By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
It is student loan week in the Democratic Party. Elizabeth Warren’s bill to refinance prior loans to the current 3.86% rate (including private loans owned by the likes of Sallie Mae), gets a vote on Wednesday. Yesterday, the President endorsed that bill, and threw in his own executive memorandum to, as the White House puts it, “make student loans more affordable.” Today, Obama will show up on Tumblr to further make the sale.
Personally, I think the goal ought to be to make student loans irrelevant. Low- or no-cost public options for higher education helped create the middle class during the Great Compression, and with the pool of money used for existing student aid initiatives, i.e. tax breaks and grants, you could pay the tuition of every student enrolled in a public university. Student loans are an easier lift politically, but won’t solve the problem.
But of course, the Warren bill isn’t designed to pass. It is “paid for” (using that term in the parlance of Washington, MMTers) with the Buffett rule, a tax hike on the wealthy which Republicans have rejected multiple times over. I can tell you with specificity that it will get either 53 or 54 votes (depending on Joe Manchin; Harry Reid will vote no in a procedural maneuver in case he wants to reconsider the vote and try again), and fail to break a filibuster. The only point here is to make a contrast between the two parties in the hopes of attracting young people to turn out for the midterms.
As for these executive actions: the first expands income-based repayment, allowing approximately five million more student debtors with older loans to have their payments capped at 10% of their monthly income. IBR is available on most new loans today, and the balance is forgiven at the end of the payment period. For some people it will represent a modicum of relief, though it remains a loan, and payments would increase as wages increase over time. IBR, which actually has its roots with Milton Friedman (although his proposal was more of an equity investment), also shares similarities with Pay It Forward, the plan that Oregon passed last year for debt-free college with a nominal pre-tax fee on future earnings. But by the way, expanding IBR requires new Education Department regulations, which means nobody will see the benefits of this until December 2015 at the earliest.
The other pieces, which didn’t get as much notice today, have some odd echoes and contradictions in them. From the Administration’s fact sheet:
Strengthen Incentives for Loan Contractors to Serve Students Well: The Department of Education administers the federal student loan program through performance-based contracts with private companies awarded through a competitive process. Rather than specifying every step of the servicing process, as was done in the guaranteed loan program that ended in 2010, these contracts provide companies with incentives to find new and innovative ways to best serve students and taxpayers and to ensure that borrowers are repaying their loans. Today, the Department announced that it will renegotiate its contracts with federal loan servicers to strengthen financial incentives to help borrowers repay their loans on time, lower payments for servicers when loans enter delinquency or default, and increase the value of borrowers’ customer satisfaction when allocating new loan volume.
If you’re like me, you’re thinking, “Hm, financial incentives for servicers to modify the terms of loans for delinquent borrowers, where have I heard that one before?” And yes, this has all the behavioral nudges of a HAMP 2.0. It goes a bit further than that by having carrots and sticks; unlike with private label MBS loans, because the government is the owner, they can set compensation contracts to increase fees for good servicing and reduce them for situations that result in default. Indeed, this is precisely the overhaul that’s desperately needed for mortgage servicer compensation, so the financial incentives finally point in the right direction.
But the order neglects to mention the fact that student loan servicers have been ripping off borrowers for years, exploiting the fact that the Education Department does not deliver step-by-step standards for servicing loans. The idea of giving these servicers more money to entice them into doing their job correctly should strike everyone as unseemly.
The star reporter on the role of student loan servicers is Shahien Nasiripour of the Huffington Post. And you only have to read through his back catalog to see the state of the industry. Student loan servicers like Sallie Mae illegally blocked payments from accruing to loans with the highest interest rates, prevented borrowers from learning about cheaper repayment options, overcharged active-duty members of the military, violated discriminatory lending practices, pushed debtors into plans that increase their overall burden, and harassed borrowers after their co-signers died (even if they were current on their loans), to name just a few activities. Sallie Mae and its loan unit Navient just paid $139 million last month in penalties to resolve federal investigations into these and other matters.
