Colleges Win, Student Borrowers Lose In Obama Administration Absolution

Colleges Win, Student Borrowers Lose In Obama Administration Absolution

The U.S. Department of Education is turning its back on at least 1,000 borrowers in favor of shielding their former colleges from potentially crippling sanctions that would have resulted from high rates of default on federal student loans.

The move, announced late Tuesday and further detailed on Wednesday, concerns an Obama administration decision not to punish as many as 20 schools for loan defaults caused by questionable servicing practices overseen by the Education Department.

Borrowers, however, were provided no such relief. The estimate of the number of affected borrowers is only a small subset of those with loans in default as a result of questionable servicing practices the Education Department identified on Tuesday.

"Borrowers aren't getting any relief or similar consideration from the Education Department," said Debbie Cochrane, research director at the California-based Institute for College Access & Success, which advocates affordable education. "If the school isn't held accountable for the default, then the borrower shouldn't either."

As many as 20 schools won't lose access to critical federal student aid programs, an Education Department official said Wednesday. Losing access to taxpayer-provided student aid would be the equivalent of a death sentence for most colleges. The institutions that were let off the hook include for-profit schools, private and public colleges, and historically black colleges and universities, the official said on a conference call organized for news media.

The department did not specify the number of schools aided by its new policy. Nor would it make officials available for a subsequent interview, or answer emailed questions.

The Huffington Post identified 13 schools that may have been affected by the policy shift. Seven are for-profit institutions, four are historically black colleges, and two are community colleges. Only one -- Frank Phillips College, a community college in Borger, Texas -- confirmed that it was aided by the Education Department's decision. Another -- Maysville Community and Technical College, a community college in Maysville, Kentucky -- said it assumed it was helped by the move.

Borrower advocates, experts on federal student aid programs, and one prominent congressional Democrat denounced the Education Department's decision, accusing it of putting the interests of for-profit schools over those of borrowers in distress. It is likely to further cement the reputation of an Education Department that is seen as valuing its contractors and colleges over students.

The Education Department showed "absolutely no concern for borrowers," said Maura Dundon, senior policy counsel at the Center for Responsible Lending.

"Any changes in the student loan system that reduce transparency and consistency may compromise our ability to hold poor-performing colleges accountable," said Rep. George Miller of California, the top Democrat on the House education committee. "The department should be doing everything it can to ensure student borrowers who have defaulted have every opportunity for redress."

The Education Department decision relates to the share of borrowers who default on a loan within the first three years they are required to make payments, a measurement known as the "cohort default rate" that the department employs to determine colleges' effectiveness, and whether they're improperly taking advantage of taxpayer programs.

When calculating that figure, the Education Department said it won't count certain borrowers who defaulted on one of their federal student loans, but remained in good standing on their other Education Department debt, Jeff Baker, a senior official at the Education Department's Federal Student Aid office, wrote in a memo published online.

The reason has to do with so-called split-servicing, or a situation in which the Education Department has assigned a borrower's loans to multiple specialists that collect monthly payments. In November 2011, Cynthia Battle, an Education Department official, told college financial aid administrators that some 500,000 borrowers with federal student loans were being forced to make multiple monthly payments to different loan companies.

Education Secretary Arne Duncan told Congress in December 2011 that borrowers who have to make monthly payments to multiple companies are more likely to default. Typical borrowers who don't consolidate their debts have multiple federal student loans -- at least one for each year of schooling.

Jee Hang Lee, vice president for public policy and external relations for the Association of Community College Trustees, said he heard of one borrower who had to deal with five loan servicers.

Borrowers are forced to deal with multiple servicers for a variety of reasons. In some instances, they took out Education Department-guaranteed loans from banks under the Federal Family Education Loan program, or FFEL -- before Congress ended the program in 2010 -- then returned to school in recent years and took out new loans under the Direct Loan program.

Another example includes undergraduate student borrowers who entered school in the fall of 2008. These borrowers may have taken out FFEL loans from banks for the first two years of college, then got loans directly from the Education Department for their junior and senior years.

The Education Department says it has tried to ensure that all student borrowers only deal with one company when making their loan payments. For example, it has put an emphasis on borrowers with Direct loans and FFEL loans owned by the Education Department, which it purchased under a 2008 financial crisis-era law that amounted to a $110 billion bailout of the student loan industry, according to figures cited by Baker.

Still, many of those borrowers are making payments to multiple loan servicers. Borrowers with Direct loans and FFEL loans that are owned by banks also are most certainly making monthly payments to multiple loan servicers.

The Education Department has not disclosed a recent count of borrowers forced to make payments to multiple loan servicers, or how many of them may be in default on just a portion of their federal student debt.

In his memo, Baker of the Education Department wrote that among borrowers forced to make payments to multiple loan servicers, some are in default on one of their loans, but in good standing on other federal student loans. In other words, borrowers are making payments to one of the department's loan servicers, but not to another.

Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project, said borrowers may be falling victim to incompetent loan servicing practices.

"If it's because of servicer incompetency, why not give the borrowers rather than the schools a break?" Loonin said.

"The department is taking multiple steps to help borrowers better understand their repayment options, including working to expand income-driven options for borrowers," Denise Horn, an Education Department spokeswoman, said in a statement. "We also working closely with our servicers, conducting our own targeted outreach, and working to improve our counseling tools to ensure all borrowers have the information they need to keep all of their loans in good standing."

