allows borrowers to limit their monthly payments to just 10% of discretionary income
  • Last June, President Obama directed the Department of Education to relax the PAYE plan’s tight eligibility restrictions and make it available to everyone with direct loans (rather than just people who borrowed on or after October 1st, 2007), by December of 2015
  • This year, President Obama proposed reforms to both PAYE, and some of the other income-driven repayment plans that are supposed to make them more sustainable for the long-haul (the downside to his proposals is that PAYE may end up being less useful for some people, but the upside is that it’ll prevent the program from being de-funded, for more details on that, see here)

The biggest change from this section is definitely the introduction of the PAYE plan, which is an excellent opportunity, and the best Federal Student Loan Repayment Plan for the vast majority of borrowers (but especially those who have trouble meeting their monthly payments).

The downside to PAYE is that it remains available only to people who’ve recently taken out loans, meaning people with no loans that were disbursed on or before October 1st, 2007.

Hopefully, the Department of Education will take President Obama’s request seriously, and will open up PAYE to everyone by December 2015.

Many people, including basically everyone who is having trouble making their monthly payments, will want to sign up for this repayment plan as soon as possible.

The Right to Quality Customer Service, Reliable Information, and Fair Treatment

  • In 2010, President Obama’s Administration eliminated bank subsidies and transitioned all new originations to the Direct Loan program, simplifying the process of getting a Federal student loan
  • In 2012, the IRS and Department of Education introduced a new online application tool that made it easier for borrowers to enroll in income-driven repayment plans, allowing them to pull information directly from the IRS
  • Starting in 2012, the Department of Education began development of an entire suite of tools that makes it easier for borrowers to figure out how much they should borrow, how much they actually owe, how long it’ll take to pay off, and what options they have for paying their loans off, including the ability to compare different repayment programs tailored to their specific financial circumstances

Compared to the 2010 Obama Reforms…

Personally, I don’t find this new “Bill of Rights” to be all that exciting.

It’s definitely a step in the right direction, but doesn’t offer a whole lot of substantive financial support to people who are buried in student loan debt, and who need direct monetary assistance.

This “Bill of Rights” is certainly nowhere near as revolutionary as the President’s 2010 Student Loan Reforms, which introduced three massive changes to Federal student loan debt, including:

  1. Introduction of the Pay As You Earn Repayment Plan, which caps monthly student loan payments at just 10% of discretionary income
  2. Halving the amount of time required to receive loan forgiveness under the Public Service Loan Forgiveness Program
  3. Offering total loan forgiveness to everyone who makes 20 years worth of payments on their Federal student loan debt, regardless of how much they still owe at that point

Those are serious opportunities for real debt relief, whereas much of the promises from the Student Aid “Bill of Rights” is essentially lip service and feel-good political rhetoric.

The thing I’m most excited about is probably the option of allowing everyone to sign up for the PAYE Plan, as I know that will be a major benefit to many of my readers (especially those of you struggling to make your monthly payments).

What do You Think?

Does this “Bill of Rights” go far enough to protect people from taking on too much debt? Does it offer enough assistance for those who’ve already made that mistake?

I want to know what you think about it, so please share your thoughts in the comments section below.

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Tim's experience battling crushing student loan debt led him to create the website Forget Student Loan Debt, where he offers advice on dealing with excessive student loans and advocates a cautious approach to funding education costs via borrowed money.