Labor groups have been trying to get the Education Department to dump Sallie Mae. Yet Arne Duncan has mostly shielded them and other servicers from scrutiny, and even renewed Sallie Mae’s contract after knowing that they cheated servicemembers. In Shahien’s latest story, we find yet more Administration coddling of Sallie Mae:
The U.S. Department of Education is seriously considering granting a potentially billion-dollar, decade-long contract to a former unit of Sallie Mae, the student loan company the Justice Department last month accused of cheating U.S. soldiers.
In a previously unreported move, the department said May 30 that Navient Corp., the nation’s largest student loan company, was one of four finalists for a new contract to run its system for originating and disbursing new federal student loans and grants and keeping track of existing ones. The current contract, held by Accenture LLP, was valued at $880 million as of May 19, according to the Education Department.
If Navient wins the contract, it would have a role in originating new federal loans for borrowers, keeping track of their debts, collecting monthly payments on their loans, and chasing them if they default. In other words, a borrower’s entire interaction with the Education Department — from the moment she takes out a loan to the day she pays it off — could solely be through Navient.
That billion-dollar contract presumably makes up for the $139 million fine. So with Sallie Mae and its pals basically untouched by their various illegal activities, what makes anyone think that renegotiating their contracts so they really, truly, no-we-mean-it-this-time have to respect their customers will make a difference?
That brings us to the next piece of the Administration’s fact sheet:
Ensure Active-Duty Military Get the Relief They Are Entitled to: The Servicemember Civil Relief Act requires all lenders to cap interest rates on student loans – including federal student loans — at 6 percent for eligible servicemembers. The Department of Education… will reduce those interest rates automatically for those eligible without the need for additional paperwork. It will also provide additional guidance to Federal Family Education Loan program servicers to provide for a similar streamlined process.
This translates to “try to automate the process to end-run student loan servicers so they don’t break the law again.” Maybe don’t hire the same miscreants to do the job!
Back to the fact sheet:
Work with the Private Sector to Promote Awareness of Repayment Options: The Secretary of the Treasury and the Secretary of Education will work with Intuit, Inc. and H&R Block, two of the U.S.’s largest tax preparation firms, to communicate information about federal student loan repayment options with millions of borrowers during the tax filing process… In addition, the Administration will work with Intuit to explore ways to communicate with federal student loan borrowers through Intuit’s free personal financial management product, Mint.com… Too many borrowers are still unaware of the flexible repayment options currently available to them, especially when they run into difficulties in managing their payments. The Department of Education is redoubling its efforts to identify borrowers who may be struggling to repay and provide them with timely information about their options supporting them through the repayment process and helping them avoid or get out of default.
Hold on, isn’t this the servicers’ JOB? Isn’t the government giving them bunches of money to keep people out of default and inform them of better options? Why are we ALSO paying Intuit and H&R Block for the same task? Why is the Education Department working on their own to identify at-risk borrowers when the servicers have the information in their own databases? Aren’t they the first line of defense, and hasn’t it been proven that they’re blocking alternatives for these borrowers in a bid to increase profits?
You literally have the Administration going around the servicers to do their job for them, while also paying the servicers more to encourage better performance. And the servicers have already proven themselves to be criminals! Why are they even still in the equation? Why are the same servicers getting the contracts?
(FYI, the last part of the executive memorandum is about stronger financial literacy for borrowers before they take out the loans, and we all know that simply doesn’t work well.)
This is another example of this White House working to prop up a broken, corrupt existing system rather than working to overhaul it. The student loan debate is a sideshow compared to actually reducing the cost of higher ed, as organizer Melissa Byrne so compellingly points out. But trusting the same fraudulent actors in the servicing arena to better serve the customers they bilked, and then covering for them with all these add-on efforts, inspires no confidence that we’ll ever get to the meaningful solutions on the other side.