America’s student debt crisis is getting worse.
More Americans with student loans directly from the Department of Education fell seriously behind on their payments in the past year, according to quarterly figures the department released in August. The figures defy widely held expectations that generous borrower protections and a significant increase in the number of borrowers making payments based on their earnings would reduce borrower distress.
Nearly 5.1 million borrowers were at least three months late on payments or had defaulted on so-called Direct Loans, according to a Huffington Post analysis of the department data through June 30.
Severely delinquent borrowers now make up about 21.5 percent of all borrowers with Direct Loans, after excluding borrowers who are still in school or are in a temporary grace period on loans that have not yet come due -- the highest recorded figure since the department began releasing quarterly data in 2013. That’s a notable increase from June 2014, when 20.4 percent of borrowers -- or 4.3 million people -- were in serious delinquency or in default.
The increase of an additional 800,000 troubled borrowers, which hasn’t been previously reported, comes despite an improving U.S. economy that has added jobs, modestly increased workers’ wages and boosted household wealth. Those trends have led to a decrease in delinquency in other forms of consumer debt, such as home mortgages.
The new figures add to mounting concerns in Washington that the nation’s roughly $1.3 trillion student loan tab could depress U.S. economic growth in the years to come, as overly-indebted households cut back on spending and investments.
“The federal government has abdicated its responsibility to properly serve student loan borrowers,” said Paul Combe, chief executive of the nonprofit American Student Assistance.
The new data don't include private loans or those made under the since-discontinued bank-based Federal Family Education Loan program. Neither type of debt offers borrowers the kind of protections against default -- such as the ability to make monthly payments that are equivalent to 10 percent of discretionary income -- available to those in the Direct Loan program. The government has not released delinquency data on these two types of debt.
Experts inside and outside the government haven’t settled on the reason why borrowers with the most generous type of student loan are increasingly falling behind on their payments. They pointed to a variety of factors, such as the recent spike in the number of low-income borrowers attending U.S. colleges, expiring provisions meant to hold schools accountable for their students’ loan defaults, and sloppy loan servicing.
Take the jump in new students from low-income neighborhoods. About 3.1 million Americans from low-income areas took out student loans each year between 2009 and 2012, according to the Federal Reserve Bank of New York. The regional bank defined low-income areas as ZIP codes where the average annual household income in 2010 was less than $40,000. An average of more than 3 million Americans taking out student loans was a 31 percent jump from 2004, and the increase among people from poor areas was the largest among all income groups.
The rise in new borrowers came after millions of Americans either lost their jobs or failed to secure one after completing their education in the aftermath of the Great Recession, leading many to seek further schooling in order to attain new skills or credentials in hopes of landing a new or better-paying job.
Students from low-income areas flocked to for-profit colleges, where programs can be completed in as little as six months. Nearly three in five students from households with annual incomes below $40,000 were enrolled in for-profit colleges in 2012, according to the most recent federal data analyzed in a February report from the Pell Institute for the Study of Opportunity in Higher Education.
But the education low-income students received hasn’t yet paid off.
Some 70 percent of borrowers from low-income communities whose student loan bills first came due in 2009 defaulted, were at some point at least four months late on their payments, or experienced an increase in their loan balances by the end of 2014, according to the New York Fed. As a group they managed to pay down just 3 percent of their combined student loan balance five years after leaving school, data show.
For-profit college supporters argue that their schools welcome students that public and nonprofit colleges traditionally shun and those who are unable to take classes at underresourced community colleges.
Many of the borrowers now in distress on their federal loans could be these former for-profit college students who enrolled in the aftermath of the Great Recession. Students at for-profit colleges in the U.S. have taken out more than $90 billion in federal student loans over the last five academic years, according to a previous HuffPost analysis of Education Department data.
