Secretary of Education Betsy DeVos has been sending some chilling signals lately about how she plans to deal with America’s $1.3 trillion student debt burden. On at least two separate ocassions now, her department has scrapped Obama-era reforms that were designed to protect borrowers from being gouged or misled by the companies responsible for collecting their loans. All told, DeVos seems less interested in protecting former students than in protecting the predators that have fleeced them for profit.
The trouble signs started flashing in March, when the Department of Education gave a group of student debt collectors permission to once again start slapping heavy fees on delinquent borrowers who were trying to catch up on loan payments. The practice had effectively been banned during the Obama administration. In a pleasantly unexpected turn, all of the organizations affected by the move announced that they would not bring back the penalties. But the incident was still disturbing, both because it demonstrated DeVos’ willingness to side with businesses over borrowers and because it may have involved an astounding conflict of interest.
The controversy centered on a slightly obscure group of nonprofits known as guarantee agencies, which are responsible for collecting and rehabbing defaulted loans that were made as part of the government’s old, bank-based student lending scheme (though the program was discontinued in 2010, there are still hundreds of billions of dollars of loans still outstanding from it). Up until 2015, when the Obama administration determined the practice was illegal, these organizations were notorious for charging high fees to borrowers who had defaulted on their debts but promised to pay up on them within 60 days. These penalties—equal to 16 percent of a borrower’s total loan balance—could be punishing. In one notable case, a Kansas woman sued the country’s largest guarantee agency, United Student Funds, after it charged her $4,500 in fees just to bring her loan current. But following the Obama administration’s clampdown, United Student Funds filed its own lawsuit claiming the penalty fees should have been permitted under the law. That case lingered on through this year.
Now here’s where the conflict of interest comes into play. Until January, United Student Funds was run by a former Bush administration official named Bill Hansen. His son, a former for-profit college lobbyist named Taylor Hansen, just happened to be an adviser to Betsy DeVos at the Department of Education. As Bloomberg’s Shahien Nasiripour reported, Hansen the younger resigned from the agency the day after DeVos issued her decision blessing the guarantee agency fees. This did not go unnoticed: Sen. Elizabeth Warren of Massachusetts, among others, called out the bizarre family connection. A Department of Education spokesman told Bloomberg that Hansen had recused himself from any issues involving United Student Funds’ lawsuit, but it wasn't clear whether he was also kept out of general conversations involving guarantee agency fees. There was, at the very least, plenty of smoke.
Even if they don’t revive their fees, DeVos’ move could still turn out to be extremely valuable for the guarantee agencies. As Nasiripour notes, executives had worried that the Obama administration had opened their organizations up to class-action suits from students who had been charged the fees before they were deemed illegal. That potentially expensive threat may now be dead.
But it turned out this was just a warmup act. This month, the Department of Education appeared to sweep away the Obama administration’s entire plan to prevent borrowers from defaulting on their debts by improving the government’s troubled system of collecting loans. How come? The secretary seems to think it would cost too much.
Some background, to start: The Department of Education’s system of servicing student loans is an unruly mess. The government contracts with nine different companies and nonprofits to help borrowers pick repayment options and then collect their monthly checks. These organizations are legendary for their inept and negligent customer service—in 2015, the Consumer Financial Protection Bureau published an extensive report on the industry’s various failings, and this year, that agency sued the country’s single largest servicer, Navient, alleging it shortchanged borrowers by steering them into inappropriate payment plans among other acts of wrongdoing.
The CFPB’s rap sheet against Navient, which was spun off from student loan giant Sallie Mae, in many ways speaks to the fundamentally misaligned incentives that plague the entire loan servicing system. The federal government offers a wide array of repayment plans for student borrowers, some of which cap their monthly payments at a percentage of their income. If their earnings drop low enough, they don’t have to pay anything at all. In theory, having these options around should prevent any former students from defaulting. The problem is that they’re complicated, and a lot of borrowers simply don’t know about them.
In large part that’s because servicers have fallen down on the job. In theory, it’s their job to make sure borrowers know about all their repayment options, including income-based options. But spending time on the phone with customers, walking them through their various options is expensive—customer service agents cost money, after all—and servicers want to keep their costs down. The CFPB says that Navient paid its agents based partly on the average time they spent per call, which encouraged them to quickly dump troubled borrowers into quick-fix options like loan deferment and forebearance rather than work on long-term solutions that might have saved them money or kept them from defaulting.
It’s not an exaggeration to say that problems like these played a central role fueling the student loan crisis of the past decade, in which three-year default rates neared 15 percent.
In 2016, as it prepared to award its next round of servicing contracts, the Obama administration issued a pair of memos laying out a plan to fix the system. The administration intended create a single online platform, designed and run by one company, that all borrowers could use to manage their loans. Other servicers could play supporting roles, and contractors would be both required and incentivized to walk troubled borrowers through all of their potential repayment options in order to ensure they arrived at the right one.
The department also announced that it would make servicers’ past performance the single most important noncost factor when deciding who should be awarded contracts. “Any proven performance failures that involved borrowers being misled, ignored, or provided wrong information must be given particular attention,” then–Education Secretary John B. King wrote. In other words, companies that had previously screwed borrowers would be shut out—which would seem to bode poorly for Navient.
But DeVos seems to have come to the companies’ rescue. Last week, she rescinded both of the Obama administration’s memos, and as the New York Times notes, it’s unclear if the idea of a single loan platform will survive at all. The idea of paying servicers to make sure students pick the right repayment option or picking companies based on their past performance certainly seems to be out.
DeVos’ official letter killing the plans did not offer much detailed explanation for the move, but she suggests it may have been motivated by cost. “The student loan servicing procurement affords us a significant opportunity to improve outcomes and experiences for federal student loan borrowers, as well as demonstrate sound fiscal stewardship of public dollars,” DeVos writes, adding later, “We have a duty to do right by both borrowers and taxpayers.”
DeVos is probably right that the system envisioned by the last administration would be more expensive. After all, crappy customer service is cheaper. “It’s more expensive to do servicing well,” David Bergeron, a former Education Department official now at the liberal Center for American Progress, told me. “The federal student loan system doesn’t spend as much on servicing as a typical bank does on a typical credit card. They spend maybe half of what a bank spends on a typical credit card. And it’s much more complicated. So yeah, it’s more expensive. But at the end of the day, you have to think of the cost and the benefit.”
Bergeron told me that DeVos’ focus on budget savings probably explains why she doesn’t want the department to carefully weigh how servicers performed in the past. “The lowest-cost bidder in student loan servicing is always going to be the one that services the most, because that drives down unit costs. Who is that? It’s Navient,” he said. “There’s this history of performance failures on the part of Navient. And Secretary DeVos is basically saying forget all that. Look at cost. And that will always advantage them.”
The benefit of spending more, of course, would be fewer students defaulting and fewer ruined credit scores. But over the past couple of months, DeVos has demonstrated a basic disregard for the well-being of those who borrow money from the government for school. Thanks to her, it’s now a great time to be issuing student loans and a terrible time to be paying one back.