Public Service' Loan Forgiveness: A Flawed White House Aid Plan

In a series of speeches last week (8/20/2014), President Obama promoted policies designed to “make college more affordable and make it easier for folks to pay for their education.” He attracted attention mainly for the novel idea that a federal ratings system might help borrowers decide which schools are really worth the cost. 

But the President also pushed for an expansion of an existing, but not well-known program, known as “pay as you earn,” which ties—and limits—student loan payments to the ability of borrowers to pay. That proposed expansion would also extend the reach of something called the Federal Public Service Loan Forgiveness Program, which makes it possible for college graduates who take jobs in government or non-profit organizations to get big breaks on their student loan payments. While it may be an attractive program on the surface, it should not be expanded. Rather, it should be rethought altogether.

Originally passed in 2007 as part of College Cost Reduction and Access Act, the Public Service Loan Forgiveness program makes it possible—if you take and keep a designated type of job—to make loan repayments for just 10 years, rather than 25, with the remainder of the interest and principal written off. That puts all taxpayers, rather than the borrower, on the hook. The program—which the President is hoping will attract more customers than it has to date—is quite specific about what types of jobs qualify as public service. They include government at any level—including public education—as well as organizations offering everything from child care to services for the elderly and disabled. A job at any tax-exempt organization qualifies—except for labor unions or partisan political groups. The implicit theory here: that such jobs are relatively poorly paid and that taxpayers have an interest in having well-qualified college graduates take them.

Such a collection of good causes make it hard to oppose, but the program does present serious problems. First, it’s become clear, especially since the financial crisis, that, even if government salaries of some types may be lower than their private sector counterparts, public employment offers a combination of job security and retirement benefits that are actually the envy of those in the private economy. At the same time, for those who go on to careers as lobbyists, public employment can also be what The Wall Street Journal has termed “deferred compensation.” What’s more, as the National Commission on Public Service, chaired by Paul Volcker, pointed out as long ago as 1989, there are plenty of barriers to our having an effective government—including outdated civil service rules and poor recruiting strategies—besides sheer salary levels.

But the larger problem with the program—one that includes its provisions for non-profits as well as government—has to do with the concept of government seeking to influence the career choices of college graduates in the belief that some jobs do more than others to serve the public interest. Both the government and the non-profit sectors, after all, ultimately rely on the growth and prosperity of the private economy. As Carl Schramm, former head of the Kauffman Foundation, has long argued, entrepreneurs—from Steve Jobs to Sergei Brin and countless others—provide the hope for economic growth. But private sector employment of any kind is effectively made less attractive by the terms of federal student loan forgiveness program. That is not, to coin a phrase, what made America great.

Even those who are devotees of the non-profit sector—and this column, after all celebrates the virtues of American civil society and what it can do that government cannot—should be skittish about the Obama proposal. The program’s long list of qualified organizations raises the prospect that, at some point, Washington will decide to favor certain non-profits at the expense of others. We are already seeing something like this in the White House Social Innovation Fund, which encourages private philanthropy to invest in ameliorating a specific, and limited, set of social problems. Some, including some in Congress, have raised the possibility that the charitable tax deduction itself should be confined to select types of non-profits.  (I elaborate on this in my forthcoming book Philanthropy Under fire, published by Encounter Books).

Participation to date in the income-based student loan repayment plan which the President proposes to expand and promote has been limited. Indeed, Time Magazine has reported that only  630,000 of  some 37 million student loan borrowers have availed themselves of the  option, despite its  being made more attractive, in 2010,  when the repayment requirement was   reduced  to 10 percent of income  for those who qualify on the basis of earnings and who  make  payments faithfully. Only a fraction of even those fall into the public service loan forgiveness category.

Still, we should be careful in pushing to increase that number.  All sorts of problems arise when government decides how to allocate financial capital—as recent New York Times reporting about the poor record of Department of Agriculture loans reminds us. We should be no more confident of the wisdom of the government when it comes to allocating human capital—that is, the talents of the American people.

Elizabeth Warren: Sallie Mae May Be Hurting Borrowers, Taxpayers

For student loan giant Sallie Mae, it may seem that every passing day brings word of yet another government probe.

On Tuesday, it was Sen. Elizabeth Warren’s turn.

Warren, a Democrat from Massachusetts, wants detailed information on Sallie Mae's practices, including scripts its customer service representatives follow, an accounting of its borrowers with federal student loans in income-based repayment plans, and the number of its delinquent borrowers who have brought their loan payments up to date. The reason for the request, according to a letter Warren sent Tuesday to Jack Remondi, Sallie Mae chief executive, was concern that the company may be hurting borrowers and taxpayers by pushing debtors into repayment plans that increase their burdens and put them at risk of default.

“I am concerned that Sallie Mae too often takes steps that hurt its student borrowers,” Warren wrote.

At least three federal agencies are investigating whether Sallie Mae, the nation’s largest student loan specialist, cheated active-duty members of the military and violated other borrowers’ consumer rights. About a half-dozen states, led by Illinois, recently joined together to probe how the company handles borrowers whose loans it collects payment on and how it treats others who have defaulted on their obligations.

In her letter, Warren told Remondi she worries his company regularly puts distressed borrowers with federal student loans in plans that temporarily delay required payments -- eventually leading to higher payments and increased loan balances -- rather than helping them enroll in federal programs that cap payments based on borrowers’ incomes and offer the possibility their debts will be forgiven.