Federal rules penalize colleges whose students subsequently default at high rates within the first roughly three years of their loans coming due. A 2012 U.S. Senate investigation revealed that for-profit colleges frequently paid firms -- some of them owned by Education Department loan contractors -- to relentlessly cajole borrowers into enrolling in federal plans that delayed their required payments until after the default window had passed.
But because colleges aren’t held accountable for defaults incurred by students after that three-year period has passed, there’s little impetus for schools to provide better servicing now for students who left school before 2013. Experts contend that the rise in hardship could worsen in the coming years as these borrowers are no longer pitched specialized plans that would help them avert default.
“There’s nobody actively calling them up trying to put them in forbearance or deferment plans,” said Elizabeth Baylor, director of postsecondary education at the Center for American Progress, a D.C.-based policy organization with close ties to the Obama administration.
Poor loan servicing deserves much of the blame, according to consumer advocates.
Borrowers and their advocates say the Education Department’s loan servicers continue to give borrowers faulty information, lose their paperwork when they apply to make payments based on their earnings, and fail to inform borrowers of the myriad options to avoid distress. That, in turn, is causing borrowers to fall behind on their debts.
“Instead of supporting higher education, the present student loan servicing system makes it more difficult for borrowers to realize the promise of their investment,” groups including the American Association of State Colleges and Universities, Center for Responsible Lending, and Consumer Federation of America said in July in a joint letter to the federal Consumer Financial Protection Bureau. “Far too many student loan borrowers face distress and default because of student loan servicers’ failure to help them access relief.”
In response to concerns, the Education Department has tried to push its loan servicers to further counsel borrowers on their options. They’ve also introduced bonus pay for loan servicers, and the Obama administration has promised to consider imposing new rules on student loans similar to those enacted in the wake of the financial crisis that cleaned up the credit card and home mortgage markets.
Last September, William Leith, a senior Education Department official, pledged to “reset” how the department pays servicers if there wasn’t “significant improvement” by June of this year. He didn’t provide details of what that might entail.
But the data suggest that servicing hasn’t improved so far; rather, the situation seems to be getting worse. During the three-month period that ended in June, borrowers lodged 12 percent more complaints with the CFPB regarding how companies serviced their private student loans compared to the same period last year, which has raised red flags for advocacy groups. Many servicers use similar systems when collecting payments on both private and federal student loans.
The White House has touted federal plans that allow borrowers to make payments based on their earnings as one form of relief designed to ease borrower distress. After repeated White House efforts to push the Education Department to more aggressively target troubled borrowers, enrollment in income plans has more than doubled in the last two years, to 3.9 million borrowers.
Under the income plans, known as Income Based Repayment and Pay As You Earn, an enrolled borrower with no earnings could make payments as low as $0 and still remain current on their debts. Virtually all borrowers with Direct Loans are eligible for the plans, depending on their annual income.
But the rise in student-loan distress over the past year occurred despite a 55 percent increase in the number of borrowers enrolled in these programs, and critics say that’s because of the ongoing problems with how loans are serviced.
For example, borrowers are often dropped from those plans, which deprives them of their benefits. Debtors complain that they are routinely kicked out of the program when their loan servicers fail to notify them of annual deadlines to recertify their income information or process their paperwork in time. Just four in five borrowers enrolled in the plans are actually making payments based on their earnings; the rest are paying based on the amount they owe.
Education Department data suggest that nearly one in three borrowers who were in the two popular income plans last year weren’t able to recertify their information by June 30 of this year in order to keep paying based on their earnings. The department disputed the figure, though it didn’t state the correct number or explain how HuffPost’s figure is wrong.
The CFPB launched an industry-wide investigation last month to determine why borrowers are being kicked out of the Education Department’s income-driven repayment plans. The consumer regulator has found that borrowers who are unexpectedly dropped from these programs face surprise overdraft fees, thousands of dollars in extra payments and interest, and "payment shocks" that are so high they cause borrowers to miss payments.
