Overhauling Federal Student Loan Repayment: Part One

By Deanne Loonin, advocate for student loan borrowers.[1]

As of the end of 2016, 42.4 million Americans owed $1.3 trillion in federal student loans with a total of over $137 billion in default.[2]

These shocking numbers are a symptom of a broken government student loan program that is failing students and taxpayers. The only consistent winners are a small group of well-connected private servicing and collection companies that make huge profits from financially distressed student borrowers.

There is no amount of incremental reform that can fix the broken government student loan system. The time for tweaking is long past. We must put borrowers and taxpayers out of their misery and build a new student loan repayment system. It is a bipartisan problem that requires a bipartisan solution.

In Part 1 of this article, I summarize why the current system is broken. I will post Part 2 in the next few days with a recommended solution.

PART ONE

THE BROKEN FEDERAL STUDENT AID SYSTEM

Billion Dollar Administrative Payments

The federal government has, in recent years, paid debt collectors close to $1 billion annually. A member of the debt collection industry characterized the Department of Education debt collection contract as “…THE most sought after contract within this industry. “

The competition to secure these contracts is more heated than ever. As of June 2017, the legal battle over the Department’s handling of a collection agency competition that began in 2015 was far from over. According to one industry insider, “The process may never end.” The stakes are high and no collector wants to lose out on the government gravy train.

Huge Profits for Private Companies with Little Benefit for Borrowers

In my years of experience representing student loan borrowers, I have consistently seen servicers putting their own interests, or what they perceive to be the government’s interests, first. They rarely counsel student borrowers about the range of student loan relief programs, too often ignoring the fact that eligible borrowers are legally entitled to relief. As a result, some of the most vulnerable borrowers never know about the lifelines that could help them get a fresh start and climb out from under mountains of student loan debt.

Relying on private contractors may work well if the Department is seeking to avoid accountability, but it does not work best for borrowers and taxpayers. We should not be growing our student loan system on the backs of defaulted borrowers or measuring success by private profit rather than student success.

Conflicts of Interest

“there is no expectation that the servicer will act in the ‘interest of the consumer’

(March 2017 Navient statement in response to CFPB enforcement action) [3]

Navient, one of the government’s largest student loan servicers, argues that they owe a duty only to the government, not borrowers, because the government pays them. This is extremely troubling from a borrower point of view, but in some ways a remarkable level of honesty from an agency that is wondering who it works for.

The Department of Education’s Federal Student Aid (FSA) agency, by its very nature, has multiple constituencies, often with conflicting needs and goals. Student borrowers are only one of these groups and often the least powerful. It is no wonder that FSA passes on this conflict (and confusion) to private contractors.

“Too Big to Fail” Companies

The same companies that ran the now defunct guaranteed student loan program in to the ground are the primary companies still involved in servicing and collecting government loans.

It should not be a surprise that these same well-connected companies keep winning government contract competitions. In a revealing 2013 email exchange on a debt collection industry web forum, one participant discussing how to enter the government student loan debt collection market stated that “Getting student loans on contingency takes political connections, period.” Another added, “You have to be a huge player in the game and have some type of connection to even get a piece of the pie from government backed loans.”[4]

The doors to the Department of Education leadership have long been open to industry. In 2007, the widening U.S. student lender scandal shed new light on the ties between private loan companies and the government agencies that oversee federal loan programs. To give just a few examples, a number of top U.S. Department of Education officials in President George W. Bush’s administration previously had worked for student lenders or related groups.[5] In 2015, Dwight Vigna, the long-time Director of the Default Division at the U.S. Department of Education’s Office of Federal Student Aid, moved to a private company involved in many aspects of student aid, including collection. In May 2017, when the head of Federal Student Aid James Runcie abruptly resigned, former PHEAA/Fed Loan Servicing official Matt Sessa took over.

As with so many private industries, lobbying pays off. For example, Sallie Mae fought aggressively to preserve the FFEL program, also known as the guaranteed loan program. Created in 1965, the FFEL program had become very costly over time due to the costs of compensating the FFEL private lenders and guaranty agencies. Yet it took many years for Congress to finally terminate the program in 2010 and transition to the government originating nearly all federal loans through the Direct Loan Program. As I wrote about in a 2014 report, Sallie Mae lobbied hard to make sure that the lucrative ride would keep going even after the guaranteed loan program died in 2010.

Lack of Accountability

For students who default on their federal loans, the accountability is relentless….Where is that kind of accountability for Sallie Mae?” — Senator Elizabeth Warren, Press Release December 2013

Over the years, the government has continued to hire the same players to service and collect student loans despite investigations showing that these same companies have mismanaged funds and failed to provide quality service.

For example, as Senator Warren pointed out in questions submitted to the Department of Education in July 2016, three of the companies that advanced to Phase II of the Obama era servicing re-compete were caught up in the 9.5% scandal that rocked the industry years ago. New America described this scandal as a reverse money laundering scheme. The government eventually caught on, but ended up imposing relatively light penalties that some of the companies have yet to pay. For example, Sallie Mae/Navient is still appealing the $22 million fine the government imposed for its role in the scandal. (See more on this topic in this 2015 Huffington Post article by Shahien Nasiripour).

More recently, state Attorneys General and the federal government have investigated and sued most of the major government servicers and collectors. Yet the government keeps hiring the same companies. It is no wonder that the companies are fighting hard to convince the government to place less weight on past problems when awarding future contracts.

Punitive Student Loan Collection System Harms Borrowers, Taxpayers and the National Economy

Current federal aid practices and policies hammer students who do not succeed the first time around. The government can garnish a borrower’s wages without a judgment, seize tax refunds, even earned income tax credits, seize portions of federal benefits such as Social Security, and deny eligibility for new education grants or loans. Even in bankruptcy, most student loans must be paid. Unlike any other type of debt, there is no statute of limitations. Even those who can make some payments face serious damage to their credit reports or ability to get credit for critical purchases such as cars and homes.

These policies prevent individuals from getting a fresh start and impede economic productivity by preventing many students from returning to school, succeeding, entering repayment on their loans, and entering the labor force.

In Part Two of this article, to be posted in the next few days, I will propose a new, simpler system that will help restore balance so that borrower and taxpayer priorities come first.

[1] Deanne Loonin is the former Director of NCLC’s Student Loan Borrower Assistance Project. She now works on behalf of student loan borrowers in a number of ways, including as an attorney with the Legal Service Center at Harvard Law School’s Project on Predatory Student Lending. For many years, she was the primary author of NCLC’s comprehensive legal manual, Student Loan Law and has authored numerous policy papers and reports on student assistance topics. Ms. Loonin writes this article in her personal capacity.

[2] These figures exclude borrowing through private student loans, credit cards, and home equity loans to finance the growing costs of college. Consumer Federation of America, “New Data: More Than 1.1 Million Federal Student Loan Defaults in 2016” (March 14, 2017).

[3] Consumer Financial Protection Bureau v. Navient Corporation, Case 3:17-cv -00101-RDM, “Memorandum of Law in Support of Defendants’ Motion to Dismiss Plaintiff’s Complaint” at 20–21 (M.D. Pa. March 24, 2017).

[4] Inside ARM, “Looking to Move into Student Loan Collections” (August 2013).

[5] See generally Martha Graybow, “’Revolving Door Eyed in Student Loan Scandal”, Boston.com (April 19, 2007).

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