Credit counselors turn to student debt
As need for traditional debt counseling dwindles, credit counselors see new opportunity
Faced with plunging demand for traditional debt counseling, nonprofit credit counseling agencies are launching a push into the $1.36 trillion student loan arena. If it succeeds, they'll help students -- and themselves.
"They desperately need money and some new customers," said David Lander, a St. Louis bankruptcy attorney and former board member of a Missouri-based credit counselor.
The agencies say student borrowers need independent advice to navigate complex repayment programs. Otherwise, they're at the mercy of schools and loan servicing companies that have a financial stake in their debt.
"You should be advocating for the debtor, nobody else," said Kevin Weeks, president of the Financial Counseling Association of America, a group of nonprofit credit counselors.
But others question if credit counselors, who traditionally charge fees for their services, are right for the job. Deanne Loonin, attorney at the National Consumer Law Center, questioned the idea of charging fees to distressed borrowers, which is how counseling agencies are initially funding their student loan counseling efforts.
"You'd want to know what people are paying," said Loonin, who heads the NCLC's Student Loan Borrower Assistance Project. There may be a role for high quality, neutral counseling, she said. However, if student loan servicing was done well, she said, "a lot of people would be able to get what they needed for free."
Going where the debt
There's no question that student loans are a huge debt problem. About 8 million borrowers are in default, weighed down by $100 billion in balances, and millions more are struggling. Only 37 percent of borrowers are actually making progress at repaying their loans, according to a report by economists at the Federal Reserve Bank of New York, Student Loan Borrowing and Repayment Trends.
Unlike most debt, student loans usually can't be extinguished in bankruptcy, and repayments may even be deducted from Social Security checks.
The Consumer Financial Protection Bureau held a hearing May 14 in Milwaukee, launching an effort to reform the student loan repayment system. Defaults should be almost entirely preventable, the U.S. Education Department says, given the existence of programs that reduce payments based on borrowers' income or defer payments during times of unemployment.
Meanwhile, loan servicers, which are paid a flat rate per loan to track payments, have little incentive to help borrowers navigate the complex array of repayment options. In fact, servicers may do better when borrowers do worse.
"We are interested to know whether payments are applied in ways that maximize fees," CFPB Director Richard Cordray said, "or lengthen the amount of time for repayment."
Karen Bauer, a legal aid attorney who owes $127,000 in student loans, told of calling her servicer to seek a lower payment when her income fell, only to be informed -- erroneously -- that she wasn't eligible. "If my student loan servicer is giving me false information, that's true for almost anyone," she said.
While student loan debtors carry a heavy burden, the credit counseling agencies also face a financial crunch. According to annual reports filed with the IRS, annual revenue for the 10 largest counseling agencies fell 11 percent in the 2013 fiscal year, the most recent data available. That came after a 15 percent decline the year before. Expenses, however, are more difficult to cut. While income fell, pay for the organizations' top executives climbed 8 percent.
Consumers' default rates on debt are at historic lows, so fewer people are coming to the agencies for help. The credit card default rate, at 2.52 percent of accounts at the end of 2014, was among the lowest on record, according to the American Bankers Association. Other forms of consumer debt are also healthy, and the rate of mortgage foreclosures has fallen to its lowest rate since 1999, according to the New York Fed's Household Debt and Credit report for the first quarter of 2015.
"We've seen overall consumer debt levels decline -- that's not necessarily a bad thing," said Susan Keating, president and CEO of the National Foundation for Credit Counseling.
"Bankruptcies are trending down, foreclosures, credit card delinquencies are low -- agencies are looking for opportunities to assist more consumers," said Weeks of the FCAA. (Weeks also writes a weekly reader advice column for CreditCards.com.)
Counseling agencies move into student debt
Both the credit counseling organizations are launching pushes into the realm of student loans. In March, the NFCC acquired Student Loan Alliance, a network for student debt counseling that plans to have certified student loan counselors available this fall. The FCAA has developed a five-week training program for student debt counselors and is referring debtors to them through an information website, studentloancounselors.org.
Member agencies charge student loan counseling fees of $149 to $299 for what is usually a series of consultations with the borrower, Weeks said.
"There's no doubt that people can do this on their own, but there are a lot of reasons why they need help," he said. Navigating the choices of standard repayment, income-based repayment, deferment or forbearance is complex, and a wrong choice is difficult to undo. "A lot of people don't understand income-based repayment programs," he said. "They may not know you need to requalify every year based on income."
