By Dirk Zuschlag
Over forty million Americans owe over $1.3 trillion in federal student loans. According to one study, student loan defaults average about 3,000 per day. And each year the federal government spends about $800 million to collect on that debt, principally by contracting with a “patchwork” of private student loan servicers. This is big business for a relative handful of firms. Some in the industry have earned strong, ongoing criticism for poor and inconsistent service at best, and greedy and abusive practices at worse (for examples, see here and here).
During the presidential campaign, Donald Trump the populist sometimes sounded sympathetic to student loan debtors, at one point referring to student debt as an “albatross” around the necks of borrowers. Yet, by memorandum April 11, 2017, U.S. Department of Education (USDOE) Secretary Betsy DeVos formally withdrew three Obama USDOE memoranda, which had protected borrowers and instituted other consumer-oriented reforms.
The April action came shortly after DeVos had cancelled a 2015 USDOE guidance letter that had capped at 16% the collection fee loan servicers could charge certain borrowers in default. The DeVos USDOE has also indicated that it will likely relax the standard for servicer participation in bidding for new loan service contracts. This move might include, irrespective of prior behavior, the reinstatement of several firms the Obama USDOE had terminated in 2015 due to dishonest practices. Ever since then, one of the most prominent alleged offenders, Navient, which denies wrongdoing, has been involved in litigation, although it now appears as a big winner from DeVos’s decisions (see here, here and here.)
Why the pattern of seemingly sudden actions within less than three months of taking office? Is it more-or-less thoughtless expediency, with no alternatives ready or in the works to address the system’s systemic shortcomings? DeVos’s memo blandly explains that because the prior administration’s reform efforts have “been subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives…we now find ourselves in a situation where we must promptly address not only these shortcomings but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service. This must be done with precision, timeliness and transparency.” Little, if any, further explanation has been forthcoming, and the USDOE has not specified what, if anything, it will positively do concerning student loan debt collection. Other possible actions are not likely pro-borrower, and the uncertainty itself is problematic for past, present, and future borrowers (as well as the ethical satisfactory loan servicers).
Beyond a seemingly ideological imperative to minimize industry regulation—especially when it can be done with the stroke of her pen—DeVos to date has failed to evidence serious thought about the effects of her actions or even begun real planning for what should come next. Meanwhile, by apparently favoring specific firms, and by moving the system back toward its former dysfunctional state, the Secretary is simply inviting the same old abuses by the same old actors. Yes, elections really do have consequences.
Contact Dirk: email@example.com