On Tuesday, President Obama proposed a new Student Aid Bill of Rights, a directive that aims to make the borrowing process less painful for college students and do a better job helping graduates manage their debt payments.
The plan called for several major changes, including the implementation of a new student borrower complaint forum; a centralized student loan tracking website; tougher rules on debt collectors; and the possibility of being able to discharge student debt in bankruptcy
No one can argue that reform isn’t needed: the national student debt tally has topped $1.3 trillion and the average borrower is saddled with $29,400 upon graduation. A recent report by the New York Federal Reserve Bank found that 11.3% of student loan borrowers had missed at least one payment in the fourth quarter of 2014 — double the rate just 10 years ago. A separate report by the Department of Education found that among students whose federal loans came due in 2011, nearly 14% have defaulted on their loans, meaning they are more than 270 days behind on payments.
But some experts are questioning whether this new Bill of Rights will be enough to resolve some of the core problems facing college students today -- namely, the fact that tuition hikes have shown no signs of slowing down.
“Unless the Administration and Congress act urgently to constructively address escalating college costs, particularly in the public sector where the vast majority of families access higher education, the debt burden will inevitably escalate and income-based repayment turns into another path of least resistance for tuition hikes,” the The American Association of State Colleges and Universities said in a statement.
College costs have risen 12-fold in the last three decades, and following the Great Recession, state and federal funding for public institutions was cut. According to a recent report by the Center on Budget and Policy Priorities, a left-leaning think tank, 48 states fund college education less now than they did before the recession.
Judah Bellin, a higher-education policy expert at the Manhattan Policy Institute, a nonpartisan research firm, says Obama’s plan does nothing to address the cost of tuition.
“It'll help students manage existing debt, but it won't prevent students from over-borrowing, because it doesn't address the cause of rising debt: the unimpeded growth of tuition,” Bellin said in a statement. “One of the reasons colleges have little incentive to keep tuition down is that the federal government ties loan awards to a student's cost of attending a particular college. So colleges can raise tuition knowing that the federal government will make up the difference. Unless that incentive changes, student loan debt will remain a problem.”
Mark Kantrowitz, a longtime advocate for more transparent student aid regulations and publisher of Edvisors.com, says he would like to see the addition of more student loan counseling for college students.
Financial aid offices are required by law to make students undergo entrance counseling before they can receive financial aid. Any student who takes out federal subsidized, unsubsidized, Parent PLUS or Perkins loans has to complete either online or in-person counseling before they can get funds. But a 2012 survey of 13,000 college students who carried $75,000 or more in student loans — placing them in the top 5% of student debtors in the U.S. — found more than 40% couldn’t remember receiving counseling.
Kantrowitz says financial literacy should be added to the core college curriculum.
“Better disclosures are not enough if students lack the skills needed to interpret the disclosures,” he says. “I would like to see student loan counseling that is personalized to the borrower's circumstances and provided more frequently.”
However, Jen Mishory, executive director of Young Invincibles, a youth advocacy group, says Obama’s plan for a centralized loan tracking website is a good step forward. Student loans are often transferred from one lender to the next over the lifetime of the loan, which makes it tricky for borrowers who fall behind on payments and have no idea which lender they should go to for help.
"We're thrilled to see President Obama taking a significant step to give students struggling with poor loan servicing and deceptive debt collection practices a voice through a centralized complaint system,” Mishory says. “A central point of access for monitoring student loan rates should minimize this challenge."
Change is gonna come
The Student Aid Bill of Rights may not solve all our problems, but it is the latest push by the White House to improve the student lending landscape. Obama recently proposed making the first two years of community college free for all students. The Education Department is also developing a college ratings system, set to launch later this year, that would help families and students better compare the value of schools. Under Obama’s new Pay as You Earn plan, federal student loan borrowers can cap their federal loan payments at 10% of their income.
One more thing missing from Obama’s Student Aid Bill of Rights plan right now is a timeline. The only concrete deadline included in the directive is the July 2016 due date for the centralized student loan website. There’s no telling how long it will take regulators to meet the rest of the items on this ambitious to-do list.
The Student Aid Bill of Rights is a presidential memorandum — meaning they don't require Congress’s approval and are as good as an executive order. President Obama has been particularly fond of presidential memorandums throughout his term, issuing close to 200 so far.
Senators in the past have had little luck getting similar measures passed by Congress, Kantrowitz notes. Then-New York Sen. Hillary Clinton proposed a Student Borrower Bill of Rights in 2006 and Sen. Richard Durbin (D-Ill.) followed up with the same initiative in 2013. Obama's iteration may not be the panacea for student debt reform we've all been waiting for, but it is at least a step in the right direction.
Here are the 5 biggest changes Obama is calling for:
Student feedback system: The Department of Education has until July 2016 to roll out a new online student feedback system to give for borrowers a way to easily complain about federal student loan lenders, servicers and the collections agencies they hire to go after delinquent borrowers.
Unfogging the student loan transfer system: Obama’s plan would require lenders to alert students when their federal student loans are transferred and create one website where they can go to see where their loan has moved. Obama is also calling for improvements to disclosure notices that are sent to borrowers while they are in repayment, the same way regulators improved disclosure notices for delinquent mortgage and credit borrowers
Reining in rogue debt collectors: Obama is asking for better treatment of defaulted student loan borrowers whose loans have gone into collections. He’s asked regulators to rein in debt collectors who charge borrowers exorbitant penalties and interest fees, as well as force them to do a better job helping students get back in good standing on their loans.
Giving low-income and disabled borrowers a break: The president is asking the Treasury Department to make it easier for borrowers struggling to make federal student loan payments to enroll and stay enrolled in income-based repayment plans. He’s also directed the Social Security Administration to figure out a way to ensure borrowers who’ve become disabled can discharge their federal student debt, rather than having their benefits garnished.
Making it easier to discharge student debt in bankruptcy: Consumer advocates have long lobbied lawmakers to make it possible to discharge student loan debt in bankruptcy, the same way people are able to discharge credit debt. Obama doesn’t exactly promise to make that happen, but he is directing his advisers to work with the Consumer Financial Protection Bureau to come up with recommendations for regulatory and legislative changes for all student loan borrowers, including “possible changes to the treatment of loans in bankruptcy proceedings.”
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What happens if you don't pay your student loans? Find out in the clip below: