The Student Borrower Protection Center’s panel series on “Solutions to Address Student Loan Default and Collections” featured Under Secretary James Kvaal as the headline speaker on August 9, 2022. His planned statements are listed below. “I appreciate you inviting me to be with you today. I’m happy to be here and appreciative of how many organizations, like the Student Borrower Protection Center, are putting forth practical answers to the student loan default situation. There is no doubt that a problem exists.
Over 7.5 million borrowers nationwide have loans that are in default. This equates to almost one in every six Americans who have student loan debt. More than the total population of Massachusetts, where I live. Naturally, this analogy doesn’t do the problem justice at all. At least before the pandemic, Massachusetts’ population did not increase by a million people annually, which is how many more loans were in default.
Nothing positive comes out of default if there is one thing I know about this situation. There are no winners here, except the debt collectors. All default does is dig the hole deeper for debtors who are already struggling financially. In addition to losing tax advantages like the EITC and child tax credits, which have grown crucial in the fight against poverty, low-income individuals may have their wages garnished. Social Security checks for seniors may have parts of them seized.
Additionally, when borrowers default, their credit ratings plummet, raising the cost of every financial transaction imaginable. Mortgages. Auto loans Cards of credit. Your choice. Undoubtedly, some people have had job or rental applications rejected. Naturally, persons with bad credit are led into riskier financial products that frequently cause them to become even more indebted.
The penalties for defaulting are so severe that it seems as though whoever created these policies imagined borrowers were attempting to game the system. I think it’s safe to say that defaulting on student loans is the furthest thing from a get-rich-quick scheme that any of us can think of. It’s more like a plan to keep you in debt indefinitely.
It makes no sense to try to collect a loan by trapping borrowers in poverty and preventing them from rising beyond it, even if you were a hard-nosed accountant who solely cared about making money for taxpayers. Additionally, lives are at risk because of college debt. Here is the reality. Borrowers who default on their student loans are typically those who have been let down by flawed laws and slow investments in making college more affordable.
They offer the most convincing proof that the student loan system requires major reform! Colleges must act as a catalyst for improved racial justice and upward mobility. However, a disproportionate number of these borrowers left school before receiving their degrees. Others obtained degrees from questionable institutions that they later discovered had little value in the labor market.
They are first-generation college students, people of color, and former Pell winners. They are parents who work full-time jobs and are attempting to advance in their careers to support their families. Nobody in this room needs me to remind them that major choices regarding student loan policy must be taken in the upcoming weeks. Whatever happens, I am confident that we cannot ever again become indifferent to the financial destruction caused by a situation that sends a million students into debt each year.
More than any other president in history, Vice President Biden has taken action to halt this calamity. In addition to saving the typical borrower $4,400 in payback since January 2021, the student loan payment and interest freeze have given us time to concentrate on addressing systemic issues. As an illustration, we are improving debt relief solutions that, until recently, didn’t offer significant debt reduction. We have already authorized relief totaling roughly $28 billion for nearly 1.4 million borrowers. Programs meant to assist them failed many of them!
similar to denying public student loan forgiveness to teachers and nurses. Prior to President Biden, just 7,000 persons had ever been eligible. 175,000 public employees have received approximately $10 billion from us today! By comparing data from the Office of Personnel Management, the Pentagon, and Federal Student Aid, we are currently attempting to automate the procedure for federal employees.
Similarly, after 25 years of repayment, we automatically forgive loans for many debtors. Additionally, we have eliminated debt for about 385,000 Americans with disabilities who qualified for relief but were unable to get beyond the bureaucracy. We’re automating the procedure once more in this case by using data from the Social Security Administration. Additionally, we are now more than ever defending students who have been taken advantage of by for-profit universities.
We have already granted 800,000 debtors who were defrauded by their institution’s long delayed releases. Many of them waited years for assistance, but the Trump administration cruelly ignored them. To make the process for future borrower defense claims more efficient, we’re also making sure that students receive automatic cancellation in the event that their schools suddenly close.
Since we are aware that students who attend for-profit universities have greater default rates, we are also toughening oversight to safeguard students from misuse in the future. The forgiven amount of around $28 billion is not a constant sum. Every day, more borrowers become eligible, and we will do everything in our power to ensure that every qualified borrower receives the help they need.
We also consider the students of today. As we speak, young people are taking out new loans to pay for college this fall. They shouldn’t be forced to inherit broken programs. Our student loan forgiveness programs must be made to last and function as intended. In order to strengthen all of these discharge programs and eliminate interest capitalization where it is not mandated by law, we recently proposed new regulations that would do so at a cost of $85 billion over ten years.
These programs merit effective operation. They protect past, current, and future debtors and cancel the entire loan. Additionally, we’re dedicated to assisting borrowers who have already experienced system failure. President Biden announced intentions to give 7.5 million defaulting loans a “new start” in April. With a fresh start, we’ll assist borrowers in utilizing the current repayment alternatives and avenues for forgiveness.
In order for students to return to school, finish their degrees, make higher earnings, and thrive in life, we will reinstate their access to financial aid. To ensure that people have access to the financial goods they require to prosper, we will put an end to exorbitant collection fees and excessively harsh collection measures. We will also assist borrowers who repaired debts during the payment freeze.
This gets us to the session’s title: beyond the fresh start. In order to reduce the number of defaulted borrowers in the future, we must create a better, fairer, and more cost-effective system. President Biden spoke about lowering monthly fees when running for office. We’ll be requesting feedback from the public on a plan to accomplish just that, with a new income-driven repayment plan that has significantly lower payments, in the upcoming weeks.
We would especially like to hear from you regarding enrolling delinquent borrowers to keep them from going into default and provide access to these plans to borrowers with loans in default. Additionally, we are attempting to improve accountability with debt collectors and student loan servicers. As always, Richard Cordray is protecting borrowers as he guides Federal Student Aid through the current procurement process.
We want these agreements to include responsibility. By employing a variety of pricing, allocations, bonuses, and penalties to encourage greater results, we will make contractors responsible for the delinquency and default rates of the borrowers. Our contractors should be owned by us, not the other way around!
Additionally, FSA is investing heavily in new technology and seeking a more adaptable procurement strategy. We can make it simpler to transfer loans between services and connect with consumers by providing FSA with more fast and more accurate data. Finally, we need your assistance in developing a system that aids borrowers in staying on track and, in the event that they default, aids them in humanely and successfully getting back on their feet.
To address important issues, we require the opinions of specialists, supporters, and borrowers. How can we prevent the annual default of so many borrowers? Numerous options exist in the federal student loan program to delay or cut payments, but they are ineffective. How can we protect borrowers from the twin blow of diminished repayment options and harsh collection methods?
When borrowers need a life raft, the existing system appears to toss them a 50-pound anchor. How can we lessen the harshness of collection operations so that they don’t cause borrowers to incur more debt? How is it justifiable that some defaulted debtors must make annual payments that are more than any payment schedule could ever be? Why is it so difficult for debtors to start repayment even though they are ready and prepared to do so?
How can we help people break away from the complicated labyrinth of overlapping forced collections, wage garnishment, rehabilitative payments, and other obstacles? We offer student loans because a college degree remains our country’s surest on-ramp to higher-paying wages and long-term financial security, despite all the shortcomings of our higher education system today.
Because of this, our country has to invest substantially more in free community college, tripling Pell grants, and other initiatives to change how college is paid for. We also require the fortitude to oppose universities that burden their students with debt that they will never be able to pay back. Additionally, we must make sure that no student is left in a worse situation than if they had not attended college at all. A lifetime of financial hardship and misery shouldn’t follow a student loan default.