September, 2021
Washington — Another troubled federal student loan servicer now bites the dust. That makes three this summer. Many are saying good riddance.
A worrisome question is where these loans will now go for servicing. The latest servicer to exit intends to hand off its portfolio to Maximus. Who and what is Maximus? It's hardly a household name in student loans.
Thanks to a remarkable research effort by Deanne Loonin, "Illusory Due Process: The Broken Student Loan Hearing System" 11 U.C. Irvine L. Rev. 173 (2020), we know that Maximus may not be a good place for sevicing. She writes:
In the hearing area, the Department [of Education] appears to rely heavily on Maximus for hearing administration and related tasks. This is a company that has a long track record of problems and sanctions related to federal and state contracts....
She goes on to describe in detail situations no borrower should have to endure, and no federal taxpayer should be supporting.
Another must-read work for anyone connected to student loans is Josh Mitchell's The Debt Trap: How Student Loans Became A National Catastrophe (2021). A WSJ reporter, he has unusual insights into the nation's student loan troubles.
Many years ago, when I was in the U.S. Navy, all personnel who handled important national security materials were required to undergo a National Agency Check (NAC) or a Background Investigation (BI). Government agency files were searched to find any records of bad behavior; investigators called on citizens who knew individuals to determine their fitness and character.
Student loan servicers should be similarly vetted. What would turn up in agency files about the fitness and character of those who service student loans? From my experience — and it is extensive — a lot of servicers would not pass muster, and should not be entrusted to handle student loans. How some have escaped sanctions and even debarment is a question that now must be asked and answered, given the inevitable shake-up that is occurring.
A student loan operational crisis will soon be upon the nation. The repayment pause granted during the pandemic will expire at the end of January. Millions of borrowers will be assigned new servicers, who will have only the old servicers' records to go by, records that we know are riddled with errors created by sevicer ineptitude and sometimes corruption.
The Department of Education should be taking steps to cancel as many loans as possible in the best interest of the country. Those borrowers who have paid back their principal and interest at the government's cost of money should have their loans cancelled now. Any remaining balances due to fees, penalties, compounding of interest, and other charges have a too-high likelihood of being manipulated by servicers toward their own ends, not based on law or regulation.
In the case of the Public Service Loan Forgiveness program, mismanaged terribly by PHEAA, loans should be cancelled after ten years of public service. Again, too many borrowers are being disqualified for servicer error, not for failure to live up to their obligations under the purpose of the program.
The Secretary of Education has the authority under existing law to make these decisions, in the interest of both borrowers and taxpayers.* The Secretary may also have additional authority under "compromise and settle" law, but he surely has authority to cancel loans as recommended above, as part of an attempt to deal with the upcoming operational crisis.
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* Taxpayers have a big interest in seeing student loan programs operated correctly and efficiently. They benefit when borrowers are able to move ahead with productive lives, whether through repayment, cancellation according to law, or, as is provided to other debtors when necessary, bankruptcy. Taxpayers should not be paying the costs of corruption among lenders, servicers, and collectors that keep people in debt as long as possible so as to maximize profits from them, yet that has been all too common for many years.
