The U.S. Treasury, which finances more than 90 percent of new student loans, is exploring ways to make repayment more affordable as defaults by almost 7 million Americans and other strapped borrowers restrain economic growth.
Leading the effort is Deputy Secretary Sarah Bloom Raskin, who became the department’s No. 2 official in March after more than three years as a Federal Reserve governor. As higher-education debt swells to a record $1.2 trillion, Raskin, 53, is alert to parallels to the mortgage crisis.
Back then, “we would see signs on telephones polls with 1-800 numbers urging homeowners to call to stop foreclosures. People generally got into more trouble when they used those services,” she said in an interview. Driving past the same telephone poles recently, she saw signs “urging people to call a 1-800 number for helping paying student loans.”
Raskin has reason to worry: Most of those loans are backed by the federal government. In addition to trying to facilitate stronger growth, she’s focusing on the impact such debt has on government’s financing needs and ways to improve servicing and collection.
The Rising U.S. Burden
Among the options under consideration is boosting participation in underused Education Department programs that reduce monthly payments by tying them to a percentage of income for those who struggle, while extending the term of the loan.
The Treasury and Education departments are working with tax preparers Intuit Inc. (INTU:US) and H&R Block Inc. to reach borrowers during the tax-filing process and provide information about student loan repayment options.
For the Treasury, which finances $100 billion of new student loans every year, a pressing need is forecasting repayments more precisely so it can better determine how much money to raise from capital markets.
“The income-based plans provide borrowers with good options to keep their loans current, and keeping those loans current is very important from the perspective of the U.S. government’s balance sheet,” Raskin, the Treasury’s highest-ranking woman ever, said in the July 16 interview. “We need precision around how much we have to raise in order to meet the demand for student loans.”
Critics such as Richard Vedder, director of the Washington-based Center for College Affordability and Productivity, a nonprofit research group, say the administration’s efforts fail to address the core issue: education costs increasing faster than inflation and income.
The income-based repayment programs don’t encourage people to seek higher-paying jobs or major in the fields that lead to better salaries, Vedder said. The administration’s measures will alleviate “some of the problems that currently exist with the system, but will actually worsen things in the long run.”
The issue has wider consequences for the economy. Students who default suffer damage to their credit records, making it harder for them to borrow for homes and cars in the future. That weighs on growth.
Default rates on student debt increased to 14.7 percent for students required to start repayment in 2010, the most recent data available, according to Education Department figures. That’s up from 13.4 percent a year before.
“As a steward of the federal government’s finances and of the American economy, the Treasury Department has a strong interest in making sure we are asking the right questions,” Raskin said in her first public speech as a Treasury official on April 29.
The Education Department’s income-based plans aren’t used very widely, with many borrowers opting instead for payment deferral plans when money gets tight or the job hunt drags on. Interest accrues during most deferrals or forbearance, further hindering the borrower.
About one-fourth of outstanding direct federal loans is being paid back through one of three income-based programs, according to the data on Education Department’s website. The percentage doesn’t include students who borrowed from banks before 2010, when federal loans were originated mostly by private lenders.
Education Department spokeswoman Denise Horn said the department’s goal is to help students “make informed decisions that are most appropriate for their financial circumstances.” The department and the loan servicers it contracts with “continue to reach out to borrowers through e-mail, phone calls and social media to talk about repayment options,” she said.
President Barack Obama also asked the Treasury and Education departments to develop and start by Sept. 30 a pilot project to test the effectiveness of loan counseling resources.
“We all have an interest in making sure that today’s student loan borrowers will be able to fully participate in the economy as homeowners, entrepreneurs and productive members of the American workforce,” Rohit Chopra, the student-loan ombudsman for the federal government’s Consumer Financial Protection Bureau, said in an interview.
While income-based plans can be helpful to customers in their early years of repayment, paying over a longer period of time can increase the cost of borrowing, said Patricia Christel, a spokeswoman for Newark, Delaware-based Navient Corp., the largest servicer of federal loans and previously a part of SLM Corp., known as Sallie Mae.
Raskin has experience dealing with consumer debt. As Maryland’s top financial regulator from 2007 to 2010, she successfully pushed for legislation that cracked down on the short-term “pay-day” lending that often saddled borrowers with interest rates of more than 600 percent a year. She helped rewrite the state’s foreclosure process, imposing penalties for mortgage fraud and giving homeowners more time to try to avoid foreclosures.
With 40 million Americans having student loans, and while Congress is too gridlocked to legislate solutions, Raskin is in a position to help consumers who may face another wave of unsustainable debt, according to analysts and her former colleagues.
“At the Fed, you could look at it and think about it, but you couldn’t do much directly about it,” Elizabeth Duke, who served on Fed Board of Governors with Raskin, said in a phone interview. “At Treasury, she can affect implementation of the solutions she comes up with.”
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