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Student debt forgiveness unlikely to ‘destroy’ the loan servicing sector

MEGAN LEONHARDT, August 29, 2022

Many student loan borrowers and consumer advocates breathed a sigh of relief Wednesday that the promise of student loan forgiveness was finally becoming a reality. But for businesses trying to turn a profit on managing these loans, the uncertainty looms large.

To help facilitate the process, Biden also announced the student loan payment pause would be extended a final time through Dec. 31, 2022, with payments resuming in early 2023.

But where do these announcements leave the companies that service student loan debt?

The Biden-Harris Student Debt Relief Plan outlined Wednesday will forgive between 23% to 39% of the $1.6 trillion student loan balance in the U.S., or between $380 billion and $637 billion, according to calculations from Vincent Caintic, a research analyst with financial services firm Stephens, which focuses on specialty finance and several student loan servicing companies.

“It has some impact, but it’s not going to destroy them,” Caintic tells Fortune.

And while Biden’s announcement did contain some specifics, Jeffries’ research team noted that there’s still an open question on how the debt forgiveness will be executed, so it’s not yet entirely clear how these industry players will be impacted.

“There is so much uncertainty about the details of all this,” says Scott Buchanan, executive director of the Student Loan Servicing Alliance. “Most of this is going to be speculation until we get firm guidance from the Department of Education on exactly how the details are going to work.”

What does a student loan servicer do?

A student loan servicer is generally the company in charge of managing the loan by handling billing, tracking payments, calculating the loan interest, and working with borrowers to select the appropriate repayment plan, particularly if they carry a federal student loan. These companies also process requests for deferment or forbearance.

There are roughly nine federal loan servicers, including Nelnet, Great Lakes, and MOHELA. A few major servicers, including Navient—which used to service 6 million federal student loan borrowers—withdrew from the Department of Education’s federal student loan servicing system at the end of 2021 and all loans were transferred to Aidvantage. Navient is still in the student loan game, just no longer a federal student loan servicer.

Several student loan servicers, including Sallie Mae and Navient, provide private student loans while other companies like SoFi specialize in refinancing options. Borrowers can go to My Federal Student Aid to find out who their federal loan servicer is.

How forgiveness could play out for loan servicers’ businesses?

Generally speaking, federal student loan borrowers don’t pay loan servicing companies directly for their services. Instead, these businesses get paid a small percentage of the outstanding loan balance (decreasing as the loan is repaid) or a fixed monthly fee from the federal government.

Regardless of how the Biden-Harris plan is ultimately implemented, it will have a have direct impact on servicers because there will be borrowers whose remaining loan balance will be completely wiped out. “That will practically reduce the number of borrowers that federal servicers work with, on a go-forward basis,” Buchanan says.

So if the loans get paid off by the government, companies like Nelnet—one of the biggest for-profit loan servicer—may not collect the servicing fees for as long as they planned, and it will lower their projected income.

“It’s a downside for their earnings,” Caintic adds, but says that he doesn’t believe the Biden-Harris Student Debt Relief Plan will bankrupt servicers.

All of the current student loan servicers are going to be impacted slightly differently, Buchanan notes. For Navient, which has multiple revenue streams related to student loans, Biden’s forgiveness plans will likely accelerate loan paydowns, Caintic says. That said, it may not matter much to the company’s stock because Navient is trading close to liquidation value (i.e. book value), he adds.

Student loan forgiveness might ultimately be positive for private servicers like Sallie Mae, Caintic adds. Most private borrowers also have federal student loans, so if the federal government pays off (or down) a borrower’s federal student loan balance, that means they should have more money to pay off the private loan, Caintic says.

When it comes to refinancing providers, it’s more of a mixed bag and even potentially more of a negative effect. “If the government’s paying off loans, then you don’t need to refinance them because they’re free,” Caintic says. Refinancing federal loans through a private company was always a trickier decision for many borrowers, because they typically lose many of the benefits they get with federal loans when refinancing, including access to loan forgiveness programs.