Warren’s letter follows a September report in The Huffington Post, citing government documents, that revealed the company had enrolled relatively few borrowers into the Income-Based Repayment program, a federal initiative championed by the Obama administration that enables borrowers to make payments based on their monthly incomes and have remaining debts forgiven after years of steady payments. At the time, Sallie Mae owned close to 40 percent of loans made under the since-discontinued Federal Family Education Loan Program that were held by the private sector, but its share of borrowers with FFELP loans who were enrolled in Income-Based Repayment was about half that amount.

“This raises questions about whether Sallie Mae is failing to offer this option to borrowers, or otherwise discouraging them from enrolling in an income-based repayment plan,” Warren wrote, citing data reported by HuffPost.

For many borrowers, tying monthly payment amounts to their incomes would be the “best option,” Warren added. The data suggests the company is putting borrowers in various other types of repayment plans, even when linking payments to incomes would be their “best choice.”

Sallie Mae responded to the HuffPost report in September by sending a statement to the higher education community promising that it was “committed to helping federal loan customers identify the least costly, fastest option to repay their loans, including Income-Based Repayment (IBR) for those eligible.”

Sallie Mae, which by then had already disclosed pending probes by the Department of Justice and Federal Deposit Insurance Corp., later disclosed an additional investigation by the Consumer Financial Protection Bureau. The company has since set aside about $70 million to deal with the Justice Department and FDIC probes.

Several weeks later, the Department of Education told Sallie Mae it intended to renew its lucrative five-year federal contract to service student loans, despite the pending investigations into allegations of significant harm to borrowers.

The Education Department, in response to an earlier demand from Warren, then sent her a letter detailing how it had confidentially determined several times over the past decade that Sallie Mae broke federal rules, harmed borrowers and incorrectly billed the U.S. government -- but never fined the company in response.

Education Secretary Arne Duncan subsequently was criticized for the decision to renew Sallie Mae’s contract. A prominent group of colleges, students, and teachers demanded an Education Department investigation and for the department to suspend its work with the company.

Warren said the Education Department risks becoming a “lapdog” as a result of its lackluster oversight of the companies it pays to handle borrowers. She said she also worries that the department’s procedures may encourage Sallie Mae’s treatment of borrowers with federal student loans.

Education Department representatives did not respond to requests for comment.

“Current federal contracts give loan servicers like Sallie Mae little incentive to keep borrowers from falling behind on their payments or to help borrowers find solutions that are best for them when they do fall behind,” Warren wrote in her letter to Remondi.

Earlier this year, Remondi wrote a letter to Duncan and federal lawmakers explaining that, despite the mounting criticism of the company, the unit that deals with troubled federal borrowers receives three times as many thank-you notes from borrowers in default than verbal complaints. His figures wildly contrasted with other publicly available information that suggest Sallie Mae is among the worst student loan specialists when it comes to the borrower experience.

Skyrocketing student debt burdens -- which now total $1.2 trillion, up 47 percent over the past four years, according to the Federal Reserve -- are holding back the U.S. economy and “threatening the futures of so many young Americans,” Warren said. She said she reckons that the government and the public “should be able to look more closely at the role that servicers and lenders play in keeping students on the path to successful repayment.”

Warren told Remondi she wants Sallie Mae to publicly disclose how many of its borrowers with federal student loans are in income-linked repayment plans and the number of borrowers who have been been placed into forbearance or deferment schemes multiple times. She also wants telephone scripts and guidance given to customer service representatives when they chat with delinquent borrowers and when they counsel borrowers on the benefits and drawbacks of various repayment options.

Warren also demanded to know how many borrowers who have defaulted on federal loans originally serviced by Sallie Mae were now being handled by the company’s default-focused business, Pioneer Credit Recovery, which also has a federal contract. Warren told Remondi the company should disclose the amount of commissions it has received on those loans.

“If Sallie Mae has confidence that its efforts at helping students avoid default are truly in the long-term interest of its distressed borrowers, it should be more transparent about the details of those efforts,” Warren wrote.

Patricia Christel, a Sallie Mae spokeswoman, said, “We are reviewing the request, and the facts confirm we service loans the right way: our customers default 30 percent less than the national average and are significantly less likely to postpone paying their loans by using forbearance.”

Warren may face a tough time getting answers. Sallie Mae and its competitors have resisted disclosing information on their federal student loan portfolios by claiming that the Education Department doesn’t allow it.

The Education Department has faced criticism for its lack of transparency on the $1.1 trillion federal student loan program. The department discloses little data, shares scant amounts with other federal agencies, and buries key information on obscure Education Department websites. Recently, the Education Department stopped disclosing performance information on its student loan servicers, including Sallie Mae.

Tuesday probably should have been a happy day for Sallie Mae. The company, which is planning to split itself into two separate firms -- one focusing solely on its private student loan business -- announced that the firm focusing on federal borrowers will be called Navient. Remondi went on CNBC to tout the change.

When asked what Sallie Mae is doing to help borrowers repay their debts, amid worries that growing student debt bills imperil the economy, Remondi responded by pointing to an initiative that he ranks as among the “most important” the company offers: “Encouraging students and families to pay the interest on their loans while in school.”

Remondi said that by doing so, the typical borrower could save thousands of dollars over the life of the loan.

Sallie Mae’s shares fell 1.5 percent on Tuesday. Investors lately have hammered the company, selling on fears of increasing government scrutiny.