Last year, in a move celebrated by the White House, the Obama administration directly emailed millions of borrowers, urging them to consider repayment plans that would cap their monthly payments based on earnings. Borrower advocates said they were unaware of any similar efforts directed at borrowers who were behind on one set of their federal student debt, but current on their other Education Department loans. Horn didn't respond to questions regarding the details of the department's efforts.

Jee Hang Lee, vice president for public policy and external relations for the Association of Community College Trustees, said he had heard from numerous borrowers who thought they were current on their federal student loans, only to learn that they were in default on a loan they didn't know was being serviced by another company.

"Think about it: You're dealing with the servicer who were referred to by you college, you're current, and you think you're golden, right? Then, all of a sudden, you get this spam-ish email telling you you're in default on a loan you didn't know about," Lee said, noting that his organization had heard from many students who were current on one or multiple loans but didn't know they were in default on another.

Lee said the community colleges group had previously warned the Education Department about defaults caused by split-servicing. The group was worried that its member colleges would be punished for what he described as improper loan servicing.

"There was no real response," Lee said of the Education Department's reaction to his group's warnings.

The Education Department had earlier notice that a problem was brewing.

In recent years, ITT Technical Institutes, a for-profit school operated by ITT Educational Services, successfully challenged its default figures by pointing to defaults among borrowers whose loans were serviced by multiple entities, said Nicole Elam, an ITT spokeswoman.

Schools whose former students subsequently default on their federal student loans at unacceptably high rates can cost their current and future students access to federal grant and loan programs. Penalties kick in once a school's default rate exceeds 30 percent over three straight years.

In his memo, Baker said that some schools were able to avoid sanctions as a result of the department's decision. Some will maintain access to federal student loans, while others will maintain access to federal grants meant for low-income students, he said.

Experts said schools slated to lose access to federal loans or grants will almost assuredly close down.

Frank Phillips College could have been one of them. Jud Hicks, the school's president, said the college challenged the Education Department over its reported default figures. For fiscal years 2009 and 2010, Frank Phillips College had default rates over 30 percent.

Hicks said that among his school's reported defaults, a significant number were for borrowers who were dealing with multiple loan servicers.

Split-servicing was the common thread that connected many of the school's reported loan defaults, Hicks said. Some of his former students were dealing with at least three loan servicers for their federal student loans, he added.

The department's decision not to hold Frank Phillips College responsible for those defaults caused the school's default rate to fall from 31.1 percent in 2010 to 25.2 percent. In 2009, the rate fell from an original 34.1 percent to 29.1 percent, Education Department data show.

"I can sympathize with the confusion caused by multiple servicers," Hicks said. "If I'm the student and I'm at home and I get a letter saying, 'Here's your loan balance, here are your servicers, please make payments,' and then three months later I get another letter from another company, then another letter six months later from yet another company, I'm wondering, 'Who do I pay, and how much?'"

Jessica Kern, a spokeswoman for Maysville Community and Technical College, said the school's default figures were adjusted without any prompting from the school. The Education Department simply told the school it wouldn't face any sanctions as a result of its default rates, a move Kern assumed was due to the department's decision to not count defaults from borrowers who were forced to deal with multiple loan servicers.

But community colleges weren't the only schools to benefit. Arkansas Baptist College, Central State University, Jarvis Christian College, and Texas College -- all historically black schools -- also had their default figures revised downward. It wasn't clear why. Representatives for Arkansas Baptist couldn't be reached for comment. Representatives for the other three schools didn't respond to requests for comment.

The mere fact that some schools dodged punishment as a result of the change is an indication that there are a large number of borrowers who have defaulted on at least one of their loans because of split-servicing, experts said.

Baker dryly noted in his memo that even though schools were let off the hook, "the borrowers’ defaulted loan remains in its current status for collection and other purposes."

Borrowers in default on at least one of their federal student loans face high collection fees, damaged credit scores, an inability to secure home mortgages or auto loans, and garnishment of their tax refunds and Social Security payments, said Cochrane of the Institute for College Access & Success.

A recent federal audit revealed that the Education Department is demanding so much money from seniors with defaulted student loans that it's forcing tens of thousands of them into poverty. At least 105,000 Americans had a part of their Social Security benefits garnished last year to the point that their monthly benefits were below federal poverty thresholds, according to the Government Accountability Office.

"Borrowers have no control over who services their loans. So why not remove the defaults from the borrowers' records as well?" Cochrane said.

In commentary published online, analysts at the New America Foundation questioned the rationale behind the Education Department's decision, lamenting the "message such a move sends about prioritizing institutions over students."

"The institutions churning out borrowers who don’t repay their loans in such high numbers that the federal government takes notice are granted excuses from government regulations," wrote Ben Miller, a former senior policy adviser under Arne Duncan at the Education Department, and Clare McCann. "There’s no indication, though, that the borrowers who have to deal with the consequences of a defaulted loan are getting any similar assistance in terms of making that loan automatically current or discharging any collection costs. If the default is not the colleges’ fault, why isn’t the student helped also?"

Cochrane, whose organization is in frequent discussions with the Education Department, said she had no indication the department was considering helping borrowers the way it helped colleges.

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