Additionally, the changes to the income-driven repayment plan that would cap monthly payments at 5% of an undergraduate borrower’s discretionary income (about half the current rate) are a “potentially significant negative to future student loan refi volumes,” Caintic says.

“The plan effectively lowers the real rate that federal student loan borrowers pay for their loans. This may make student loan refi uneconomical for borrowers,” Caintic says. The new rules state that borrower only have to pay interest and principal equaling 5% of their income above 225% of the poverty line (which is just about $30,000).

Caintic calculates that a $30,000, 10-year federal student loan with a 6% interest rate currently has a $333 monthly payment. Under the new income based repayment plan, a borrower earning $100,000 would only be required to pay 5% of roughly $70,000 ($100,000 minus $30,00) which comes out to $289 per month—essentially making the effective rate on the loan about 3%.

The $44 monthly difference between the current $333 payment and the $289 under Biden’s proposal does not accrue to the balance of the loan; effectively it is forgiven, Caintic says. Meanwhile for borrowers making less than $30,000 a year, the Biden’s proposal effectively makes their student balances free, since the required monthly payment is $0.

“We think it is highly unlikely that this example borrower would choose to refi the loan, especially as benchmark interest rates continue to rise,” Caintic says.

But Wednesday’s announcement does remove an “overhang” that’s been shadowing the refinance business, according to Jeffries. The Biden-Harris plan essentially clears the way for those who have been waiting to refinance until the forgiveness amounts and eligibility were finalized. Now borrowers who are ineligible for debt forgiveness due to income caps could be more likely to consider refinancing once the payment pause expires.

What’s ahead?

The next few months are going to be a busy time for servicers, Buchanan says. These companies are going to have to work hard to implement the updates, as well as process change requests, possibly work to verify incomes and handle the regular course of customer service. The student loan forgiveness and income based repayment plan changes are also coming on top of previously announced changes that include Public Service Loan Forgiveness waivers and the Fresh Start program for borrowers in default.

“That’s more work that we have to do in the near-term,” Buchanan says. And that’s not taking into account any delays or change that could come about if groups sue over Biden’s proposed plans.

“This is the kind of volatility, uncertainty, and operational confusion that make it very difficult to be a partner in this business,” Buchanan adds.

The loan servicing sector will likely survive this round of student loan forgiveness without too much upheaval, but Caintic says the real challenge comes if Biden’s actions start a moment.

If the government decides to make higher education free in the future, then do we need student lenders? “That’s the business risk and why these stocks trade at such low multiples because theoretically, the worst case could be that you just don’t need them anymore,” Caintic says.

Or perhaps this will only be a short-term blip for the servicing industry. “The practical reality that we can get is that all of this does nothing to change the pipeline of new borrowers,” Buchanan says, adding he’s seen analysis that shows by 2026, the U.S. would be back to the same volume of student loans as today.

Fact Check: Is Congress Exempt From Paying Off Student Loans?

Source: site

The Biden administration announced changes on April 19, 2022 that would result in immediate student debt relief to some 40,000 borrowers.

The Public Service Forgiveness Program eliminates the debts of government and non-profit organizations’ workers, who have accrued at least 10 years of qualifying payments.

However, recent posts on social media claim there are also existing provisions that exempt family members of congressmen and congressional staffers from having to pay off student loans at all.

The claim is often framed around the broader debate of student debt forgiveness, which has become a major polarizing issue across the political and generational divides in the U.S.

The Claim

The claim, which has been viewed nearly 300,000 times on social media platform Telegram, states both children and family members of congressional staffers don’t have to pay back their college loans.

It was shared on other Telegram channels, including The Daily Expose.

The post stated, in part: “Children of Congress members do not have to pay back their college student loans.”

“Staffers of Congress family members are also exempt from having to pay back student loans.”

The Facts

This claim has been shared since at least 2010. Previous iterations of the claim have been debunked by other fact-checkers.

In 2011, the U.S. Department of Education told reporters that there are no such provisions under Title IV of the federal student aid programs, which provide loans to Members of Congress and families of congressional staffers.

Responding to Newsweek’s request for comment, the Department of Education affirmed that federal staff are not exempt from paying their student debt.

