October, 2023
Washington — Welcome news from the U.S. Department of Education: it is finally cracking down on student loan servicers that are failing in their responsibility to borrowers. Federal funds under contract will be withheld from servicer MOHELA for its many serious transgressions. Other servicers have been put on notice.
Unfortunately, it comes years and even decades too late. Had borrowers been better protected from faulty servicing over the years, many would not find themselves in the kinds of repayment crises that now justify billions of dollars of outright loan cancellations. Which the department is slowly but methodically making.
I have a hypothesis that I believe is worthy of exploration: servicers that have somehow been held to account for their behavior over the years have victimized far fewer borrowers than those that have not experienced accountability sanctions. In the former group are those that either cleaned up their performance or dropped their federal contracts. In the latter group are those whose bad behaviors were overlooked or even indulged by the Department of Education and the Department of Justice, ultimately at great cost.
A new report by the CFPB ombudsman included the graphic below (click to enlarge) that appears to support the hypothesis, if read over time. Navient was eventually held to account by CFPB litigation; PHEAA was held to account by the Massachusetts attorney general. Both were further undone by U.S. Senate hearings in 2021. But holding Navient and PHEAA to account came too late for many borrowers. These two servicers were able to hold off accountability for decades, due in part to the revolving door of personnel who rotated between the servicers, federal offices, and key staff positions in Congress.
Accountability came earlier for several servicers who had to suffer the consequences of making false claims in their role as lenders in the early 2000s. In response to qui tam litigation, they either undertook serious reforms to regain credibility (and earn greater servicing volume) or went out of business. But those consequences were not initiated or administered by the Department of Education, which sent unsubtle messages to servicers like Navient and PHEAA — and MOHELA — that lax oversight would continue as far as it was concerned. Even false claims against taxpayers did not have to be repaid, under a Bush administration decision carried out by Secretary Margaret Spellings.
With the new, tougher stance of the Department of Education comes an invitation to those with knowledge of violations to report them. See footnote, below.* Before praising the department for this initiative, however, it should be pointed out that if more information on these subjects were published by the department, more people could offer insights on servicing problems and solutions. For example, it would be good to know how much of the federal loan portfolio is principal, interest, capitalized interest, fees, negative amortization, etc. Even estimates would be helpful. Nor is it too late to take the long-neglected advice of student loan expert Tom Butts, who has called for the department to open up competition for student loan servicing to include experienced home mortgage and credit card servicers.
A closer look is also overdue to determine why and how so many borrowers took on so much debt in the first place, particularly those who wouldn't have, and shouldn't have, but for being manipulated into it by postsecondary institutions and their vendors, consultants, and contractors. A good place to start is with New America's Kevin Carey, whose provocative 2022 article ("The Single Most Important Thing to Know About Financial Aid: It’s a Sham") compares student financial aid packaging at many institutions to airline ticket pricing.
The comparison is apt. It raises the question of how federal student aid programs, which are supposed to be helping those with financial need, got transformed into life-ruining debt burdens for literally millions of citizens. Was the Department of Education not aware of this? Has it done anything to stop the exploitation? Are revenue-maximizing, data-driven algorithms imposed over federal programs even legal? (I would like to see a case brought against the worst practices.) Are Navient (dba Sallie Mae) and PHEAA now establishing an even wilder private student loan market to make up for their losses of federal servicing revenue?
The problem is not just with one department that is not up to the job of taking on the nation's student loan behemoths. The U.S. Supreme Court itself found, last June, that a theoretical loss of federal student loan servicing income at MOHELA, which in turn might somehow affect the state of Missouri, gave Missouri new-found standing to oppose a loan cancellation plan of the Biden administration, and to prevail. The result: the very servicer making errors requiring remediation was protected by the high court, not the borrower victims.
As if this were not convoluted enough (and tragic for many families, including parents who took on heavy debt for their children), Congress is not funding the legitimate needs of the servicers to correct errors and be more responsive to borrower rights under law. There are some in Congress who apparently want to see the entire loan system collapse, for political reasons. Despite the accountability measures finally being applied to MOHELA by the Department of Education, the general outlook for borrowers looks bleak.
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"As part of its ongoing effort to identify and respond to misconduct by institutions in the Title IV programs, the Office of Enforcement, in November 2022, began to invite knowledgeable sources to submit tips and information about potential violations. FSA welcomes information from current or former employees, students, vendors, or contractors of postsecondary institutions; third-party servicers; third-party lead generators; and any other individuals with knowledge of potential violations. Knowledgeable sources may submit relevant tips and information by visiting Ed.gov/FSATips or emailing FSATips@ed.gov."
