To keep grads solvent, take the middleman out of student loans

By Chris Hicks
July 31, 2014

Occupy Wall Street demonstrators participating in a street-theater production wear signs around their neck representing their student debt during a protest against the rising national student debt in Union Square, in New York

The mounting student debt crisis could cause serious economic damage to the United States. Rising college costs and declining financial aid at both state and federal levels have significantly contributed to the problem. A good deal of responsibility, however, belongs to the financial institutions that service federal student loans, according to a new report.

Millions of students use loans underwritten by the Treasury Department and granted by the Department of Education to help make college a reality. Once the loan is approved, however, borrowers usually deal with third-party servicers — and that’s where the trouble often begins.

In 2010, the Education Department expanded its Direct Loan Program and contracted many for-profit financial institutions to service and administer the loans. Complaints to the department’s Office of Federal Student Aid jumped significantly.

The Consumer Financial Protection Bureau has documented a wide range of complaints, including payments not showing up in payment histories; processing errors that maximize late fees and penalties; misinformation on how payments are applied to multiple loans; misplaced paperwork that results in missed deadlines, and poor customer service that denies borrowers vital information about flexible repayment options.

Borrowers also complain that servicers often make debt management more complicated instead of helping them manage their debt. Servicers, however, are at fault for far more, according to the new report by Eric Fink, associate professor of law at Elon University, and Roland Zullo, an assistant research scientist at the University of Michigan.

Thousands of college students and faculty march at the State Capitol in SacramentoTheir study shows that servicing firms are playing a major role in the huge increase in student-loan defaults and delinquencies — because the companies have neglected their responsibility to counsel borrowers with distressed loans. By complicating the process and providing misinformation about repayment options, many servicers make paying off student debt an incredibly difficult process.

Since Education Department contracts cap the total revenue a servicer can make on each account, many companies seek higher profits by trying to cut other costs. The result is often a reduced customer-service staff and overall decline in service.

Yet these financial institutions do not shoulder all the blame. The report also blames the Education Department for not providing appropriate oversight and allowing servicers to take on new loans they cannot manage efficiently. Though the department periodically reviews each contractor, the companies are all guaranteed to receive some proportion of new accounts — essentially undermining any demands for performance improvements.

Moreover, because contractors are assessed against each other — rather than against independent standards — the entire floor is lowered with no consequence or penalty for poor performance.

Education Secretary Arne Duncan has recently agreed to conduct an internal investigation of his department’s servicers. But other government agencies have already looked into this — and the results were troubling. The Federal Deposit Insurance Corporation and the Justice Department both investigated one of the largest student-loan servicers, Sallie Mae (as well as Navient, formerly a division of Sallie Mae). The companies were found to be overcharging active-duty soldiers  on their federal student loans. The investigation resulted in a large settlement from both companies.

This helps demonstrate the Education Department’s failure to oversee its contractors effectively. Several senators have also called on the Office of Federal Student Aid to address complaints about Sallie Mae. Senator Tom Harkin (D-Iowa), for example, charges that the servicers are being treated as though they’re “too big to fail.”

To rein in servicers, policymakers should move contract monitoring to the Consumer Financial Protection Bureau. It has no stake in the servicers’ performance.

uspo-texasAnother way to overhaul the program is to cut out the middle man. Administration of the loans could be taken on fully by the federal government and moved to a government agency better equipped to handle it, with a mandate to insist on responsible servicing rather than revenue maximization. In their report, Fink and Zullo recommend moving oversight to the Treasury Department, the Internal Revenue Service or the United States Postal Service.

Their suggestion dovetails with the Postal Service inspector general’s recent comments about expanding into nonbanking financial services, particularly for people underserved by existing banks and other financial institutions.

The agency is logistically well-positioned for loan servicing with its vast network of offices, many on college and university campuses. It has the personnel and infrastructure to assist borrowers with financial transactions.  Unlike current servicers, the Postal Service could offer face-to-face counselors. In addition, the Post Office is already more trusted than banks.

Combating student-loan debt will require reform on many fronts — including tackling college affordability. There are clear, actionable steps, however, that can be taken immediately to ease borrowers’ debt burdens and lessen the resulting drag on our economy.

