How a Trump Administration Plan to Privatize Students Loans Could Help

If reports are true, Trump's student loan plan may not be as bleak as it sounds ... so as long as the administration adds some key caveats.

Remember when you were a kid and your folks made you wait patiently before tearing into a pile of presents that were just beyond your reach? How you rubbed your hands together so quickly that your palms heated up and the skin-on-skin sound you made could be heard in the next room?

Well, imagine a bunch of blue-suited, white-shirted, red-tied, black-shoed lenders doing the same thing as they not-so-patiently wait for a new administration to divest some or all of the roughly $1 trillion of student loans that currently reside on the federal government’s books and supplant the Federal Direct student loan program with a modern-day version of the one that enriched them years ago.

According to a recent Wall Street Journal article, the banks and other lending institutions that were once the middlemen of choice for the government-guaranteed Federal Family Education Loan program have good reason to believe that the incoming Trump administration — in tandem with a Republican-controlled House and Senate —will move to resurrect what the Obama administration discontinued in 2010 because of cost. (The Trump transition team did not respond immediately to Credit.com’s request for comment on this possibility.)

When that happens — and in all likelihood it really is a matter of when more than if — we can expect a triumphant resurgence in the secondary financial markets as securitization after securitization of government-guaranteed education loans are flogged out to an investment community that’s clamoring for an opportunity to earn more than 1% on a virtually risk-free gambit. At the same time, though, we should also worry about what that portends for the tens of millions of financially distressed borrowers who may well find themselves at the mercy of loan administrators that are more concerned with the interests of their benefactors (the aforementioned investors) than they are them or the taxpayers who will be left holding the bag when they default.

An inescapably bleak scenario? Doesn’t have to be.

The simple truth is that trees don’t grow to the sky: The government’s balance sheet is not infinite. At some point, the Department of Education will have no choice but to rid itself of some portion of the Federal Direct loans it owns, not least because the nearly dollar-for-dollar amount of debt that the federal government incurs to fund that program has the potential to interfere with its other financing needs. But that doesn’t mean that education borrowers should be left to fend for themselves.

The incoming administration and its legislating compatriots can move to extract much-needed debtor and taxpayer-guarantor protections in exchange for the governmental backstop against default that will be necessary to move these debts into private hands.

It can, for instance, mandate specific loan servicing standards, such as those that require responses within a reasonable period, and prohibit servicers from moving financially distressed borrowers into temporary and expensive forbearances (because of the interest-compounding effect) instead of permanently modifying their contracts by extending loan durations. It can also prohibit any after-the-fact contractual changes, such as for prepayment penalties or requiring loan cosigners, in exchange for granting relief.

Better yet, given that roughly half of all student loans that are currently in repayment are either delinquent, in default, temporarily accommodated or participating in some form of income-based repayment plan, wouldn’t it make more sense to restructure the entire portfolio by extending the remaining terms for every contract before any of these are sold into the private marketplace?

The fundamental problem that plagues the modern-day student loan program is structural — too short a repayment duration for the high level of borrowing that’s currently taking place.

This needs to be addressed before Washington lets the financial services industry have its way at the party table.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Bastiaan Slabbers

The post How a Trump Administration Plan to Privatize Students Loans Could Help appeared first on Credit.com.

How the Incoming Trump Administration Can Help Student Loan Borrowers

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The 2016 presidential election is settled and a new administration will take office in two months’ time. Considering all that was said during this particularly contentious campaign, it’s no surprise that student loan borrowers are concerned about what that will mean to them beginning in 2017.

Two of the many items on my list of concerns have to do with the future of the Consumer Financial Protection Bureau, within the context of a potential repeal or overhaul of the Dodd-Frank legislation that created the consumer watchdog agency in the first place, and the Federal Direct Student Loan program, which the Obama administration established in 2010 as a successor to the simultaneously discontinued Federal Family Education Loan program.

The Possible Negatives

In the case of the CFPB, should Congress move to curtail the agency’s regulatory authority and/or impose more stringent oversight on its activities, I worry that less will be done to address loan-servicing-related problems, which include the misapplication of remittances on the part of private-sector administrators and their failure to promptly conduit financially distressed debtors into a government-sponsored payment relief program, or to prevent collection companies from pursuing past-due payments in a manner that violates the Fair Debt Collection Practices Act. (You can see how your student loan repayments are impacting your credit by checking your two free credit scores, updated every 14 days, on Credit.com.)

As for the Federal Direct Loan program, a financial services industry that benefited from virtually risk-free income courtesy of the government-guaranteed FFEL program is probably getting pretty excited about the potential for its reincarnation, now that smaller-government-minded lawmakers are in control of all three branches of our system. And not just for the new loans that will be taken out in the future.

A Fresh Approach

At present, roughly one trillion dollars’ worth of Federal Direct Loans are currently on the books, plus another $200 billion to $300 billion in legacy FFELs.

But if one were to tally together all the federally-backed loans that are at present delinquent and in default, plus all those that have been granted temporary forbearance and longer-term relief to date, and compare that total to the aggregate value of all the loans that are currently in repayment, that number would approach 50%.

Any loan portfolio that looks anything like that is one whose loan agreements were improperly structured at the outset. If we want these debts to be repaid anytime soon — without continuing to spend outrageous sums of money to accomplish that objective — the new administration would be wise to bite the bullet and restructure all these contracts over an extended term at a rate that properly reflects the federal government’s costs.

That’s the first step.

The second is to lock in that cost by financing the Federal Direct loans that currently reside on the education department’s balance sheet as any prudent private-sector lending institution would, instead of continuing the government’s potentially ruinous tact of borrowing short to lend long in a rising-interest-rate environment. The new financing can take the form of direct borrowing on the part of the federal government as it does now, or the education department can oversee the sale of these loans into the private sector while retaining administrative oversight of their servicing.

This stands in contrast to the old FFEL program, where private-sector lenders originated student loans backed by the federal government, and had the option to later sell these contracts into the secondary market for added profit. Not only did that program create significant remunerative opportunities at the expense of taxpayers (who would be called upon to make good on the government’s guarantees), but it also distanced the feds from directly overseeing the administration of the loans it backed.

In a nutshell, that’s the key reason why there’s been so much foot-dragging on the part of the companies that service the FFEL loans that are in repayment: the interests of the private-sector note holders and investors are at odds with those of the taxpayers.

Finally, the new administration would also be wise to address the matter of student loan dischargeability in bankruptcy. Not so that borrowers would have an easier time getting out from under the legitimate debts they incurred, but so the potential for abject loss at the point of default would inspire all lenders to negotiate in good faith with financially distressed debtors who, for the most part, truly desire to honor their obligations.

All of this boils down to having the courage to take an evenhanded approach to solving a trillion-dollar problem. Hopefully, this new administration has enough of that to go around.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Bastiaan Slabbers

The post How the Incoming Trump Administration Can Help Student Loan Borrowers appeared first on Credit.com.