The Obama administration and the student loan industry reckon they know how to fix America’s student debt crisis: Bombard Americans’ cell phones with robocalls and text messages telling them to pay up.
With total student debt nearing $1.3 trillion and 1 in 4 borrowers either delinquent or in default, according to the Federal Reserve and the Consumer Financial Protection Bureau, policymakers are grasping for proposals that would stop the relentless rise in late payments and distress that’s afflicting the nation’s more than 40 million student loan borrowers.
While the Great Recession and the subsequent lackluster economic recovery play a role, the CFPB and consumer groups claim that sloppy loan servicing practices have exacerbated the situation by depriving borrowers of their right to make affordable monthly payments on their federal loans. More than 90 percent of all student loans are either owned or backed by the Department of Education and the department’s loan contractors have a business incentive to cut costs and minimize the amount of time they spend on the phone with borrowers seeking help, consumer advocates have told the CFPB.
Instead of cracking down on alleged abuses, the Education Department wants to give its loan contractors more power. In doing so, the department is aiding their quest to maintain profitability -- its four largest loan servicers have generated at least $5 billion in combined income over the last three years -- at a time when consumer groups argue the loan companies need to hire more workers and better train them.
In several notices filed over the past year with the Federal Communications Commission, trade associations representing loan specialists, debt collectors, college administrators and financial aid counselors have tried to persuade the agency to exempt federal student loans from typical consumer protections. They reason that “millions” of loan defaults could be averted if contractors working for the Education Department were permitted to use computerized auto-dialers to call and text borrowers on their cell phones.
Since cell phone owners are charged for calls and texts they receive, the FCC has generally not permitted companies to auto-dial consumers when they haven't given consent. Nearly half of American households eschewed land lines to rely solely on cell phones, according to a recent survey by the National Center for Health Statistics.
In April, one of the Education Department’s main contractors -- Nelnet Inc. -- told the FCC that borrowers they were able to auto-dial were less likely than others to fall behind on their payments or default and were more likely to resolve delinquencies.
The Education Department agrees, and told the White House in an Oct. 1 report that Congress should change the Telephone Consumer Protection Act to allow the department’s loan contractors to contact borrowers “and help them get into the right repayment plan and avoid the consequences of default or resolve their default.”
With so many Americans, particularly young ones, relying solely on cell phones, President Barack Obama has long sought to allow the government's loan servicers to auto-dial them, and included the provision in his last several annual budget requests to Congress. In 2010, the Education Department told the FCC that taxpayers and colleges would benefit from a change because loan servicers can place many more calls using auto-dialers than when their employees manually dial, increasing their ability to prevent defaults, according to a written summary of the meeting.
Neither Congress nor the FCC have agreed to the White House’s requests.
The problem, according to consumer advocates and regulators, is that there’s little evidence that opening up borrowers’ cell phones to relentless calls and text messages would help.
The White House estimates the proposal, if enacted into law, would generate just $12 million annually in additional government revenue -- a far cry from industry claims that it would let close to 12 million borrowers avoid default over the next decade and help another 8 million correct their defaults.
A federal consumer bureau analysis of borrowers’ complaints suggests that even when borrowers get on the phone with their loan servicer they often receive wrong information or otherwise aren’t properly informed of all their options to avoid distress, such as federal plans that allow them to make monthly payments based on their income.
Borrowers are so misinformed that Chris Hicks, who leads the Debt-Free Future campaign at the advocacy group Jobs With Justice, has led seminars in more than a dozen cities with hundreds of borrowers in an effort to tell them about repayment plans that could cut their required monthly payments by hundreds of dollars.
Robocalls are among the most frequent sources of consumer complaints, according to the Federal Trade Commission and the FCC. In July, the CFPB accused Discover Financial Services of placing more than 150,000 calls demanding payment to private student loan borrowers' cell phones at inconvenient times, such as before 8 a.m. or after 9 p.m. The bank agreed to a settlement, though it neither admitted to nor denied the allegations.
Consumer advocates’ arguments haven’t persuaded the Education Department, which has gone around Congress and the FCC by simply requiring borrowers to consent to auto-dialed calls and messages at the time they sign their paperwork to take out federal student loans.
Dorie Nolt, an Education Department spokeswoman, didn’t respond to a request for comment.
Since at least August 2009, borrowers have agreed to be contacted via auto-dialers on any present or future numbers they provide to their colleges, the Education Department or their contractors when signing the Education Department’s master promissory note at the time they take out loans.
Borrowers have taken out at least $602 billion in federal student loans that has required them to consent to receive calls, texts or pre-recorded messages via auto-dialers. That amount represents more than half of all outstanding federal student loans, according to Education Department data.
The Education Department has further expanded the pool of borrowers that have given consent by including the provision in forms borrowers have to fill out in order to receive key benefits, such as the right to make monthly payments based on their earnings. The department also wants military members to grant consent when filling out applications to reduce the interest rate on their loans when they enter active duty, a right under the Servicemembers Civil Relief Act.
But the pool of borrowers that can be contacted via auto-dialers remains small, said Michele Streeter, communications manager at the Education Finance Council, a Washington group that represents some student loan companies.
Older federal loans’ master promissory notes didn’t include the auto-dial provision, Streeter said, and the consent that borrowers have given only applies to phone numbers they’ve provided. If a borrower changes phone numbers and doesn’t share the number with a loan company, his former school or the Education Department, loan specialists aren’t legally allowed to contact them using auto-dialers.
Furthermore, Streeter said, with so many young Americans changing their phone numbers, loan companies fear that if they auto-dial the wrong cell phone the recipient could sue them for damages under the Telephone Consumer Protection Act.
The Education Finance Council and the National Council of Higher Education Resources -- trade associations that represent student loan companies -- have been lobbying Congress to change the law and increase their members’ ability to use auto-dialers to contact borrowers’ cell phones, arguing it would allow them to help distressed borrowers.
“The cost of inaction is simply too high -- for borrowers and taxpayers alike,” they said in documents they’ve circulated on Capitol Hill.