One crucial missing ingredient, however, is the political will to stop this crisis from getting even worse.

 

PHOTO (TOP): Occupy Wall Street demonstrators participating in a street-theater production wear signs around their neck representing their student debt during a protest against the rising national student debt in Union Square, in New York, April 25, 2012. REUTERS/Andrew Burton

PHOTO (INSERT 1): Thousands of college students and faculty march at the State Capitol in Sacramento, California, March 14, 2011. REUTERS/Max Whittaker

PHOTO (INSERT 2): U.S. Post Office and Court House in Larado, Texas. Courtesy of LIBRARY OF CONGRESS

15 comments

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How’s that private sector solution working’ out for ya?

Posted by WestFlorida | Report as abusive

These people take these loans, finish school, and then want someone else to pay. Typical American Liberals- they love to spend someone else’s money.

Posted by UKantHndleTruth | Report as abusive

WestFlorida: Is this really a private sector solution if “the companies are all guaranteed to receive some proportion of new accounts”? That -to me- still sounds like the government picking winners and losers, or at the very least tying its own hands. Do the final consumers (those of us with student loans) have a substantially viable alternative to this oligopoly? That’s a real question, as I’m ignorant of this particular topic and the news article isn’t very in-depth. I’m also quite happy with whoever is servicing my loans, but I also have no trouble repaying them.

Posted by LKS473 | Report as abusive

Get a job and pay as you go. Your education might be part time, but you won’t have the debt. It is not the fault of others that you are young and dumb and signed on to loans that you were not prepared to pay off. Perhaps employment would occur if you had gotten better grades and made a better choice of degree. Simply getting a degree, especially if you are a C student, will not necessarily result in a high paying job. You also have to have some skill and dedication. There are some things you can only learn by working bad jobs as you also go to school, that cannot be learned in any other way, since no one tells the truth in either the media or the education system. With the exception of those facts and tasks which do not involve subjective evaluation. There are real tasks that need to be done in this world, and if you don’t know what those are and are not prepared to do them, then the result is on you. Not the people who encouraged you to be weak and stupid.

Posted by brotherkenny4 | Report as abusive

One can always expect a NeoClown to post, the students are or at least should not be a revenue source, they are training to become tax payers, medical and social sec payers.

NeoClowns and the lie that is Supply-Side continue to act as traitors to the core american principles. Time for those who scream and make endless threats on their 2nd Ammendment rights being infringed, etc.

There will be enough money made on these future consumers after they graduate because they will have less debit so more disposable. Forest from the trees.

Posted by zx74125800 | Report as abusive

The government can do this more efficiently?

Please remember that a government-run servicing center would be UNIONIZED.

The SIEU would love to take over this business and gouge the taxpayers even more on federal student loans.

(Most are never repaid by the way, the taxpayer eats the loss.)

What you’re suggesting in this piece would make student loan servicing more expensive and less efficient – not more.

Posted by GriddleJim | Report as abusive

Its pretty ironic how most of the older generation benefited from socialized education yet call the younger generation liberal freeloaders when they complain about excessive student debt. The older generation worked a summer job and made enough to pay for education yet they assume the younger generation should do the same.

If one could make $55K a year on a summer or part time job then there would not be a need for additional education

In response to botherkenny4 – you will never learn to be an engineer working a bad job and you cannot go to medical school part time.

Unfortunately everyone will pay for the excessive student debt one way or another. When you need a lawyer or take you pet to see a veterinarian part of the additional cost will be for their student debt. When there is a lack general health care physicians because all of the smart one have specialized to pay off their debt. When you sell your house to a Chinese national because young Americans have too poor of a debt to income ratio to afford a larger home loan.

Posted by Holden52 | Report as abusive

Most guys I knew instantly ran out to the Apple store after they got their loans, and proceeded to waste a good portion of the money on toys. Then spent every possible minute they could during college, drinking and partying. Then once they got out, they proceeded to pass up 95% of the jobs out there, because they thought they were beneath them. I paid off all my debt by busting my butt and sacrificing… Not standing in a park with a sign around my neck, whining about how unfair life is.

