This week Education Secretary Betsy DeVos withdrew a series of Obama-era protections designed to increase federal servicer accountability and to ensure borrowers get accurate information. In her criticism of the previous administration’s handling of the student loan servicer contracts, DeVos said, “This process has been subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.”
Betsy DeVos and Student Loan Servicers
Devos seems to be adopting a very traditional conservative approach by withdrawing the standards. The idea behind it is that by putting into place fewer regulations, loan servicers can more easily adhere to the regulations that do exist. Further, by simplifying the requirements for loan servicers, DeVos is suggesting that borrowers will get better treatment because the loan servicers can focus on customer quality rather than bureaucratic red tape.
DeVos doesn’t understand student loan servicing
The problem with letting the free market sort out these servicing issues is that federal student loan servicing is not a traditional free market. The borrowers are not the customer in this equation… the customer is the federal government. While borrowers can complain about loan servicing to the Department of Education or Consumer Financial Protection Bureau, they are stuck with the loan servicer that the federal government assigns, absent a few exceptions.
With the government being the only customer of these loan servicers, they only need to meet the minimum standards set by the government. The contracts between loan servicers and the government now have no incentive for high quality service. This means that federal loan servicers can achieve max profits by doing the bare minimum to get by. Slashing the standards will not improve borrower experiences, it will only serve to enhance loan servicer profits.
How bad can loan servicing get?
As DeVos slashes minimum standards of quality for loan servicers, one has to wonder what the breaking point will look like. As it is right now, we have both the Department of Education and Navient telling the courts that loan servicers cannot be relied upon. We also have 27% of borrowers in default, despite the existence of repayment plans that set monthly payments as a small percentage of income.
Given how bad things have already become, it is hard to imagine how devastating things would be if they got worse.
Unless the Trump administration alters its policy, Congress or lawsuits force change, it looks like borrowers are in for some serious headaches dealing with their federal loan servicers.