Problems in ensuring borrowers’ paperwork is processed by their annual deadlines are widespread. A Education Department study from April found that 57 percent of borrowers, or 696,000 people, didn't recertify their earnings information by the annual deadline. The department, which pays its loan servicers in part to remind borrowers about the deadlines, couldn’t say why that was the case.
Borrowers who fall out of income-based plans are especially at risk of falling behind on their loans, said Chris Hicks, who leads the Debt-Free Future campaign at the advocacy group Jobs With Justice.
That’s because when borrowers receive the income plans’ full benefits, they rarely fall behind on their payments. The government’s Income Based Repayment and Pay As You Earn plans have the lowest delinquency rates of any federal repayment plan, according to Education Department data released in December.
Over the last five years, three of the Education Department’s four primary loan servicers have failed to earn even average customer satisfaction scores from borrowers surveyed by the department. In two of those years, borrowers rated Great Lakes Higher Education Corp. & Affiliates as above average, department records show. The Education Department’s survey administrator encourages companies to attain scores in the low 80s. Borrowers haven’t rated any of the department’s main loan servicers above 77.2.
“Is the federal government providing the quality of service that borrowers need? No, I don’t think it does, and that ripples down to the servicers,” said Combe, the American Student Assistance chief executive. “Usually the borrower gets the right information six months too late.”
The Education Department expects to pay its loan servicers $804 million this year, Dorie Nolt, a department spokeswoman, said Aug. 6.
The Education Department has faced relentless criticism from consumer advocates, Senate Democrats and its own inspector general for its lackluster oversight of loan contractors. In one recent example, its inspector general said in an Aug. 24 report that the department failed to hold one of its contractors, Xerox Education Solutions, accountable for widespread problems in its system to track defaulted student loans.
Another problematic contractor is Navient, the student loan giant formerly known as Sallie Mae. Federal prosecutors last year accused the company of intentionally cheating tens of thousands of active-duty troops on their private and federal student loans, a charge the company settled without admitting wrongdoing. The CFPB is prepping a possible lawsuit against the company for allegedly mistreating student loan borrowers.
But as other government agencies attempt to penalize Navient for allegedly faulty servicing practices, the Education Department continues to send the company new accounts. It also has yet to recoup $22 million in alleged overpayments to Navient under the FFEL program, despite a 2009 recommendation from its inspector general that it recover the money. The department and Navient are in settlement negotiations, Nolt said early this month.
Navient has repeatedly insisted it hasn’t violated any rules, and it is hoping to convince the CFPB not to penalize it for allegedly violating consumer protection laws, the company told investors last month.
To date, the Department of Education hasn’t brought any public enforcement actions against Navient over its loan servicing practices. Nor have they taken action against the other three main loan servicers -- Nelnet Inc., Great Lakes, and Pennsylvania Higher Education Assistance Agency (PHEAA), which is more commonly known as FedLoan Servicing -- despite allegations that all four routinely mistreat and mislead student loan borrowers.
“We recognize that we’re not all the way there, and too many students are struggling to repay their loans,” Lehrich, of the Education Department, said. “We will not rest in our efforts to ensure that borrowers are successfully managing their debt and more and more Americans are getting an affordable college education that leaves them with a meaningful degree and the job prospects to repay their loans and get ahead.”
Consumer groups and some federal officials said that many of the problems in student loan servicing stem from servicers’ inadequate spending on their systems and training for their employees, despite the fact that the four loan servicers have generated billions of dollars in profit over the last three years, according to their annual reports. From 2012 to 2014, Navient recorded $3.5 billion in combined net income while Nelnet recorded $788.3 million in profit. PHEAA, a quasi-government agency, generated $660.1 million in combined income before grants and financial aid during the three-year period. Great Lakes, a nonprofit that hasn’t yet disclosed its 2014 figures, recorded combined income of $286.4 million in 2012 and 2013.
Spokespeople for Nelnet, Great Lakes, Navient and PHEAA did not respond to requests for comment.
