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The Consumer Financial Protection Bureau sued Navient, one of the largest student loan servicers, in 2017 because it ‘systematically and illegally failed borrowers at every stage of repayment.’
As Bob Kuttner reported for the Prospect last week, former Consumer Financial Protection Bureau director Rich Cordray has been appointed chief operating officer of the office of Federal Student Aid (FSA), which manages the government’s $1.56 trillion student loan portfolio. This position was a major priority of the progressive left, and getting Cordray selected over the alternative candidates has to be seen as a victory.
For months, activists have been frustrated with a relatively slow pace of change at the Education Department. As Kuttner writes, with Cordray at FSA, a lot of initiatives can be accelerated, including fixing the appallingly dysfunctional Public Service Loan Forgiveness program, allowing more victims of for-profit colleges to cancel their loans, and ensuring that “totally and permanently disabled” students get loan forgiveness.
But I must part ways with my colleague on one point. He describes how Cordray needs to exercise tougher oversight over student loan servicing companies, which handle day-to-day operations on the loans. Actually, we should get rid of these companies entirely. And if we do, we’ll make it even easier to forgive much of this student debt and rethink the entire way we finance higher education.
I’ve been writing about the puzzling existence of student loan servicers for many years. To break this down simply, the servicers, outside for-profit companies contracted to manage federally issued loans, collect monthly payments on loans and assist borrowers with payment options. So let me ask you this: Have you ever sent money to the U.S. government? Have you ever had money owed to the U.S. government taken out of a paycheck? If you are a U.S. citizen, or even not, and you’ve ever held down a job, the answer is yes. The Internal Revenue Service is the largest accounts receivable department in the world.
It is inconceivable that you would have to outsource this function—and pay handsomely for it—even if the private servicing companies were doing a passable job. But nobody more than Richard Cordray knows what a menace these companies are. When he was CFPB director, the agency put out several signature reports on student loan servicing abuse, showing that servicers routinely imposed illegal payments and penalties on borrowers, violated interest rate caps under the Servicemembers Civil Relief Act, misapplied payments, lost paperwork, steered borrowers into higher-cost repayment plans, hid cheaper options from their customers, and even harassed customers after their co-signers died. In 2017, Cordray’s CFPB sued Navient, one of the largest servicers, because it “systematically and illegally failed borrowers at every stage of repayment.” The case is ongoing.
This does not sound like an industry that should exist, especially if there’s a credible alternative available. Privatization of student loan collection is yet another example where the theory that private enterprise always conducts operations more efficiently does not at all prove true in practice. These servicer contracts were recently renewed through 2021, and some into 2022. But if the companies are routinely breaking the law, that’s grounds for breach of contract.
In 2014, the Obama administration tested a pilot program of directly collecting student loan payments. The pilot was run out of the Treasury Department, under the auspices of Deputy Secretary Sarah Bloom Raskin; after she left in the changeover of power to Trump, it languished. At the time, an Education Department attorney confirmed that Education Secretary Miguel Cardona could bring collections in-house: All he would have to do is “determine that it wasn’t practicable for the department to use servicers to collect loans and do that directly using federal employees.” With Cordray in the key office, he would be in a position to nudge Cardona in that direction; and it shouldn’t be practicable to give contracts to companies that rip off their customers.
Congress would have to provide funding to fully insource direct collection, but it would likely be cheaper than outsourcing to private companies that take a profit. Moreover, as the student loan market moves to income-based repayment, there are opportunities to conduct payments as a secondary form of withholding, directly taken out of paychecks. That would reduce the administrative burden to almost nothing.
Congress would have to provide funding to fully insource direct collection, but it would likely be cheaper than outsourcing to private companies that take a profit.
Of course, that does raise the potential for errors, if too much is taken out of paychecks. When Navient or some other servicer messes up, they get sued. What independent oversight would there be over government collectors, some student debt advocates wonder. “I think the idea is right that Navient is driving profit out of a [bad] business model,” said Seth Frotman of the Student Borrower Protection Center. “I think there needs to be a ton of thought about real oversight, how you provide restitution to problems, etc.”
That said, government mismanagement of funds typically gets a lot of attention, and there are pressure tools from advocates and members of Congress that usually lead to restitution. More oversight could be built into the funding mechanism. And there’s another good reason for getting rid of student loan servicers: It will pave the way for canceling student debt.
As the Prospect has been explaining, under the Higher Education Act of 1965, the Education Department can cancel federally issued student loans on its own authority. Currently, the Biden administration is undertaking a legal review before making a determination on whether to go ahead with forgiveness. Cordray would also be involved with this decision.
As with virtually every controversial government action, you can expect opponents to go ahead and sue if this ever happens. The obvious question here is, who would actually be able to sue? Who would be harmed by the Education Department not collecting student loans? And the obvious answer is, student loan servicers. The government contracts them to collect payments, and if the debt is simply canceled, the servicers lose a bunch of business. That doesn’t mean their lawsuit would succeed, but given that we are talking about extremely conservative courts, it would certainly give opponents of debt relief a shot.
But if you eliminate this private middleman in the student loan process, that threat goes away. And then there really is nobody left to sue. Insourcing student loan collection removes one of the only available strategies to reverse debt forgiveness through litigation.
Canceling even a modicum of student debt would wipe out obligations for millions of borrowers, and take some of the most nettlesome legacy accounts off the books. It would make servicing the loans much easier to do—and well within the abilities of the federal government. And the government couldn’t possibly do it worse than the rogue’s gallery currently in charge of servicing these loans.
With leaders like Chuck Schumer imploring President Biden to cancel student debt, he should similarly be asking to remove private student loan servicers from the equation. These private companies offer no value and much harm to borrowers. The ten scariest words in the English language are: I’m with a federal contractor and I’m here to help. The government already issues these loans; they should take charge of collecting the payments.
