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Column: Saddled with student loans? Beware of online debt relief firms

Editor’s Note: On Making Sense this week, we’ve been tackling the topic of student debt. On Tuesday, John Wasik explained how to beat back the college debt beast and on Wednesday, how to pick the right college while avoiding debt. Today, Wasik, author of “The Debt-Free Degree,” examines our student debt infrastructure.

Kristen Doerer, Making Sen$e Editor

Like the nation’s troubled roads, bridges, tunnels and rail networks, the U.S. student loan infrastructure is in dire need of repairs.

Some 40 million Americans in debt with college loans aren’t getting the resources they need to lower repayments and avoid rapacious debt collectors and debt “relief” scams. Some eight million (and climbing) are defaulting on about $100 million in obligations.

Based on research I conducted for The Nation Institute Investigative Fund and my book “The Debt-Free Degree” over the past year, I discovered that graduates often have no idea how much they owe and are unaware of the myriad repayment options on federal loans. Even when they see what’s offered through the U.S. Department of Education, they are stymied by the complexity.

Frustrated and poorly informed, they turn to shady online debt relief firms, who falsely promise loan forgiveness and charge hundreds of dollars for free government forms. Although the Consumer Financial Protection Bureau and the Illinois Attorney General have sued them for deceptive practices, they continue to exploit graduates in an unregulated industry.

What can be done to effectively aid the two-thirds of graduates who leave school with an average $30,000 in debt?

A complete overhaul of everything from pre-debt counseling in college to best practice regulation for loan servicing companies is needed. The Consumer Financial Protection Bureau, for example, is exploring making loan servicing disclosure as transparent as the consumer mortgage/credit industry, according to Richard Cordray, the agency’s director.

“As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during and after the financial crisis,” Cordray said, speaking at a Consumer Financial Protection Bureau field hearing on May 14 in Milwaukee.

Cordray and other student loan experts have heard and documented thousands of loan holders’ frustrating struggles to repay their debts — voices echoed all over the country from recent graduates to those in their 60s.

But much more needs to be done. In my investigation, I discovered that the Federal Trade Commission was sitting on more than 1,000 complaints filed from student-loan recipients against debt collection companies, many of which appeared to violate federal law. A Freedom of Information Act officer at the Federal Trade Commission said the agency didn’t have the resources to follow up on the complaints.

Even with a plethora of private and federal resources, the loan repayment system is daunting and hard to navigate. At present, there’s little help to guide a debtor through the maze of federal income-based repayment plans. And those stuck with private loans have almost no leverage to negotiate lower payments.

In an age in which you can book an airline flight, do appliance research or bank through your smartphone, the government’s system for getting students into the best repayment plans is outdated and inadequate. You have to stumble through confusing websites before you find the best terms for your financial situation.

Fortunately, much of the debt repayment crisis can be fixed by the Department of Education and other agencies working in partnership. Here are some suggestions:

  • Loan servicing companies should be required to follow strict, uniform customer service standards on repayment. Although they don’t have financial incentives to do so, they should be rewarded for presenting the best repayment options to loan holders. If they don’t follow a best practices model, they should be “fired” and replaced by the Department of Education.
  • Federal regulators should police firms charging fees on free government applications and put violators out of business. If debt counseling is provided — and it should be in college and through the Department of Education — it should be offered by trained, certified counselors.
  • Upon graduation, provide automatic defaults into the most favorable repayment terms based on loan holders’ income in loan programs. Through emails or text messages, the government can directly connect with loan holders.
  • Require that private loan holders be offered several options on consolidation and refinancing. They also should be allowed to discharge loans in bankruptcy if they suffer long-term disabilities that will make them unable to repay their loans.
  • Allow debtors to choose their servicing companies, which will be rated independently on their customer service. Debt collection companies would also be constantly monitored by the Department of Education and respond to customer complaints.

Of course, none of the repayment fixes would be complete without lowering the cost of college and ending the practice of allowing colleges to immerse students in debt.

Higher education that thrives from plunging students deep in debt has no “skin in the game.” Colleges — especially for-profit institutions — have nothing at risk if they saddle any student with federal loans and show no commitment to release them into the world with a meaningful degree.

Loans should be replaced with grants for qualified students or offer free tuition through enhanced federal support. At present, the U.S. and Britain are the only modern, developed countries that burden future generations with crushing student debt. It’s not only hurting economic prosperity today, it will contract our economy and hobble generations for years to come.