Student loan payment reform
American Student Assistance’s mission is to help students successfully manage their student loan debt. That’s why we support easier access to Economic Hardship Deferments and the Project on Student Debt’s Plan for Fair Loan Payments.
Easier access to Economic Hardship Deferments
The overly complicated process of applying for an economic hardship deferment results in underutilization of the deferment entitlement and makes it simpler for a lender to offer the borrower a less-beneficial (especially in the long run) discretionary forbearance. Current regulations also base eligibility exclusively on the level of student loan debt versus income, regardless of other circumstances and financial responsibilities the borrower may have. This results, for example, in a borrower with an income of $30,000 per year, with three dependents and a student loan payment of $400 per month, to be denied this deferment.
We recommend that Congress re-evaluate the Higher Education Act provisions to simplify the eligibility criteria; in the meantime, we suggest the Education Secretary exercise her authority to simplify existing regulations. In particular, we would like the Secretary to examine the eligibility criterion that allows a borrower to qualify for the deferment if the borrower is receiving or has received payments under a federal or state public assistance program. The Department should consider developing a comprehensive list of federal and state qualifying public assistance programs and placing that list on a website, to enable loan holders to consider the eligibility of all applicants for the deferment in a consistent manner.
Support for the Project on Student Debt’s Plan for Fair Loan Payments
In 2006, the Project on Student Debt submitted a formal petition to the Department of Education to make student loan payments more manageable for low-income borrowers. American Student Assistance was one of a few FFELP guarantors to join student groups, parent associations and college access providers in signing the petition.
The Project’s plan specifically aims to simplify the economic hardship deferment application process and make required payments more manageable by basing them on both federal poverty guidelines and family size. It also seeks to make the income contingent repayment program more effective and accessible to more student loan borrowers, not just those in the Federal Direct Loan program. The proposals contained in the plan are consistent with American Student Assistance’s commitment to helping borrowers avoid defaulting on their student loans. If adopted, they would further advance our efforts to provide viable repayment options to borrowers who are willing to pay their student loans but are unable to manage their monthly payments.
While various repayment options exist in the federal loan programs, their effectiveness is limited, especially with the increasing debt burden experienced by students. Most options are based exclusively on the borrower’s debt level rather than their ability to pay. This leaves borrowers with high debt and low, family income repayment options that lead to negative amortization and increased debt. A single borrower with no dependents is treated the same as a single borrower with multiple dependents despite the fact that their monetary obligations are significantly different. Notwithstanding that there does exist the income based income sensitive repayment option, it also does not take into account other debt or prevent situations where the loan balance is increasing even if payments are being made.
Payments should be restricted to a reasonable percentage of the borrower’s monthly income, regardless of debt level. Those borrowers with financial hardship should be able to more easily obtain deferment, and should be counseled more closely by their lenders, servicers and guarantors as to the repayment option most likely to achieve long term repayment success.
Finally, a borrower’s need for the income contingent repayment program should not require them to put their credit in jeopardy to receive the help they need. We urge the Department to reevaluate the requirements for Federal Family Education Loan borrowers to be a minimum of 60 days delinquent during the entire application period for Direct Lending’s income contingent program.
