A Presidential Memorandum titled the "Student Aid Bill of Rights," issued last week by President Obama, calls for the creation of a new complaint system for federal student loans. This proposal is likely to result in significant changes to the servicing and collection of student loans.

In the Memorandum, the President directed the following actions to be taken:

  • Complaint and Feedback System. The Secretary of Education, by July 1, 2016, must "develop and implement a simple process for borrowers to file complaints regarding Federal financial aid, including those pertaining to lenders, loan servicers, private collection agencies, and institutions of higher education. The process shall allow people to file a complaint and monitor its progress toward resolution." Complaint system data must be shared with "other enforcement agencies that are responsible for oversight of Federal student loan lenders, loan servicers, private collection agencies, and institutions of higher education." Beginning by October 1, 2017, the Department of Education (ED) must publish an annual complaint report. Also, by October 1, 2015, the Secretary must report to the President on the "optimal way to address other student complaints regarding institutions of higher education that participate in Federal student financial aid programs."

  • Enforcement. By October 1, 2015, the Education Secretary, in consultation with the Consumer Financial Protection Bureau's Director, must recommend to the President "a process for sharing information with relevant enforcement agencies so that those enforcement agencies may refer matters where there may be violations of consumer protection law."

  • Loan Servicing. By January 1, 2016, the Education Secretary must require all federal direct student loan servicers "to provide enhanced disclosures to borrowers and strengthened consumer protections." These must include "disclosures to borrowers regarding loan transfers from one servicer to another and notifications when borrowers become delinquent or have incomplete applications to change repayment plans." The Secretary must also, "as soon as practicable,” direct all federal direct student loan servicers to apply prepayments to loans with the highest interest rate, unless a borrower directs otherwise.

  • Interagency Task Force on Student Loan Performance and Borrower Trends. The Director of the Office of Management and Budget (OMB) and the Education Secretary must convene, on a quarterly basis, an interagency task force consisting of the Treasury Department, ED, OMB, and Domestic Policy Council to "monitor trends in the student loan portfolio, budget costs, and borrower assistance efforts." By August 1, 2015, the task force must review recommendations made by it and the CFPB "on best practices in performance-based contracting to better ensure that servicers help borrowers responsibly make affordable monthly payments on their student loans."

  • Borrower Protections. By October 1, 2015, the Education Secretary, in consultation with the Treasury Secretary and CFPB Director, must issue a report to the President that (i) advises whether statutory or regulatory changes are needed to permit the Education Secretary to "specify acts or omissions at institutions of higher education that borrowers may assert as a defense to repayment of a direct loan," and (ii)  "after assessing the potential applicability of consumer protections in the mortgage and credit card markets to student loans," recommends statutory or regulatory changes, "including, where appropriate, strong servicing standards, flexible repayment opportunities for all student loan borrowers, and changes to bankruptcy laws." (Concerning bankruptcy, S. 729, titled the "Fairness for Struggling Students Act of 2015," was introduced last week by a group of Democratic senators. The bill would make private student loans dischargeable in bankruptcy.)

  • Income-Based Repayment Plans. By October 1, 2015, the Education and Treasury Secretaries must report to the President on the feasibility of developing a system that allows borrowers to authorize the Internal Revenue Service "to release income information for multiple years for the purposes of automatically determining monthly payments under income-driven repayment plans."

  • Communication with Borrowers. By January 1, 2016, the Education Secretary must report to the President "on the findings of a pilot program to test new methods for communicating with borrowers who have Federal Direct student loans on which they are at least 140 days delinquent but which have not entered default." By January 1, 2017, the Secretary, in consultation with the Director of the White House Office of Science and Technology Policy, must "develop and implement at least five behaviorally designed pilot programs to identify the most effective ways to communicate with borrowers to maximize successful borrower repayment and help reduce delinquency and default" and report to the President on the programs’ status and results.

  • Centralization of Account Information. The Education Secretary, "as soon as practicable," must create "a centralized point of access for all Federal student loan borrowers in repayment, including a central location for account information and payment processing for all Federal student loan servicing, regardless of the specific servicer."

  • Debt Collection. The Education Secretary must:

By July 1, 2015, implement actions "to ensure that the debt collection process for defaulted Federal student loans is fair, transparent, charges reasonable fees to defaulted borrowers, and effectively assists borrowers in meeting their obligations and returning to good standing."      

By January 1, 2016, publish a quarterly performance report on ED's private debt collection agency contractors that includes the underlying data, broken down by contractor.

By July 1, 2015, issue information "highlighting factors the courts have used in their determination of undue hardship, to assist parties who must determine whether to contest an undue hardship discharge in bankruptcy of a Federal student loan."

By July 1, 2015, together with the OMB Director and in consultation with the Commissioner of Social Security, develop a plan to identify federal student loan borrowers who receive Social Security Disability Insurance (SSDI) and determine which beneficiaries qualify for a total and permanent disability discharge of their student loans under the Higher Education Act of 1965. The plan must include a process for the Education Secretary to stop collection "from qualified borrowers in order to ensure that SSDI benefits are not reduced to repay student loans that are eligible for discharge." The Education Secretary and OMB Director, in consultation with the Commissioner, must also "identify the best way to communicate with other SSDI recipients who hold student loans about their repayment options, including income-driven plans, and assist them in entering those plans."

Consult with the Treasury Secretary who, by July 1, 2016, must report to the President on the initial findings of an ongoing pilot program that uses the Treasury Department’s Bureau of the Fiscal Service "to collect on a sample of defaulted Federal student loan debts to help determine how to improve the collection process for defaulted Federal student loans."

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.


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