Struggling Borrowers At Higher Risk Of Default As Education Department Resists Recommendations

"If the department continues this inaction and refuses to hold its servicers to a higher standard, millions will suffer."

Millions of Americans are more likely to default on their federal student loans because the Education Department refuses to tell them they’re eligible to make lower monthly payments, according to a blistering report released Thursday by the Government Accountability Office.

The report comes as borrowers with loans directly from the Education Department are increasingly falling behind on their debts, risking a lifetime of wage garnishments and ruined credit profiles as a result. Consumer advocates blame the department’s loan contractors, which collect monthly payments and counsel borrowers on repayment, for failing to inform borrowers of their options.

In fact, according to the GAO, in 2012 the Treasury Department found that about 70 percent of borrowers in default on their federal student loans qualified for plans that enabled them to make payments based on their earnings. Many of those borrowers probably qualified for the plans before they defaulted, providing evidence for a concern voiced by Deputy Treasury Secretary Sarah Bloom Raskin in April of last year, when she challenged the Education Department and its loan servicers for high rates of borrower defaults given the existence of generous repayment plans.

With nearly 41 million Americans collectively owing nearly $1.2 trillion on their federal student loans, according to Education Department data, concerns are mounting in Washington that those debts risk slowing economic growth as borrowers delay purchases and investments in order to repay Uncle Sam, or instead default on the loans after failing to secure jobs that would enable them to make good on their obligations.

The GAO, Congress’s in-house watchdog, recommended that the Education Department and its contracted loan servicers proactively tell borrowers on a regular basis that they could be eligible to annually save thousands of dollars on their loan payments. The office determined too many eligible borrowers didn’t know about the plans as a result of ineffective outreach efforts by the department and inconsistent communications from the department’s loan contractors.

A top department official, James Runcie, rejected the recommendation in his written response to the report, claiming that it could lead to “imprudent” decisions by borrowers. Enrollment in income plans has more than doubled over the past two years to 3.9 million borrowers, but the GAO cited 2012 estimates by the Treasury Department, and its own interviews with borrowers, to argue that many borrowers are unaware of this option.

The watchdog’s report, the result of a nearly two-year audit, lays bare what many borrower advocates have been arguing for years: The Education Department, led by Secretary Arne Duncan, is simply unwilling to take necessary steps to help distressed student loan borrowers.

“The Department of Education and its student loan servicers aren't doing enough to help struggling borrowers. It's that simple,” said Chris Hicks, who leads the Debt-Free Future campaign at the advocacy group Jobs With Justice. “If the department continues this inaction and refuses to hold its servicers to a higher standard, millions will suffer, and working people won't be able to make ends meet. This is the legacy that Secretary Duncan is leaving behind.”

Instead of heeding calls from President Barack Obama to ensure that eligible borrowers know about plans enabling them to make monthly payments based on their earnings, “borrowers must actively seek information” about them, the GAO said.

Just three of the 14 borrowers interviewed by the congressional watchdog either had a good understanding of the income plans or had been told about them by their loan servicer.

Runcie, the Education Department official, said the report overstated the degree to which borrowers are unaware of the income plans. The report, which largely relies on data available as of last September, also doesn’t reflect recent efforts by the department, he said.

Furthermore, Runcie added, it wasn’t clear that telling all borrowers about all their options would be the “most efficient or effective way” to help borrowers manage their debts.

Obama has repeatedly chided the Education Department for borrowers’ general lack of awareness about the income plans. He’s written at least two memorandums to Duncan urging him to do more.

The department expects to pay its loan servicers $804 million this year, in part to help borrowers pick repayment plans best suited for their financial circumstances.

But the Education Department hasn’t been regularly notifying borrowers whose loans have come due about the income plans, according to the GAO. It also hasn’t examined the effectiveness of its outreach efforts to borrowers.

One of the department’s loan contractors, which services nearly a quarter of the department’s loans, representing more than 5 million borrower accounts, doesn’t tell borrowers about an existing plan that enables those working in public service to have their debts forgiven tax-free after 10 years of payments. Borrowers first have to request the information.

As a result, eligible borrowers could be paying extra on their loans, are at greater risk of missing payments, and could be forgoing thousands of dollars in eventual loan forgiveness.

Borrowers enrolled in income plans generally make little money. About three-quarters of borrowers in the two most popular plans, Income Based Repayment and Pay As You Earn, earn less than $20,000, according to the report. The vast majority of borrowers in the income plans also are repaying only undergraduate loans, echoing previous findings. The findings refute hypothetical scenarios offered by researchers at the Brookings Institution and the New America Foundation that well-off borrowers or those with graduate degrees are taking advantage of the plans.

Department officials told the GAO they haven’t targeted borrowers eligible for the Public Service Loan Forgiveness plan because they can’t identify them based on existing information. In its report, the GAO said that made it even more important for the department and its loan contractors to proactively remind all borrowers about this option.

About 4 million borrowers with loans directly from the Education Department may be employed in public service, the GAO estimated in its report. But only about 147,000 were enrolled in the public service plan.

“The gap between participation and eligibility and [the department’s] own assessment of borrower feedback suggests that borrowers are not receiving sufficient information about income-driven repayment plans,” according to the report. For the public service plan, the Education Department “has little assurance that borrowers know about the program, given that it has not assessed its efforts to raise awareness and relatively few borrowers” are enrolled.

The Education Department’s failings could be causing otherwise avoidable defaults.

“Increasing enrollment in income-driven repayment plans is a potent weapon to tame the student loan default crisis,” said Rohit Chopra, formerly the top student loan official at the federal Consumer Financial Protection Bureau. The report, he added, “provides further evidence that servicers may be hiding the ball to protect their bottom line.”

Borrowers in Income Based Repayment and Pay As You Earn rarely default, according to the report. For those whose loans came due between 2010 and 2014, less than 1 percent had defaulted. Borrowers making payments based on the amount they owe defaulted at a 14 percent clip.

Spokespeople for the Education Department’s four major loan servicers -- Navient Corp., Nelnet Inc., Great Lakes Higher Education Corp. & Affiliates, and Pennsylvania Higher Education Assistance Agency, which is more commonly known as FedLoan Servicing -- either didn’t respond to requests for comment or referred inquiries to the Education Department.

Education Department officials “appear unable or unwilling to provide the direction needed to servicers,” said Maura Dundon, senior policy counsel at the Center for Responsible Lending. “We can’t allow defaults and delinquencies caused by poor servicing to continue. In this age of increasing tuitions, increased need for a college degree, decreasing real wages, and increased costs for basics like childcare and houses, students need to know that they have safety net if they attempt a college degree.”