“The U.S. Department of Education requires all federal student loan borrowers to repay their loan(s) and any accrued interest and fees,” the Department’s representative wrote in an email.

The misleading claim reappeared as the U.S. Department of Education announced its expansion of student debt relief to thousands of government agency employees.

“Federal student loans offer flexible repayment plans, loan consolidation, forgiveness programs, and more, which can be found at StudentAid.gov,” the email stated.

On April 19, the agency said its Public Service Loan Forgiveness Program (PSLF) would be extended to qualify 40,000 workers for immediate debt relief. Several thousand other borrowers with older loans will also receive forgiveness, in addition to “at least three years of additional credit toward IDR forgiveness” for another 3.6 million people.

The PSLF allows employees of U.S. federal, state, local, or tribal government or not-for-profit organizations to apply for a cancellation of the remaining balance of direct loans after making 120 qualifying monthly payments, while working full-time for a qualifying employer.

The program, created 15 years ago, had granted only a small fraction of applicants forgiveness until 2021. In March 2022, the Department of Education said it had identified 100,000 borrowers eligible for $6.2 billion in student debt forgiveness.

Government portfolio reporting from September 20, 2020, to February 28, 2022, shows the government paid out $7.1 billion in PSLF and related waivers, averaging around $70,883 per borrower.

The Biden administration has come under pressure recently from within the Democratic Party to expand student loan debt relief in an effort to avoid losses during the upcoming November midterm elections.

Massachusetts Democratic Senator Elizabeth Warren, writing in The New York Times earlier this week, identified the policy among a number of changes the government should explore, in an article titled “Democrats Can Avoid Disaster in November.”

In addition to PSLF, provisions set under the Federal Student Loan Repayment Program state that agencies can “repay Federally insured student loans as a recruitment or retention incentive for candidates or current employees of the agency.”

The U.S. Office of Personnel Management (OPM) says that under this program, employees are eligible for up to $10,000 relief per calendar year, to a total of $60,000 per employee. However, to qualify, employees must “remain in the service of the paying agency for a period of at least 3 years.”

According to the most recent publicly-available report to Congress on the Federal Student Loan Repayment Program, 10,412 employees from 34 agencies received repayments in 2018, totaling $78.7 million.

The Ruling

Fact Check: Is Asking Someone If They Are Vaccinated a HIPAA Violation?
Fact Check: Is Asking Someone If They Are Vaccinated a HIPAA Violation?
False.

The claim is false. Families of Members of Congress and of congressional staffers have to pay student loans. It is true that repayment plans are available to federal agency employees in general, not just those in Congress. However, these support measures are conditional, requiring employees to have already contributed towards servicing their debts and/or to have remained in federal employment for a number of years.

FACT CHECK BY NEWSWEEK

California Eyes $632 Million Plan to Help Students Attend State Colleges Debt Free

Source: site

California is on track to remove any reason for its public university students to take out student loans.

Known as Middle Class Scholarship 2.0, the “debt-free” program is slated to receive its first infusion of money this summer: a cool $632 million that lawmakers and Gov. Gavin Newsom promised in last year’s state budget that they said they’d fund this year.

If that money appears in the state’s budget this June, an anticipated 246,000 California State University students and 114,000 University of California students will receive this aid to help finance their educations starting this fall. Students at other California campuses, including community colleges, are ineligible.

The money will have an immediate impact on low- and middle-class students whose families generally earn less than $201,000. The exact amounts students receive will vary, but grants will range between $1,000 and just over $3,000 on average in the program’s first phase. Students in higher-income households will typically get the larger amounts to make up for the lack of aid they receive from other state and federal grants.

The awards reflect a portion of what students would get if lawmakers funded the whole $2.6 billion price tag. By committing $632 million this fall, the state is funding 24% of the program’s total cost, so each eligible student would receive 24% of the total amount they’d get were the scholarship fully funded.

Even at partial funding, those added dollars will likely lower student debt loads if lawmakers actually fund and maintain the program. Across the UC and CSU, students who borrowed federal loans and graduated in 2019-20 typically took out about $15,000, according to a CalMatters analysis of federal data. (Some students may also take out private loans or have their parents secure federal loans.)

