Will Obama’s Student Loan Plan Really Help Borrowers?

It seems that the Obama administration is finally ready to put its money where its mouth has been on the student-loan crisis.

The president announced that he will be taking certain executive actions to expand the relief programs the government has in place. One action would eliminate the absurdly limited eligibility standard that currently exists for federally-backed loan borrowers (right now, only loans drawn down between October 2007 and October 2011 are eligible). Once that happens, some five million more debtors will then be able to cap their monthly payments at 10% of household income.

Another action directs the Department of Education to renegotiate the agreements it has with third-party loan-servicers. The administration wants to offer subcontractors additional financial incentives to prevent more loans from slipping into delinquency status.

The president is also calling for passage of a bill that’s sponsored by Senator Elizabeth Warren. The legislation would permit all borrowers—whether or not they are experiencing financial distress, and without regard for the original sources of the loans—to refinance their debts at current rates through the Federal Direct Loan program.

What This Really Means for Borrowers

Now for the disclaimers.

To start, the president’s actions have a distressingly long lead time for enactment—18 months—which isn’t terribly helpful to those who currently reside in their parents’ basements, are putting off purchasing cars and houses, and even marriage.

Next, there’s the matter of all those who’ve previously applied for or have already been granted relief, or who are otherwise excluded because one or more of their monthly payments are past-due. If the government’s offer to help is truly sincere, these borrowers must also be included, if for no other reason than it makes little sense to leave behind those most desperately in need of assistance.

As for renegotiating existing third-party loan-servicing agreements, pardon me, but isn’t preventing delinquencies and defaults a fundamental element of a loan servicer’s job? Rather than throwing more money at these folks so that they might do the work for which they are being paid in the first place, shouldn’t the government first enforce its existing standards, that is, if there are any? Unfortunately, no one can be sure because the ED has been less than forthcoming about its subcontracting arrangements.

And then there is the Warren bill: legislation that, given its call for additional taxation to cover the “cost” of the refinancing it proposes stands little chance of overcoming filibuster in the Senate or passage in the Republican-dominated House. But is that so-called cost really the problem here?

Let’s not forget that, as the program is currently funded, the government continues to reap substantial profits from its lending activities. In fact, even if the ED were to securitize the loans that currently reside on its balance sheet, the feds would still earn significant income at this juncture, without the additional taxation.

Perhaps the real issue is the extent to which all this income has already been taken into account within the context of the federal budget. And that’s without taking into consideration the even higher rates that new borrowers are likely to be charged beginning next month, thanks to last year’s legislation.

In sum, as well intentioned as the prospective executive actions and the Warren legislation may be, more work is needed on the former, and a more palatable construct is required for the latter. Otherwise, there will be little celebrating in basements across America.