The federal student loan program is a disaster. Over five million people are in default even though Congress provides all borrowers with the right to affordable payments and to discharge of borrowers’ debts in specific circumstances. Many student loan borrowers who could benefit from these rights are unaware they exist or are unable to exercise their rights.
This Article examines the dynamics and incentives that drive the longstanding problem of high default rates and repayment distress among student loan borrowers. Our core finding is that the Education Department adopts a creditors-rights framework for student loan repayment, which is inapposite for student loans because borrowers have unique, federal rights that are unavailable in market credit transactions. We then demonstrate why the mission and track record of the Education Department, including its failure to manage and oversee servicers, make it unlikely that the Department would ever adopt a borrower-rights focus on student loan repayment.
We build the case for the creation of the Student Borrower Protection Agency, modeled in part on the Consumer Financial Protection Bureau (CFPB). The function of the SBPA would be to serve student loan borrowers. Just as the country needed the CFPB to fill regulatory gaps in consumer financial protection, we need an agency that will deliver to student loan borrowers the rights promised under federal law.
The fundamental thesis of this article points out that unlike the normal debtor-creditor relationship, where the creditor's goal, bounded by legal restrictions under consumer rights laws, is solely to collect a debt, with government student loans the creditor is the Department of Education. With its servicers and debt collectors, it not only has an obligation to the borrowers, not only a citizens, but also under the various student loan programs such as the Total Permanent Disability ("TPD") discharge, Income Drive Repayment ("IDR") plans, and Public Service Loan Forgiveness ("PSLF").
The following chart taken from the article contrasts those obligations:
Comparison of Market-Based Loans and Student Loans
|Market-Based Loan Servicing||Student Loan Servicing|
|Creditor determines whether|
borrower is eligible for loan and the price.
|Borrower exercises right to obtain loan.|
No underwriting occurs; just determination of eligibility under HEA.
|Creditor determines payment amount based on loan contract and charges the Borrower.||Borrower makes a choice to accept standard/ extended/graduated repayment or enroll in IDR. Borrower is responsible for documenting IDR, if applicable.|
|Creditor determines amounts owed, creates billing, credits and allocates payments, and controls related|
|Creditor determines amounts owed, creates billing, credits and allocates payments, and controls related processes. Borrowers are responsible for documenting IDR eligibility and requesting/documenting discharge rights, if applicable.|
|Creditor determines period from nonpayment to placement of loan in|
default. Creditor decides when and how to seek collection or other
recourse. Creditor determines loan and payment modifications to offer
Borrower, if any.
|Borrower determines whether and when to exercise rights of forbearance, deferment, rehabilitation, or consolidation (and switch to IDR, if appropriate). Creditor implements remedy, if any selected.|
|Creditor discharges loan only after|
full repayment required by loan
contract (with any modifications)
or borrower obtains bankruptcy or
other judicial discharge.
|Creditor: discharges loan after full payment (with any modifications as a result of borrowers participating in IDR); Creditor discharges balance of loan on IDR completion; Creditor discharges balance of loan when borrower documents PLSF or disability discharge; Borrower obtains administrative discharge (full or partial) based on other discharge right; or Borrower obtains bankruptcy (rare) or other judicial discharge.|
The Department of Education, however, uniformly not only gives preference to its collection obligation, but largely ignores its obligations to borrower rights and protections. The former Acting Assistant Secretary for Postsecondary Education at ED, David Bergeron, offered this observation of how student loan repayment is currently administered: “at the end of the day, what FSA is judged by is not customer service, but how much money is returned to the Treasury. Their default option is to think of servicers first and borrowers as an afterthought.” As the article points out, this would be akin to the IRS seeking to maximize tax collections by obscuring tax payer's rights to take appropriate deductions.
While the authors find no rational basis for the Department of Education shirking its duty to protect borrowers, it does recognize that historically student loans have been a "cash cow for the government." See Watson, Camilla E., Reforming the Tax Incentives for Higher Education (2017). Virginia Tax Review, Vol. 36, 2017, University of Georgia School of Law Legal Studies Research Paper No. 2018-16. These costs to the government have now over-whelmed any profits and are primarily a cash-cow for the mortgage servicers.
Beyond the interest of the federal government itself in maintaining a creditor-rights focus in regards to student loans, there is a clear self-interest in the employees of the Department of Education maintaining the collections processes and profits at the servicers where many, through the revolving door of public-private employment, eventually hope to work themselves.
The idea of having a Student Borrower Protection Agency, whether as part of the CFPB or as an independent agency oriented to maximizing borrower rights and outcomes, would be interesting, particularly if it was also given oversight in regards to bankruptcy. Given the current narrow split in Congress, however, such a new entity seems unlikely.
In addition to the failures that this article points out, the Department of Education with is sole focus on student loans as a creditors-right issue will fight tooth and nail any attempted bankruptcy discharge, without regard for whether that debt has any likelihood of being collected or even whether the costs of litigation are justified. Instead the Department of Education should adopt a "no contest" approach to many bankruptcy discharges based on clear "safe harbors", including:
a) the borrower is receiving disability benefits under the Social Security Act;
b) the borrower has been determined by the Secretary of Veterans Affairs to be
unemployable due to a service-connected disability;
c) the borrower’s income is derived solely from retirement benefits under the Social
Security Act or from a retirement fund or account, and the annual household income
for the borrower is less than the median family income of the borrower’s applicable
State as reported by the Bureau of the Census;
d) the borrower provides for the care and support of an elderly, chronically ill, or
disabled household member or member of the borrower’s immediate family
(including parents, grandparents, siblings, children, and grandchildren of the
borrower, the dependents of the borrower, and the spouse of the borrower in a joint
case who is not a dependent) and the annual household income for the borrower is
less than the median family income of the borrower’s applicable State as reported by
the Bureau of the Census; or
e) during each year of the three-year period before the filing of the petition (exclusive of
any applicable suspension of the repayment period), the annual household income for
the borrower has been less than the median family income of the borrower’s
applicable State as reported by the Bureau of the Census.
This suggestion has been advanced by both the American Bankruptcy Institute in its 2019 Final Report of the Commission on Consumer Bankruptcy and the National Association of Consumer Bankruptcy Attorneys in its letter encouraging the President to take executive action in this regard. See also: A No-Contest Discharge for Uncollectible Student Loans (April 5, 2019) and Consent to Student-Loan Bankruptcy Discharge (February 9, 2019).
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