Posted by dd606 | Report as abusive

I have a BS and PhD in chemistry. It took me eight years to get the BS as I paid as I went. I did receive a small academic scholarship that paid for about 20% of my cost in my last two years. GPA of 3.9 as an undergrad. Grad school was free as I taught and did research and recieved tuition waivers. I was able to contribute to 10 journal publications during four and half years as a grad student. I have worked 60-70 hours a week for most of my life. By work I mean either direct employment or education or sweat equity that I put into my home. To this day that is still true and I continue to learn. I graduated with the BS in 1993 and the PhD in 1998, although I was employed before the actual graduation date. As an undergrad I had jobs as a factory worker, a school bus driver, a tutor, a lab technician, a house painter, and a number of really crappy jobs through temp agencies. I also sold plasma. I fixed my own cars, owned and repair my own house and grew a vegetable garden. You won’t learn how to be an engineer if your lazy either.

Posted by brotherkenny4 | Report as abusive

I have a BS and PhD in chemistry. It took me eight years to get the BS as I paid as I went. I did receive a small academic scholarship that paid for about 20% of my cost in my last two years. GPA of 3.9 as an undergrad. Grad school was free as I taught and did research and recieved tuition waivers. I was able to contribute to 10 journal publications during four and half years as a grad student. I have worked 60-70 hours a week for most of my life. By work I mean either direct employment or education or sweat equity that I put into my home. To this day that is still true and I continue to learn. I graduated with the BS in 1993 and the PhD in 1998, although I was employed before the actual graduation date. As an undergrad I had jobs as a factory worker, a school bus driver, a tutor, a lab technician, a house painter, and a number of really crappy jobs through temp agencies. I also sold plasma. I fixed my own cars, owned and repair my own house and grew a vegetable garden. You won’t learn how to be an engineer if your lazy either.

Posted by brotherkenny4 | Report as abusive

First, the article is primarily about the third-party servicing companies (which are HORRIBLE.) I am 100% in favor of eliminating these, as they are impossible to get in touch with, and they make mistakes far too often. At one point I had to call in every month for 5 or 6 months in a row, because they would mess up my statement and apply my payment incorrectly every time. There is nothing complicated about my loans, these companies are just hopelessly incompetent.

Regarding the student loans themselves – I have a big problem with the tendency of some students to major in something of questionable job market value, while borrowing a massive sum, then expect the taxpayers to foot the bill later when they cannot afford the loan payments.

Posted by mizugori | Report as abusive

Make the universities co-sign for the loans. The loan sums started going up to meet the increases in tuition and fees. Which happened because of building binges and other boondoggles.

Then if some students wants to borrow 60k to study ‘comparative literature,’ the university can figure out on its own if that is a good business partner to have.

Posted by AlkalineState | Report as abusive

there are two issues here that are totally messed up.

1. in 06 the bank lobbyist had congress change the bankruptcy laws so college debt could not be “thrown out” in a bankruptcy proceeding. The effect of this was that banks no longer had to assess the risk of a college loan and they were just about guaranteed high profits since the risk was significantly reduced.

2. The college administration pigwigs ran up the cost of eduction at about 5 times the inflation rate from 1980 to present. Why – look at what they are paid!! Sinful. AND in some cases they were paid by the banks to send them foolish students.

Fixes

number one – Repeal the bankruptcy laws related to college debt. This will immediately change the risk assessment process and stop the loans for career fields or students that can’t pay back the debt. Tough luck all you art students.

number two – regulate the cost of running a college campus. Limit Administration expense to 10%.

Posted by michaelryan | Report as abusive

This is the same problem we are seeing throughout the federal government. Nobody is supervising and managing. They turn a job over to someone and walk away without ever checking to see if the work is being done properly. Subordinates are left to do whatever they like. Obama is not taking responsibility for an abject failure to perform the basic function of the presidency: The management of the executive branch.

Posted by Yaakovweeeeeee | Report as abusive

American Educational Services is my servicing company. Here are their reviews on Yelp:

http://www.yelp.com/biz/american-educati on-services-guaranty-and-grant-services- harrisburg

Why does our government allow servicing companies to treat us this way?

Posted by ronryegadfly | Report as abusive