The Hill. Jan 7, 2014.
The student loan system is broken, and we need new ideas for fixing it.
Student debt now totals more than $1 trillion, and students are borrowing some $113 billion a year. With this year’s college graduates owing $32,500 on average, these debts threaten to be dead weights on their financial futures.
The nation is moving toward a mobile information and transaction paradigm, with purchases and payments online. Students bank electronically, shop electronically and study electronically. They should be able to repay their loans electronically, especially the large percentage of borrowers who are non-banked or under-banked.
The Obama administration is starting to make student loans more transparent and repayment more affordable. The new online “scorecard” measures colleges based on tuition, graduation rates, debt levels and graduates’ earnings. The Department of Education is reaching out to struggling borrowers, informing them of their options. The Consumer Financial Protection Bureau is scrutinizing the largest loan servicers. And Congress is holding hearings on the student debt crisis.
Still, we need to do more to consumerize and democratize student lending practices. As the founder of a company that has helped more than 2 million current and former students to avoid delinquency and default, and talks to students daily about their financial situations — and as a parent who has put children through college — I have offered federal policymakers new ideas that are Web based, user friendly and money saving.
The entire system must stress servicing student loans from origination and not begin when students begin repayment. Representatives of all the stakeholders — students, recent graduates, adult learners, colleges and universities, bankers, loan servicers and federal agencies — should devise a brand-new system that works.
In that spirit, I suggest six initiatives:
First, help all students, including the non-banked, repay their loans. Every student loan holder, even those without adequate banking services, should benefit from new repayment methods. The federal government should let every student use the Treasury Department’s Pay.gov portal, at no cost. If this is not possible, the private sector should be encouraged to provide payment portals directly to the servicers. Multiple access points provide better services. This will help students make payments at any time during their school years and after graduating. Let’s also provide a portal for parents to help repay loans on behalf of their children.
Second, let the non-banked share in interest discounts. Currently, only borrowers who make six consecutive loan repayments electronically through Department-approved federal servicers receive a quarter-point discount. Students and graduates without bank accounts who use money orders to repay their loans, or those who use their own financial institutions to make payments, should share in this discount.
Third, lower interest rates by letting students “Keep the Change.” Let’s create a student checking account “Transfer the Change” program through banks and other financial depository institutions. With the account holder’s consent, purchases would be rounded to the nearest dollar. The accumulated difference would be applied directly to the student’s federal student loan account on a monthly basis. This would reduce the balances that students must repay, with interest, for years to come.
Fourth, encourage smart spending through an FSA debit card. Loans covering education costs, such as tuition and textbooks, should have lower interest rates than loans covering other expenses. Federal Student Aid (FSA) should issue a debit card to students through their schools or any U.S. bank for tuition and other education-related expenses as a lump sum to the college. But the extra amount for other expenses would be disbursed monthly, like a paycheck, and, similar to other federal assistance programs, will automatically exclude the purchase of luxuries, alcohol and tobacco, and limit cash withdrawals.
Fifth, streamline student repayment. Students in school with loans have a hard time making payments on their loans. Those in repayment are required to go through servicers and other entities, now numbering more than 20. The FSA should provide an electronic mechanism for loan holders to sign up voluntarily and make payments through payroll deductions. This, too, will help the non-banked avoid unnecessary fees for money orders and mailing costs. It is also less costly for the department to process electronic payments than paper checks.
Lastly is “Just-in-time financial education.” Just as high school students are offered college counseling, they need financial education about bank accounts, credit cards and auto loans, as well as earning, saving, spending and borrowing. Students consume information when they need it on the Web. Financial education for post-secondary loans should be “just in time,” not limited to entrance and exit counseling, videos and printed brochures.
Student debts can hobble graduates for the rest of their lives, making it more difficult to get new and better jobs, form families and own homes. Fixing the student loan system is an investment in their futures — and America’s.