A Conservative Solution to Student Loan Servicing

Michael Lux Blog, News, Student Loans 0 Comments

The Department of Education’s focus on improving federal student loan servicing is much-needed.  The current system has been the source of many lawsuits brought by both the government and by borrowers.

The Trump Administration’s solution to this issue is to have one student loan servicer handle the $1.3 trillion in federal loans, replacing the current system where nine different companies handle these duties.  According to Education Secretary Betsy DeVos, “Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method.”  The idea behind the shift is to reduce contractual obligations on the loan servicer so that they can focus there efforts on improving customer service rather than compliance.  Further, by having the government oversee one single servicer instead of nine, less federal resources need to be expended in insuring borrower’s needs are addressed.

Getting Back to Conservative Principals

The Trump solution certainly reduces the need for bureaucratic oversight, but the robust free market that is necessary to force loan servicers to increase quality does not exist.  Under the Trump plan a single company will be granted a monopoly on federal student loan servicing.  The financial incentive for this servicer will be to meet the minimum federal standards while spending as little as possible.

Trump has soundly rejected the partially enacted Obama plan that would have created additionally requirements for the loan servicer to be in compliance.

A Simple Solution

If the Trump Administration wants to reduce oversight and regulations while improving customer service, they only need to take two simple steps.  First, there needs to be multiple federal student loan servicers.  Creating a monopoly is a step in the wrong direction.  Second, borrowers should have the right to switch student loan servicers.  The government can pick four loan servicers and give each of them 1/4 of the total borrower base.  Compensation per the contract can be on a per borrower basis.  If a borrower finds call times or payment processing be substandard with their current servicer, they can switch to a different company.

By implementing a competition-driven system, rules and regulations can be kept at a minimum.  Tracking borrower satisfaction and loan servicer quality will be as simple as following the movement of borrowers.

Secretary of Education Betsy DeVos has long been a proponent of the idea that providing families school choice is the best way to ensure a quality education.  Though this viewpoint on K-12 education is hotly debated, applying the same logic to student loan servicing should be agreeable to all interested parties.  The government reduces it’s oversight role, businesses can increase their profits by attracting more consumers, and borrower satisfaction is put front and center.