President Donald Trump has a pretty good idea.
Although he hasn’t raised the issue since the November election, Trump tackled the growing problem of student debt while on the campaign trail. About 44 million Americans hold roughly $1.4 trillion in student loans – more than is owed for credit cards.
“Students should not be asked to pay more on the debt than they can afford,” Trump said during an October appearance in Columbus, Ohio. “And the debt should not be an albatross around their necks for the rest of their lives.”
His solution: Capping annual student-loan payments at 12.5 percent of income. After 15 years, whatever’s still outstanding would be forgiven.
As is rapidly becoming clear, Trump said a number of things while running for office that – how shall we put it? – had no basis in reality. Exhibit A: his eagerness to release his taxes.
Addressing student debt deserves more serious treatment.
The federal government now accounts for the vast majority of student loans, but the betting is that, under Trump, private-sector lenders and loan servicers will play a greater role. That’s why shares of private loan originator Sallie Mae have jumped nearly 70 percent since the election.
Ripe for ripoff
But more action for private companies also means more opportunities for borrowers to be ripped off by unscrupulous firms.
The Consumer Financial Protection Bureau last month joined two state attorneys general in suing Navient, the country’s largest servicer of student loans. A loan servicer collects monthly payments on behalf of banks, the government and other lenders.
Under the Obama administration, people with student debt were given more options for paying back their loans, including the possibility of debt forgiveness after 20 to 25 years. The CFPB is alleging that Navient went out of its way to keep borrowers in the dark about such opportunities.
“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” CFPB Director Richard Cordray said in a statement. “At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs.
“Too many borrowers paid more for their loans because Navient illegally cheated them.”
Props once again to the consumer watchdog for doing its job, despite Trump and Republican lawmakers aiming to eviscerate the agency as a gift to business interests.
I spoke with Josephine Lee, an attorney at the Legal Aid Foundation of Los Angeles. She specializes in student debt and represents about 80 borrowers at any particular time. Much of her efforts involve untangling borrowers’ dealings with Navient.
‘Bullied by Navient’
“Clients tell me they’ve been bullied by Navient or weren’t notified of all their options,” Lee told me. “I hear a lot from clients about Navient giving improper advice.”
This jibes with allegations made by the CFPB, which says Navient deliberately gave bad info to borrowers to prevent them from reducing their debt. The company is also accused of processing payments incorrectly and failing to respond to complaints.
The average borrower carries more than $37,000 in student debt, and at least 1 in 4 is either late on payments or in default. Navient services more than $300 billion in federal and private student loans extended to about 12 million borrowers.
Navient spokeswoman Patricia Christel declined to comment on the lawsuits or the company’s alleged misdeeds. She passed along a company statement calling the allegations “unfounded.”
Tustin lawyer Chris Santos, 45, would beg to differ. He told me he’s carrying about $135,000 in student debt from his undergraduate education and law school. Navient is his debt servicer.
A couple of years ago, Santos said, he fell two months behind on his loan payments. He contacted Navient and said he wanted to pay the outstanding amount so he could catch up. After making the payment, the service rep assured him that all was well.
A month or so later, however, he was told by Navient that he was still late, and that his tardiness had been reported to the credit bureaus. The company said the earlier service rep had been mistaken about how much he owed.
“I asked how that was fair,” Santos said. “How could it be my fault when I was given incorrect information? They just said that it was my fault for not making my payments in the first place.”
He’s still trying to rebuild his credit.
Time to act is now
Navient’s alleged rough stuff notwithstanding, it’s time for bold steps in alleviating the student debt crisis.
College costs keep rising, but government grants and financial aid are either harder to come by or cover a smaller share of overall expenses. As a result, students have to borrow more for a post-secondary education. That means they enter their working lives already deep in a hole and often have to defer things like getting married, having kids or buying a home. Delaying such major events can jeopardize financial stability later in life, when people need it most.
Trump’s proposals for a 12.5 percent of income cap on payments and debt forgiveness after 15 years are a good starting point. He said during the campaign that he’d pay for uncollected student loans by reducing federal spending elsewhere.
As with nearly all his campaign proposals, Trump offered no specifics about what he’d actually do. So it’s unclear what budget cuts he has in mind.
One thing that he may want to reconsider is that 12.5 percent cap – it’s a high amount compared with steps many other developed nations have taken in dealing with their own student-loan situations. Australia, for instance, puts its cap at between 4 and 8 percent of a borrower’s earnings, and you don’t have to make any payments until you’re pulling down at least $40,000 a year.
Federal repayment programs implemented by former President Barack Obama require 10 percent of discretionary income annually for up to 25 years, so 12.5 percent over 15 years is better for borrowers. But it’s still a heavy load to carry.
That’s why I also like the idea of allowing people to work off student debt through community service.
Such programs already exist on a limited basis (check out SponsorChange). Trump should seek the private sector’s help in allowing employees to carve out time for a wide array of volunteer gigs – a couple of days a month, say – that would result in student-loan reductions.
Some employers also are matching employees’ student-loan payments as a workplace benefit. Promoting such programs is another way that Trump can advance a business-friendly agenda while also helping people.
Hopefully he wasn’t just blowing smoke when he said in October that “if borrowers work hard and make their full payments for 15 years, we’ll let them get on with their lives.”
That’s one promise worth keeping.