The New Zealand Government has proposed changes to the Student Loan Scheme in order to increase repayment rates and bring the overall loan balance to a more manageable figure.

“This in turn will make the scheme fairer for the vast majority of borrowers who do honour their loan obligations and for taxpayers more generally,” says Revenue Minister Peter Dunne.

However student advocate groups are opposing the move saying they will make it even harder for new graduates to find their feet as the repayments start too low and demand too much.

“New Zealand graduates already make payments from a level of income below any other income-contingent loans scheme in the world; the rate of payment proposed will now also be higher than is demanded anywhere else,” said Pete Hodkinson, President of the New Zealand Union of Students’ Associations (NZUSA).

Currently those with student loans who earn over $19,084 per year pay 10% of their income over the threshold. This will rise to 12%, an increase that the Massey University Extramural Students Society and NZUSA estimate will cost students and graduates between $15 and $30 per week.

The Green Party is also opposing the Government’s proposal, stating that a graduated rate would be fairer and more effective.

“A better alternative would be a progressive repayment rate that kicks in when graduates are actually earn[ing] higher incomes so that those who can afford to repay their loans do so, while those on lower incomes have a chance to find their feet first,” suggests Green Party student spokesperson Holly Walker.

The Government has also indicated it plans to make changes around student allowance eligibility and is considering a student allowance cap of four years.

The student allowance scheme allows students from low income families access to funding for living costs which is not added to their loan.

Student groups, including the New Zealand Medical Students Association, are also angered by these plans saying that it is unfair to those completing longer degrees and may discourage students from entering those degrees including medicine which is a minimum of eight years.

“We have grave concerns that the seven-year cap on student loans and now this four-year cap on access to student allowances may force students to take out high-interest bank loans to live, which will reduce access to tertiary education for many students and is unreasonable,” says NZMSA President Michael Chen-Xu.

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The Department of Education has been transferring large batches of federal student loans to new loan-servicing companies — leaving in the lurch some borrowers who are suddenly encountering problems with their loans, such as payments that are mysteriously adjusted up or down.

The switch, which has been going on for months and will ultimately include millions of loans, is mandated by a little-known provision tucked into the 2010 healthcare overhaul. Pushed by a consortium of nonprofit student loan companies, the provision forces the DOE to use nonprofit loan servicers. But at least in the short run, the switch has caused problems.

Borrower Isabelle Baeck said that after a new servicer, Mohela, took over her loans in December, she received a letter saying that her monthly payments had been reduced to $50 — roughly a quarter of what they had been. The change meant Baeck would ultimately pay more in interest over a longer period of time. Concerned, she said she has made repeated calls to get the problem fixed, only to have the payments repeatedly readjusted.

A Mohela representative declined to comment on specific borrower situations but said that the company is working hard to minimize disruption and to resolve issues as they arise.

Baeck is not alone. Since last fall, one million borrowers have had their federal student loans randomly assigned to one of the new companies, all nonprofits or subsidiaries of nonprofit organizations. It is not known what proportion of borrowers has had problems during the switch.

Like their for-profit counterparts, many of these nonprofit student loan companies traditionally originated, bought and insured student loans, with the day-to-day servicing making up only a portion of their business. Several — including at least six that the department has transferred or is planning to transfer loans to — have been touched by scandal in those other capacities, with accusations ranging from bad lending practices to violating state law to overbilling the Education Department.

In all, the Department of Education expects to add more than a dozen new servicers to the mix, roughly tripling the total number of companies that were handling direct federal loans this time last year. The move would also mean that borrowers with such loans would eventually be using about a dozen separate servicer websites, whereas before there was a single website for all direct loans.

Some worry the addition of so many new servicers could make standardization and oversight more challenging.

“It’s hard to know if having more servicers will help or hurt because it’s so bad with just a few right now,” said Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “Our fear is that the more you have, the less ability you have to oversee them.”

Ultimately, borrowers having their loans moved over to these new servicers have Congress to thank for it. Coupled with the passage of the health care reconciliation bill was an overhaul of federal student lending, which shifted the government away from backing loans by private lenders — what were known as federally guaranteed student loans — and toward loaning directly to students.

For-profit and nonprofit student loan companies alike lobbied over the change and shifted their business models accordingly. In particular, the nonprofit student loan companies won a carve-out to ensure they’d get in on the business of servicing the direct federal loans. The carve-out was crafted and lobbied for by the Education Finance Council, a trade group representing nonprofit student loan companies that spent more than $200,000 on lobbying that year. (The Education Finance Council did not respond to a request for comment.)

Now, two years later, borrowers are experiencing the effect of the law.