Last year, lawmakers hailed the budget deal to fund the downpayment this year as something that will “ultimately eliminate the de facto requirement for lower- and middle-income students to rely on student loans to attend CSU and UC.”

There is no schedule for when lawmakers will fully fund the scholarship.

“It will still fall short of … creating a real viable path to a debt-free, quality public degree in California,” said Jessica Thompson, vice president at the California policy group The Institute for College Access & Success.

Competing Financial Aid Overhaul Programs

While that first wave of money is likely a sure thing, it is still unclear whether the state will also expand its vaunted Cal Grant program to another 150,000 students as some lawmakers are currently seeking.

The decisions facing the Legislature and Newsom come down to somewhat competing but ultimately complementary visions of funding financial aid in California.

With the enhanced Middle Class Scholarship, which builds on an existing program, many students will definitely get something.

Expanding the Cal Grant program means another roughly 36,000 students would get their tuition fully covered at the UC and Cal States. An additional 109,000 community college students would receive non-tuition grants of $1,648, plus free tuition if they transfer to a UC or Cal State.

Several thousand students at private colleges would also get awards. The expansion, which would be made possible under Assembly Bill 1746, would effectively remove all the eligibility barriers that advocates say have plagued the Cal Grant, the state’s chief financial aid vehicle. The bill is being proposed by Democratic Assemblymembers Jose Medina of Riverside and Kevin McCarty of Sacramento — as well as Connie Leyva, a senate Democrat from Chico. Roughly half a million students receive the Cal Grant already.

But those extra students result in new annual Cal Grant costs that rival the price tag for the Middle Class Scholarship overhaul.

The Cal Grant expansion will cost anywhere from $250 million to $350 million for the tuition waivers and community college student grants. Then there’s another $130 million to $150 million to fund the $6,000 supplemental grant that parents who are students receive if they’re already Cal Grant recipients, among other add-ons, for a potential total of $380 million to $500 million or more.

Lawmakers of the Higher Education Committee unanimously approved the bill on Tuesday. About 40 students and advocates spoke in support of the bill by phone and in person, but it still faces a long road legislatively and in the state’s budget process.

The high costs were one reason Newsom vetoed a bill expanding the program last year, though he and the Legislature did loosen eligibility requirements to allow more than 100,000 new community college students to begin receiving grants for the first time.

If the goal is to eventually fully fund the Middle Class Scholarship, expanding the Cal Grant for UC and Cal State students doesn’t interfere with those aspirations. Because the Middle Class Scholarship overhaul is meant to cover the cost of attendance after all other aid is calculated, including an assumption that students raise about $8,000 by working part-time, increasing the Cal Grant program means spending less on the Middle Class Scholarship.

Think of the two programs as two chunks of the same cost-of-attendance pie. The larger the Cal Grant slice, the smaller the Middle Class Scholarship slice.

But that metaphor doesn’t apply to the costs for expanding the Cal Grant to community college students. Because the Middle Class Scholarship will only apply to UC and Cal State students, any new money that goes to Cal Grant expansion for community college students will mean more financial aid spending overall for the state.

One leading lawmaker wondered whether the state is rushing to fund the revised Middle Class Scholarship that’ll benefit a large share of middle-class students before it secured Cal Grants for all low-income college students.

“What can we as a Legislature do now to make sure that this is taken care of before we start putting in so much money into the Middle Class Scholarship Program?” asked Assembly Majority Leader Eloise Gómez Reyes, a Democrat from Colton, during a March budget subcommittee hearing.

The Senate’s top lawmaker, President Pro Tem Toni Atkins, a Democrat from San Diego, said her priority is the scholarship and last year’s Cal Grant changes.

“My colleagues and I are paying close attention to this bill’s progress (AB 1746), while our top priority continues to be on proper implementation of Cal Grant and the changes to the Middle Class Scholarship implemented last year,” she wrote in an email last Friday.

