New Push to Ease Debt

Coalition of student groups and lenders urge Education Department to change rules to make student loan repayment easier. 
May 5, 2006

Taking an innovative tack to try to shrink student debt, a broad and surprisingly diverse coalition of student groups, lenders, parent associations and others has filed an unusual petition urging the U.S. Education Department to rewrite its "inconsistent, confusing and contradictory" regulations for repaying loans.

Among other things, the groups recommend that the department change its rules to reduce a borrower's payments when they exceed a set proportion of their discretionary income and to lower to 20 from 25 the number of years after which the government would discharge the remaining loan balance of a borrower who has regularly made "manageable" payments.

The little used "petition for rule making" is the latest tactic in a much broader campaign by the Project on Student Debt, which engineered the effort, to put the issue of mounting loan burden on the public -- and the public policy -- agenda. The group has held conferences and published white papers, and last month it issued model legislation aimed at creating a new federal tax credit for borrowers' student loan interest payments.

And Thursday, in addition to announcing its petition on the loan repayment rules, the Project on Student Debt released a national poll showing that while Americans strongly believe that student loans are a legitimate way to pay for a higher education that they increasingly value, most of them believe that today's college graduates have too much loan debt and that the government should do more to deal with the problem.

The standard way advocates for a particular like federal student loan debt relief would push the issue would be to ask friendly members of Congress take up their fight and pass a law. The model legislation the Project on Student Debt released last month shows that it isn't reluctant to go that route. But in a federal legislative climate that is dominated by divisiveness and budget cutting, the prospect of getting anything through Congress -- especially any proposal with a significant price tag, as some of the loan repayment proposals could bear -- is dicey.

So as Robert Shireman, director of the Project on Student Debt, and other officials explored their options for pursuing some of their ideas for attacking the debt problem, they concluded that the Education Department would have the authority to make certain changes itself, because the 1992 Higher Education Act amendments that created programs to let strapped borrowers reduce their payments gave the department significant leeway to set rules for the programs.

In many federal agencies, particularly those like the Food and Drug Administration that are primarily regulatory bodies, it is standard practice for external groups to formally ask officials to begin a process to review a specific rule or set of rules. It almost never happens in the Education Department -- in part, Shireman said, because most laws Congress passes on education issues tend to leave little discretion to department officials.

But the fact that such requests to the Education Department are rare did not stop the Project on Student Debt and a wide range of partners -- two loan guarantee agencies, American Student Assistance and Great Lakes Higher Education Corp. and Affiliates ; two student groups, the State Public Interest Research Group and the United States Student Association ; and four other groups: the College Board, College Parents of America, the Council for Opportunity in Education, which lobbies on behalf of the federal TRIO programs for needy students, and the Howard Center for Family, Religion and Society -- from filing such a petition with the department Thursday.

"To ensure that low-income students meet their full potential through higher education, the secretary has the duty to improve the current regulations so that more students are able to manage debt repayment and low-income students are not deterred from pursuing higher education," the groups argue in their petition.

Specifically, the petition asks the department to review and change two current policies. One, commonly referred to as "hardship relief," calls for the government to pay three years' worth of interest charges for borrowers with federally subsidized (Stafford or Perkins) student loans who can show that they are facing economic hardship. But the program is flawed, the groups argue, because the formula for defining "hardship" does not take into account a borrower's family size and can deny relief to people who earn just a few dollars more than allowed, in a way that can discourage them from working (and earning) more; the deferment lasts for only three years, when ; and the process for applying for hardship is difficult to navigate.

The groups propose altering the economic hardship deferment to tie the amount of a borrower's payments to his or her income. Borrowers would make be required to make "manageable" payments capped at 15 percent of their discretionary income, which would be defined as income above 150 percent of the federal government's poverty guidelines based on family size. In addition, borrowers would be able to apply for additional three-year hardship periods after the initial one. They also urge the department to simplify the process of applying for economic hardship by allowing the use of existing tax forms  to verify their income.

The student and other groups also seek changes to the government's income contingent repayment program, which currently allows borrowers in the government's direct lending program (but not the competing guaranteed loan program) to make token payments if their family income is below the poverty level and caps payments for others at 20 percent of earnings over the poverty level. When those payments fail to cover the interest on a borrower's loans, the size of his or her debt grows, and is forgiven only 25 years after loan payments begin.

To make the income contingent repayment more effective and available to more borrowers, the groups argue that the department can and should change its regulations to make income contingent repayment available in the federal guaranteed loan program as well as the direct loan program, and to reduce to 20 from 25 the number of years a borrower can be in the program before his or her loan balance is forgiven.

What is perhaps most striking about the groups' proposals is that they have gained the support not just of student and other groups that traditionally advocate on behalf of more favorable rates and conditions for borrowers, but also of lenders, with whom the student groups often butt heads. In addition to American Student Assistance and Great Lakes, the two guarantors that joined in the formal petition to the department, a much broader coalition of lenders have endorsed its call for the department to review the repayment policies, though they stopped short of supporting the specific changes the petition seeks.

"We would welcome the Department of Education opening the regulation and taking a look at this," said John Dean, president of the Consumer Bankers Association, one of the groups that signed the supporting letter. "We all realize there is room for improvement."

Dean added: "There have been some surprisingly productive exchanges between Bob Shireman and the [guaranteed loan] people. We share an interest in having the program work well for borrowers."

The leading higher education associations also threw their weight behind the call for rulemaking on the repayment programs, and for the recommendations made by the Project on Student Debt, in a letter to Education Secretary Margaret Spellings.

What happens to the groups' proposals from here is unclear. An Education Department spokeswoman said only that department officials had received the petition and were reviewing it. But the department, Shireman acknowledges, could "say thank you very much for your petition, but no, we won't begin a rule making process." Or the department could engage in rule making but conclude that the groups' proposals were flawed or too expensive and either reject them or seek to negotiate alternatives.

"The question of the cost of the different provisions is going to be the area of both analysis and discussion," Shireman said. "Part of what is needed is for the Department of Education to look at its own data, to get a sense of the number of people who would be affected and the cost of the provisions. We are certainly open to discussions about balancing certain provisions and weighing the costs."

He added: "I'd just like to see that Federal Register notice from the department saying, 'We're beginning a process.'"


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