Borrower Karen Mahnk said she logged into the Department of Education’s student loan website in October and saw that her loan balance — which typically hovered around $100,000 — was suddenly zero. When she called around, her servicer told her that she had been put in an administrative forbearance.

That didn’t sit well with Mahnk, who said she didn’t want to put off her payments and certainly didn’t want to rack up additional interest. She said she called again and talked to someone else, who assured her the opposite — there was no record of forbearance.

While still confused about many details, Mahnk said she learned that her loan is being handled by a new servicer, a company called EdFinancial, which shows she’s not due for a payment until June. Taking no chances, Mahnk said she has been forcing through monthly payments.

“I wanted to continue making payments regardless of what their problem was,” Mahnk explained. But she’s still concerned about how things will shake out. “I’m only taking their word on it that my payment is fine, and that EdFinancial is going to do everything they’re supposed to do.”

EdFinancial did not respond to a request for comment.

Some borrowers were notified of the switch only after the fact. “There was really no prior warning,” said Scott Trudeau, a borrower whose loans were transferred to Mohela in late January. Trudeau, who said he’s never fallen behind on his loans, has had recurring problems since the switchover trying to correct his bank account information with Mohela.

“I get delinquency notices regularly, I get letters in the mail, but every time I try to give them money, the system breaks down,” he said. “I’ve had no trouble with the Department of Education all these years, but it’s been nothing but confusion with Mohela.”

“Anytime you change a servicing relationship, it can cause concern,” said Will Shaffner, Mohela’s director of business development and government relations. “They need to pick up the phone and call us. If they’re not satisfied with our service or aren’t getting answers, they should ask to speak with a supervisor. They can even get in touch with our CEO if they need to.”

The Department of Education’s own implementation schedule shows that the transition is still a work in progress and the phasing in of new servicers is being pushed back.

“FSA has been working aggressively to implement the new not-for-profit servicers,” the document reads. “Our original schedule did not fully accommodate the level of effort required to bring up servicers in a way that minimizes risks for borrowers, FSA, and the not-for-profits themselves.”

by Marian Wang, ProPublica, April 23, 2012, 2 p.m.

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It was with some fanfare that the Obama administration announced last fall that it was ramping up a program to help students with federal loans reduce their monthly payments. Under the program, payments are adjusted based on how much students earn 2014 what’s known as income-based repayment.

Yet, even while the administration has emphasized easing the burden for student borrowers, some contractors with the Department of Education appear to be exacerbating it.

Bloomberg reported this week that some federally contracted debt collection agencies have been playing hardball with borrowers who are behind, insisting on payments the borrowers can’t afford 2014 even when federal student-loan rules allow more leniency.

The debt collectors have an incentive to be tough. As Bloomberg explains:

Under Education Department contracts, collection companies “rehabilitate” a defaulted loan by getting a borrower to make nine payments in 10 months. If they succeed, they reap a jackpot: a commission equal to as much as 16 percent of the entire loan amount, or $3,200 on a $20,000 loan.

These companies receive that fee only if borrowers make a minimum payment of 0.75 percent to 1.25 percent of the loan each month, depending on its size. For example, a $20,000 loan would require payments of about $200 a month. If the payment falls below that figure, the collector receives an administrative fee of $150.

The Department of Education is trying to balance its interest in helping struggling borrowers and stewarding taxpayer dollars, department spokesman Justin Hamilton told Bloomberg.

Striking that balance, it seems, hasn’t been easy. Consumer advocates chafed when President Obama, as part of a deficit-reduction plan promoted last fall, recommended allowing debt collectors to robo-call the cell phones of borrowers who fell behind on federal student loans and other debts to the government.

That plan didn’t get far. But the measure resurfaced as a line item [PDF] in Obama’s proposed 2013 budget last month.

As Bloomberg noted, federal student-loan rules require that collectors work out “reasonable and affordable” payments with borrowers to get them back on track, but the rules don’t spell out how such a calculation should be made. The Department of Education is meeting with key student-loan stakeholders this week to discuss, among other things , whether to use the income-based repayment formula to help set that standard. (As it stands, only borrowers who are current on their federal loans are eligible for help via income-based repayment.)

One thing that isn’t on the table at these rule-making meetings? A measure hailed by some advocates as potentially the single most important rule change for student borrowers who’ve become severely disabled and are seeking a discharge of their federal student loans. As we reported last year, the department initially pledged to overhaul the program and consider whether to simply accept Social Security determinations of disability instead of its current complex and opaque process. The department subsequently backed off that fix. Now it isn’t even on the agenda [PDF].

by Marian Wang ProPublica, March 29, 2012, 12:24 p.m.

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