“Student Debt—The Obligation of a Lifetime” at the Midyear Meeting

The panelists provided the audience with the latest statistics regarding education debt and default rates. Student loan debt exceeds $1.2 trillion in the United States. It exceeds credit card debt and has become the second largest source of consumer debt. Almost 70% of graduating seniors at public and private nonprofit colleges have federal and private student loans averaging over $29,000 per student. The amount of education debt has more than tripled in the last 10 years, and student loan default rates reached almost 15% in 2013.

The panel addressed several causes of the recent rise in education debt. Ms. Johnson noted that students and their families were greatly affected by the Great Recession. Many still have not fully recovered. Traditionally, parents relied on the equity in their homes to help pay for college tuition, but depressed home prices led to negative equity positions for many homeowners while others lost their homes to foreclosure. In addition, many students and their parents lost part-time or full-time jobs during the recession or became under-employed as a result of the nation’s economic downturn. This reduction in wages led students to borrow more money in order to pay for college. Ms. Johnson stressed the importance of financial literacy and money management education programs designed to explain to both parents and students the various types of loans, grants, interest rates, and repayment options available before a student enrolls in college. In fact, the U.S. Department of Education now requires any student who receives a direct subsidized or nonsubsidized loan to complete entrance counseling before receiving a loan and exit counseling when the student graduates, leaves school, or transfers to part-time status.

The panelists representing the regulatory agencies provided an overview of recent enforcement actions taken by their respective agencies. For several years, these agencies have been working cooperatively to address consumer issues related to for-profit colleges. Ms. Brown outlined the FTC’s jurisdiction and its role in investigating these so-called “diploma mills.” She also addressed the growing problem of student loan consolidation and debt relief companies who target borrowers with scams that provide little or no assistance for a sizeable fee.

Mr. Leatherman discussed his office’s role in pursuing several for-profit colleges. He outlined common tactics used by these colleges, including (1) high pressure recruiting, (2) misrepresentations regarding accreditation and job placement rates, and (3) deceptive statements regarding transferability of credits. Finally, Mr. Chopra outlined the terms of a recent settlement that the CFPB reached with a for-profit college that provided more than $480 million in debt relief to its current and former students. He also explained many of the protections available to members of the U.S. Armed Services with education debt. These protections include interest rate reductions, loan deferral and forgiveness programs, and income-based repayment options.

Mr. Sharinn’s law firm collects student debt from borrowers who are in default. As a member of the National Association of Retail Collection Attorneys (NARCA), Mr. Sharinn explained that his firm and other NARCA members collect student debt according to a strict code of professional conduct and ethics. He remarked that following these guidelines and “collecting the debt with sensitivity” typically results in a better outcome for his clients. Mr. Sharinn told the audience that his attempts to work cooperatively with debtors leads to increased collections for his clients and is more effective than abusive collection tactics sometimes employed by nonlawyers.

Without question, the current education debt crisis is negatively affecting our nation’s economy. The panelists outlined the precipitous drop in home, automobile, and small business ownership rates among recent college graduates. Education debt has swelled to such a level that many students cannot afford or cannot qualify for a loan to purchase a home or a car or to start a business. In addition, education debt is burdening students’ parents into their retirement years. While there is no short-term solution, various panelists posited that increased regulation, increased public education, or a combination of both methods will bring about meaningful change. In doing its part to respond to the education debt crisis, the ABA House of Delegates recently approved a resolution urging law schools and bar associations to provide law students and young lawyers with comprehensive debt counseling and debt management education.