Americans currently owe $1.5 trillion in student loans. More than a million borrowers default every year. Under past administrations, the federal government tried to make student loans easier to access, to both understand and pay off. In 2008, the Higher Education Act was updated to move the loan system to 100 percent direct lending through the Department of Education. The move had several benefits, according to the Center for American Progress:
“This completely federalized system has resulted in many benefits: less on-the-ground industry influence in lending; repayment programs that are unavailable in the private market; and, though it may seem ironic given the current dissatisfaction with the repayment system, stronger consumer protections. Perhaps most importantly, the transition to direct lending saves the federal government roughly $6 billion per year—funds that have resulted in an infusion of $36 billion of mandatory funding into the Pell Grant program over the past 10 years.”
But, even though the federal government does all the lending, it doesn’t do nearly all the servicing. Much of the servicing is outsourced to private businesses that own and manage the accounts. The Department of Education’s Office of Federal Student Aid is charged with oversight of these private loan managers. Too often, these private managers intentionally try to keep borrowers in debt. The most common tactic is to not inform—or even deliberately hide information from—borrowers of all their repayment options, which could substantially reduce their burden.
The FSA is failing at its mission. The Department of Education’s Inspector General released a report last month after examining FSA oversight of nine loan servicers over an 18-month period:
“FSA had not established policies and procedures that provided reasonable assurance that the risk of servicer noncompliance with requirements for servicing federally held student loans was mitigated … FSA management rarely used available contract accountability provisions to hold servicers accountable for instances of noncompliance … FSA did not provide servicers with an incentive to take actions to mitigate the risk of continued servicer noncompliance that could harm students.”
In the face of federal inadequacies, several state governments have been launching initiatives to protect student loan borrowers. Rhode Island is pushing for a “student loan bill of rights” that would establish oversight of loan servicers operating in Rhode Island, reports WPRO News. Other states are trying to do the same. “A Maine lawmaker is currently making a push to create a state system to oversee student loan services operating there. Oregon’s attorney general wants to regulate student loan services and force them to be licensed under the state. Connecticut’s student loan bill of rights has been picked up by other statehouses nationwide.”
The Trump administration has joined the battle—but on the side of the private servicers. The Education Department has stopped sharing student loan information with state governments since the start of Trump’s presidency. On Thursday, 21 state attorneys general sent a letter to Education Secretary Betsy DeVos requesting the agency start sharing that information again. “Student loan information is vital to our efforts to protect consumers from illegal, unfair, abusive or deceptive practices by actors in the higher education industry,” the letter read. This is a follow-up to a July 2018 request that was ignored, the attorneys general say. Maryland Attorney General Brian Frosh told the Washington Post that the “private companies contracted by the Department to service student loans are subject to state consumer protection laws. The established practice of sharing certain student loan information helps states ensure these companies are complying with the law and borrowers are being treated fairly.”
Ironically, DeVos’s agency argues that, since the Department of Education services all the loans – a policy DeVos herself has signaled she wishes to rescind and replace with a decentralized, privately-run loan system—that makes them “federal assets and therefore must be controlled and regulated [exclusively] by the federal government.”
There’s an obvious lesson here: The Trump administration is a government of, for, and by rent-seeking profiteers. But this story contains a challenge to progressive reformers who too often base their hopes and ideas on a stronger, more centralized system. No doubt, student borrowers now wish state governments could wrest more power from the federal government. A powerful, more centralized system has its benefits, but it also creates a rod for an administration like the current one to use on students’ backs.
