Questions on Student Loan Servicing

December, 2017

Washington -- Several times recently I've been asked what I think of the proposed merger between the for-profit student loan servicer Nelnet and its non-profit competitor, Great Lakes Student Loan Servicing. Rather than repeating myself, I'll address the matter in this post for all to see.

I've always thought highly of the Great Lakes leadership; they're among the best around. I have a settlement agreement with Nelnet so I can't say too much about them. It's a standard type of agreement in which Nelnet paid back funds to the Treasury and I dropped my federal False Claims case against them; each side going forward does not discuss or reveal the details of discovery in the case. That's what the federal judge in the case wanted, to avoid a trial in 2010, so that was the outcome. There's nothing in the agreement that precludes me from discussing public policy about student loan servicing, however, so I can say relatively good things about Nelnet regarding its record over the years since the settlement. Nelnet has added good people to its board; it diversified; it has fewer borrower complaints than Navient or PHEAA, servicers with records so bad several state attorneys general are taking legal action against them to protect their citizens. The Consumer Financial Protection Bureau has also taken legal action against Navient (formerly known as Sallie Mae). Of the nation's "big four" student loan servicers, Great Lakes and Nelnet are clearly better than the other two. But the bar for comparison is low.

The question of a merger (actually an acquisition of Great Lakes by Nelnet) has at least two aspects. First, is it wise to continue the movement toward for-profit servicers, as opposed to nonprofits? Second, inasmuch as the servicers are supposed to compete with each other as federal contractors, would this merger lessen the competition to the disadvantage of federal taxpayers, who pay the bills?

The move to for-profit servicers and secondary markets dates to the mid-1990s. Back then, nonprofit Boston-based Nellie Mae persuaded Senator Ted Kennedy that it should be allowed to go for-profit, at which time it would set up a charitable foundation worth tens of millions, representing the value of the tax exemptions and concessions it received as a nonprofit over the years. The new foundation would make grants to education charities. This conversion, however, required a change to the Higher Education Act. Senator Kennedy successfully got an amendment to make the conversion possible, albeit through an unrelated bill that went unnoticed until the next morning when the deed had been done. Secretary of Education Richard Riley opposed the change, as did Donald Feuerstein and the late Tom Wolanin of the Education Department, who understood that the amendment applied not only to Nellie Mae, but to all nonprofits that might want to convert to for-profit. This led to a chain reaction of conversions over the ensuing years on terms favorable to the new for-profits, including the grandfathering of their tax-exempt bond estates for years into the future.

Likewise in the mid-1990s, the government sponsored enterprise (GSE) known as Sallie Mae, the largest student loan servicer and secondary market in the country, also petitioned Congress to allow it to go for-profit. The Clinton Administration did not oppose it, the idea coming in part out of Vice President Gore's "re-inventing government" initiative. The legendary Secretary Riley, named by Time magazine as one of the top ten cabinet members of the post-WWII era, opposed the change unless Sallie Mae made concessions back to the government in recognition of all the benefits that had been bestowed on it as a GSE. Deputy Assistant Secretary Tom Wolanin also opposed the conversion on the basis that the government was getting an extremely bad deal. He resigned in frustration.

We have now seen the results of the conversions. The ability of for-profits to move loans around among taxable and tax-exempt bond estates was a factor in the mischief known as the 9.5% loan scandal. Worse, for-profit Sallie Mae (newly Navient), now boldly states that its operations are to benefit its stockholders, and that it has no obligation to borrowers to provide them with information about what repayment programs might be best for them. This is a federal contractor being paid with taxpayer money, out only for itself with no real regard for the obligations it has to give borrowers correct information and get them into programs appropriate to their situation. It's not really a surprise that the CFPB has sued Navient.

As to the matter of competition between servicers, it is again necessary to look back to the 1990s when Congress created the so-called Direct Loan program. It was an alternative to the bank-based student loan program known as FFEL. Rather than using private bank capital to originate student loans, requiring a subsidy set by Congress to make the loans and their servicing profitable, the DL program used Treasury capital to make the loans and set up a competitive bidding process to hold down the cost of servicing. In 2010, Congress killed the wasteful, fraud-riddled FFEL program (see previous posts) in favor of the DL program going forward. But for the DL program to be successful, there would have to be adequate competition among servicers to let the free market help hold down taxpayer costs.*

So one of the questions now is whether a merger between the two top servicers is in taxpayers' interests. I would be more comfortable with the merger if the other competitors, Navient and PHEAA, were worthy of federal contracts. As long as they are not, a merger does not seem like a good idea. Will a charitable foundation be spun off from Great Lakes, as has been the case with other conversions to for-profit? There is a waiting period required by law before the merger-acquisition takes place. Consumer and taxpayer advocates, take note.

You may ask why the Department of Education limits servicer contract competition only to those with student loan servicing experience. What about companies that do credit card servicing, or mortgage servicing? Good question. The merger would be more palatable if the competition were opened up further.

Then there is the possibility of handling student loan repayments as other countries do, through the tax payment and withholding system. That could make the question of the merger moot.

* Savings from killing the costly FFEL program have been redirected into the Pell Grant program, to benefit low-income students.