The Trump era is likely to usher in rapid privatization of public goods and services. Dozens of president-elect Donald Trump’s transition team members and cabinet selections have either close ties to privatization groups or enthusiasm for the concept. Private companies that specialize in taking over government functions are thriving. Trump’s infrastructure plan, one of the few agenda items Democrats have complimented, looks increasingly like a stealth privatization scheme.
Behind these plans to sell off the public sector lies a philosophy that private enterprise can perform government roles more cheaply and efficiently. Perhaps nothing shatters this myth more than a lawsuit filed Wednesday against Navient, a company that administers payments on student loans. The Consumer Financial Protection Bureau (CFPB) and state attorneys general in Illinois and Washington state accuse Navient of “systematically and illegally failing borrowers at every stage of repayment,” using “shortcuts and deception” to rip off students. “These unlawful practices have cost student loan borrowers across the country both heartache and money,” said CFPB Director Richard Cordray in a conference call Wednesday.
Navient committed these alleged violations in part while fulfilling a federal contract for work that could indisputably have been performed by the public sector. What did Americans get out of that deal? A rapacious entity that could only meet contractual goals and rake in profits by screwing its customer base.
Let’s step back for a minute. The student loan industry, rare among its counterparts, was brought back under federal control by President Obama. The 2010 Student Aid and Fiscal Responsibility Act (SAFRA) ended the practice of private banks lending to students with a government guarantee while skimming profits off the top, instead switching to 100 percent direct lending from the government, which put the savings back into student aid.
But despite that law, Congress inserted language in the statute that directed the Education Department to contract out the right to service the loans, which involves collecting payments, managing accounts, and performing day-to-day operations. The language permits the agency to transfer that role to federal employees if using private servicers isn’t “practicable,” but specifies that as long as private servicers could physically perform the job, they would have to be in charge of collecting federal student loans.
This mandate mostly saved the business model—and profits—of one company: the Student Loan Marketing Association, or Sallie Mae, established in 1973 as a government entity to service private student loans. The government fully privatized Sallie Mae after 2004, and it moved into origination and debt collection, along with servicing.
Sallie Mae was devastated after SAFRA took effect, issuing significant layoffs. But lucrative servicing contracts kept it afloat. In 2014, Sallie Mae spun its servicing business into a separate company—Navient—that became the nation’s largest student loan servicer, managing 12 million accounts, more than half of them on loans issued by the federal government. So a government agency servicing private loans became a private company servicing government loans.
And they’re apparently very bad at it. According to the complaint, Navient failed to correctly allocate borrower payments across multiple loans, sometimes ringing up late fees and defaults even when the borrower made the payment. The company steered borrowers into forbearance plans (a temporary break from payments) that increased interest due, rather than other repayment options. The CFPB estimates that $4 billion in unnecessary interest charges piled up on borrower accounts from 2010-2015 because of this. This added an even higher burden on already cash-strapped students, overloaded with over a trillion dollars in student debt.
The CFPB added that Navient gave student borrowers incorrect information for how to maintain eligibility for income-based repayment plans, which only take a sliver of a borrowers’ income every month. If those who weren’t informed of the steps failed to renew eligibility, they would lose that more affordable plan, seeing their monthly payments jump by hundreds or thousands of dollars. The company erroneously misreported loan defaults to credit reporting agencies of severely disabled borrowers —including veterans—who had the right to seek loan forgiveness after contracting their disability. Navient’s subsidiary, Pioneer Credit Recovery, also made misrepresentations to borrowers about credit reporting and collection fees. Navient failed to correct these and other errors in the face of borrower complaints.
THIS IS NOT NAVIENT’S FIRST RUN-IN with the law. The company was fined $97 million by the Justice Department in 2014 for illegally charging service members overly high interest rates. And the most amazing thing about this is that Navient shouldn’t even have a business model.
Spend ten seconds thinking about the fact that private companies collect payments on behalf of the federal government, and you’ll probably view it as ridiculous on its face. The government literally features the largest payment collection agency in the world—the Internal Revenue Service. Other federal bureaus, like the Department of Agriculture’s Farm Service Agency, collects on direct loans to farmers. The Treasury Department even started experimenting with doing this on student loans in 2014. Collecting from millions of student loan borrowers would increase scale. But if anyone knows how to take a payment and credit an account with minimal errors, it’s the federal government.
Furthermore, if income-based repayment plans commit borrowers to pay a percentage of their incomes, that could easily be accomplished through tax withholding. “Borrowers that want to pay through a payroll deduction or the tax code would make loan modifications automatic,” says Rohit Chopra, a senior fellow at the Consumer Federation of America, who previously worked on student loan issues at CFPB. “You wouldn’t need to go through so much red tape to get an affordable repayment program.”
Indeed, it’s hard to understand what value Navient adds to the student loan program. But we do know what harm they create. When you add the profit motive into payment collection, you provide incentives for companies like Navient to cheat their customers. Privatization must both meet contractual obligations to deliver services at a lower cost than federal provision, and turn a profit to boot. The only way to achieve that is through cutting labor costs to the bone and wringing as much out of every customer as possible. With government as the issuer of the contract, lobbying and campaign contributions become a more important shield on the contractor’s profits than fixing systems and delivering better service.
Whether the conduct was incompetent or malicious—because overworked and under-trained call center employees made honest mistakes in delivering information to borrowers, or because they actively hid better repayment options and other tricks—the entire process rips off recipients of the services by design. “The incentive of the servicer is misaligned from the borrower, that’s where you get these fundamental breakdowns,” says Chopra.
Navient’s many lobbyists and friends in high places helped preserve this system of exclusive contracts, against all logic. Indeed, Navient continued to appeal to its friends in government on Wednesday, calling the CFPB lawsuit a “midnight action filed on the eve of a new administration” that speaks to the agency’s “political motivations,” an obvious dog-whistle to Trump and the Republicans for a lifeline.
Indeed, the future of this lawsuit could depend on the role of the CFPB in a Trump administration. Conservatives have been gunning for the consumer agency, seeking to change its funding streams and fire its independent director, Richard Cordray. In fact, Navient lobbyists funded ads during presidential debates depicting CFPB as a Soviet-style politburo controlling all lending decisions that must be stopped. Trump’s decisions on CFPB now threaten to give Navient a handsome return on its investment in demonizing the agency.
But the Navient lawsuit doesn’t just reinforce why we need the CFPB. It shreds the argument for privatization, particularly of functions the government is perfectly capable of doing on its own. We could easily route student loan payments right to Uncle Sam. But instead, we push them through a predatory actor that needs to commit harm to make it worthwhile. Navient is just a symptom of a larger fallacy that the private sector can magically solve any problem, rather than creating more of them.