Credit counseling agencies are looking for alternative funding sources to lift the burden from debtors, in much the same way that credit card issuers help pay for cardholders' counseling by contributing a share of the money they repay. Weeks said that colleges, lenders and the federal government may be asked to contribute, since they all have a stake in the student loan system and collect income from it.
However, it is unclear whether credit counselors will get funding as part of the effort to reform student lending. The U.S. Department of Education, the source of federal loans, is focusing on the performance of loan servicing companies, which are paid to manage repayments from borrowers and to administer repayment programs. Some, such as Great Lakes Higher Education Corp., whose CEO Richard George attended the hearing, are nonprofit organizations.
As the department rebids its contracts with servicers this year, "With the tools we have in place, particularly income-based repayment plans, we should be aiming at zero default rate on student loans," Education Department Undersecretary Ted Mitchell said at the regulatory hearing. "Much of the heavy lifting will continue to be done by servicers."
MMI: Largest counseling agency adjusts
Money Management International, the nation's largest credit counseling company, has worked with fewer than 1,000 student loan borrowers since launching its student loan counseling program in 2013, CEO Ivan Hand said. "It's taken us longer than we anticipated to get into the student loan counseling arena," he said.
Based in the Houston suburbs, MMI highlights the trends in counseling. After debtor calls dwindled, it subleased out one floor of its two-floor call center in Sugar Land, Texas, Hand said, and shrank a major call center in Phoenix. Counseling jobs were trimmed, mostly through attrition, but also through layoffs.
Revenue has plunged 30 percent since 2009 as bankruptcy counseling, home foreclosure prevention and credit card repayment plans have all fallen off. Some of the decline was the expected runoff of counseling work inherited from AmeriDebt, an agency that went bankrupt in 2005 and handed off 50,000 debtor accounts to MMI.
While the counseling agency shrank, pay for top officers and key employees grew in 2013, led by Hand's own $660,000 bonus, which brought his total compensation for the year to $1.7 million, including $257,000 deferred from previous years. The performance and incentive bonus -- not paid in previous years or repeated in 2014 -- was in recognition of past years, and was approved by the board as Hand approached retirement age and the end of a contract period, he said. As at other nonprofits, MMI's board sets executive pay on based on a consultant's survey of pay at comparable organizations and at for-profit companies. Hand said his pay has historically been below the midpoint of the comparable group.
"In a difficult year you could have as much or more challenges as in a successful year," he said.
Credit counseling agencies have an important role to play in student debt counseling because they're equipped to look at the borrower's entire debt picture, Hand said. Usually debtors are out of school and in the workplace, shouldering living expenses and debts other than their student loans. But the hurdle will be how to fund the counseling, which struggling debtors are reluctant to pay for themselves. "In my opinion it should be funded by the government," Hand said.
A different world of
Can agencies that are used to dealing with banks shift to student loans, where the biggest lender by far is the federal government? Unlike credit card debt, student loans are governed by a complex array of repayment options and rules -- and hardship programs are already available from loan servicers.
"[T]he world of government student loan defaults is many times more complex than the world of credit card defaults," Lander wrote in a blog post.
When it comes to reducing credit card debt, the consumer credit counseling agencies have a major advantage. Their relationships with card issuers allow them to negotiate reductions in interest rates that make balances more manageable.
In the student loan world, however, the ability to defer or reduce payments is held by the loan servicers. As a result, the focus on reforming student loan repayment problems is on oversight of servicers. Representatives of credit counseling agencies were not on the panel of experts at the CFPB hearing, although some attended and spoke up from the audience during an opportunity for public comment.
Bill Druliner, representing the Michigan-based counseling agency GreenPath, said student loan debtors sometimes need a broader look at their financial picture than a loan servicer can provide. "A servicer can't help someone who also is carrying credit card debt at 28 percent interest," he said at the hearing.
Weeks suggested that counseling could begin before a student borrows money, in the way that reverse mortgage borrowers are required by the U.S. Housing and Urban Development department to meet with an independent counselor before signing a loan application.
Colleges, he said, are not the best sources for pre-loan advice. In the case of an elite music school he knows of, for example, students are unlikely to hear that their course of study will result in over $60,000 in debt -- and a job likely to pay less than $20,000 upon graduation.
"The big problem with student debt is at the front end," he said. With repayment years off in the future, entering students frequently embark on costly programs without considering the expense, Weeks said. "They just made a lifetime decision without really thinking it all through."See related: Behind the credit counseling curtain
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