The Legislative Analyst’s Office proposed something of a middle path: Before pouring money into the Middle Class Scholarship in subsequent years, the state could instead increase the grants the poorest Cal Grant recipients receive by $1,000 to $2,648. Doing so prioritizes the poorest students first while still moving the state closer to a debt-free promise.

Adding more students to the Cal Grant is also more of a fiscal commitment for lawmakers than the Middle Class Scholarship. Because it’s an entitlement, anyone eligible for the Cal Grant will get it, even during budgetary lean times — unless lawmakers expose themselves to political precarity by limiting the Cal Grant’s scope, something they didn’t do during the 2020 budget cuts spurred by the pandemic. The Middle Class Scholarship will always depend on how much money lawmakers want to send it annually.

Timing Problems in Middle Class Scholarship

One flaw in the debt-free program is its timing.

Most colleges require students to commit to enrollment and put down a deposit by May 1.

The California Student Aid Commission, the state agency that’ll operate the grant, told lawmakers in March that it won’t be able to inform students of their award until July — well after the May 1 deadline.

That’s because the UC, Cal States and the aid commission need that time to calculate how much institutional aid and Cal Grant support is going to every student — on top of all other aid, like federal Pell grants. Only then can the aid commission tack on the Middle Class Scholarship amount.

It’s a lot of work. Every student’s cost of attendance and financial picture is different and ranges from around $24,000 to $38,000, depending on the campus. Two students with the same family incomes may also have different costs because one plans to live at home while another lives off campus, typically a more expensive option. Meanwhile, some housing markets cost more than others, another reason cost of attendance varies.

Also, the Middle Class Scholarship’s funding is determined in June (so, after May 1) — when lawmakers and the governor agree on a state budget for the next fiscal year.

That means new students won’t know their full financial aid package until after they have to commit to a Cal State or UC — a quirk that will remain in the program unless policymakers find a workaround.

“We are working with the California Student Aid Commission to resolve concerns that have arisen about the program, and are evaluating if any legislative fixes might be necessary,” Atkins said by email.

Typically, campuses send first-time freshmen students their preliminary financial aid packages before May 1, allowing them to determine which college or university is the most affordable. Campuses then send final letters around early June.

These may not be significant worries when the Middle Class Scholarship grants are on average $3,000 or less. But if lawmakers grow the program, those grants may get large enough to potentially affect the attendance decisions of students — especially if a private college is promising more aid initially, only for a UC or Cal State to be less expensive after the Middle Class Scholarship is calculated.

Ryan King, a UC office of the President spokesperson, wrote in an email that the system will help students “make informed decisions over the summer about the other choices they face, such as whether or not to consider a student loan.”

UC Riverside’s director of financial aid, Jose A. Aguilar, doesn’t think the delay in when students will find out they’re getting additional money will influence their enrollment patterns. That’s based on his observations administering campus scholarships. Whether students get those or not, they’ll still end up attending the school of their choice, he said.

He also notes that the delay affects all UC and Cal State campuses equally, so no public university has a competitive advantage over the other in letting students know they’re getting more financial aid.

No More Conferences/ For Now or Forever

We hope everyone is well and safe during these troubled times of change. The United States is the strongest country and have the most resilient people on earth, which is why everyone worldwide wants to live here.

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As far as educational seminars at a conference are concerned, zoom and other platforms similar to it can do a fantastic job at providing a safe alternative to fulfill your ongoing requirements. In fact, in many ways a zoom meeting is better than attending in person. All registered users have access to watch the same fabulous educational videos over and over which is an invaluable asset. The internet also provides all kinds of tools to keep you in front of your existing clients. WWW.COLLECTIONINDUSTRYNEWS.COM is published weekly and sent to over 100,000 OPT IN subscribers. Newsletters provide an excellent platform for companies to show that they are active and serious about promoting their company. You can write articles and press releases and submit them to WWW.COLLECTIONINDUSTRYNEWS.COM which is an excellent way to show that you know your business and it also creates a positive image of you and your company. Also, running ads that give a viewer a reason to call you. Many times we are trying to find the contact information for a business and if you knew where they were advertising you could just click on their link and correspond with them.

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Article by Robert Pinchuck 

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