In March, President Barack Obama issued a memorandum calling for a “student aid bill of rights” that, if all the measures were enacted, would significantly improve how servicers treat borrowers. In response, the administration last month recommended that the Education Department make numerous changes to how its loan servicers interact with borrowers. Some of the proposals amounted to bypassing servicers altogether, such as creating a new government website where borrowers could check their account information, make payments and learn about various repayment options.
The Obama administration has publicly touted its efforts to go around loan servicers to directly reach at-risk borrowers, such as through email campaigns and a partnership with Intuit’s TurboTax platform. But at the same time the administration has asked Congress for more money to pay its servicers -- the White House this year requested an additional 18.5 percent for the 2016 fiscal year -- leading some federal officials to question why the administration has continued to boost pay for servicers as it also takes on some of their responsibilities.
Other Obama administration recommendations included more stringent oversight of servicers by the Education Department; developing new customer-focused metrics to grade servicers’ performance, such as measuring the amount of time it takes servicers to answer phone calls or respond to borrower complaints; withholding pay when servicers fail to meet expectations; using the results of department audits when allocating new accounts; and forcing servicers to proactively tell borrowers how much they could be saving if they made monthly payments based on their earnings.
Borrower complaints led the Education Department to adjust its contracts with loan servicers in 2014. The department decreased how much it would pay its loan servicers for delinquent and nonpaying accounts, and increased the weight given to borrower surveys when determining how many new accounts it annually sends to its contractors.
Under the revamped 2014 contracts, the department agreed to pay its servicers quarterly bonuses if they slightly decreased or maintained the same delinquency rates they had prior to the August signing of the contracts. The White House, which has been pushing the department to reduce student loan distress, praised the move. The department has since doled out $1.8 million in quarterly bonuses, Nolt said last month, with Great Lakes receiving $1.2 million in bonuses and Navient getting $600,000 -- even though serious delinquencies and defaults in general have risen over the past year.
But the department’s loan servicers don’t like aspects of the new contract, and have told policymakers in Washington that reducing the amount they’re paid on delinquent accounts could lead them to devote fewer resources to helping delinquent borrowers get back on track. They’ve also disputed allegations that they’re mistreating borrowers, and they’ve argued that when they get in touch with borrowers they help them avoid default.
Jack Remondi, Navient’s chief executive, has said that “nine times out of 10 when we can reach past due customers, we can identify a solution to help them avoid default.” Other servicers have made similar claims.
The lack of meaningful changes to how loans are serviced, despite ever-increasing delinquency rates and growing complaints from student loan borrowers and legal aid lawyers, has some current and former federal officials worrying that millions of Americans could fall victim to preventable defaults.
Default data compiled by the New York Fed suggests that distress is widespread among all types of borrowers, from drop-outs to those with advanced degrees. For example, about one in five borrowers who entered repayment in 2009 with at least $100,000 in student debt defaulted within five years. The regional Fed defined defaults as being at least nine months past due, similar to the government’s definition for federal student loans.
Widespread borrower distress is drawing comparisons to the housing crisis that began in 2007 before eventually rippling throughout the U.S. economy. Defaults ruin borrowers’ credit profiles, limiting their ability to buy homes and cars. And in many states where licenses are needed for certain jobs, state governments will revoke a borrower’s occupational license for defaulting on a federal student loan -- all of which bodes ill for the 5.1 million people currently in distress on loans directly from the Education Department.
“The loan portfolio is increasingly taking on characteristics of subprime loans, which would -- along with the [Education] Department's servicing issues -- explain why its performance is deteriorating despite an improving economy,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities.
Others drew similar comparisons.
“Regulators uncovered foul play in the mortgage servicing industry that led to too many unnecessary and avoidable foreclosures,” said Rohit Chopra, formerly the top student loan official at the CFPB. “There is a spooky similarity to the problems we are seeing with student loan servicers.”
“If the student loan industry is failing to keep serious delinquencies under control,” he added,“this can have consequences for the broader economy.”