College is ruining lives! How to stop student debt’s paralyzing spiral

This is getting absurd. The answer is a tangible short-term solution and long-term vision. Here are both (UPDATED)

Topics: student loans, College, Higher education, Debt, Editor's Picks, Sallie Mae, tuition, Starbucks, Consumer Financial Protection Bureau, ,

College is ruining lives! How to stop student debt's paralyzing spiral (Credit: AP/Heather Ainsworth)

It’s easy to criticize the student debt crisis, and the small-ball solutions policymakers have offered up as band-aids. But if students want to organize around changing how we finance higher education in America to something more in their – and the country’s – interest, they should create two goals for themselves: a long-term vision for how things ought to look, and a realizable, tangible objective that can be achieved, even in today’s polarized political environment. I believe I have an answer on both counts.

First of all, wrangling over student loans and interest rates and refinancing obscures the long-term vision – public colleges and universities should be free to attend. Or at least as close to free as possible. Though it may take time for the majority of the public to realize it, this idea is not far-fetched. The United States currently spends enough on grant aid, tax preferences and loan subsidies to cover the cost of tuition at every public college and university.

Tuition is not the only expense, and more funding would be needed to make college free or near-free. But using existing resources – and moreover, returning them to pre-recession levels – gets us a lot of the way there. Think of it as a two-track alternative: first, a “public option,” subsidized by states and the federal government, available to students attending public institutions. If a student wants to attend a private college instead, that’s fine, but they shouldn’t benefit from public subsidies to do so. Ultimately, competition from a free college option will probably bring down the cost of private higher ed, which can be accomplished by removing the vast administrative bloat, outrageous executive compensation and unnecessary spending that characterizes far too many of these institutions.

We can see hints at the promise of free higher education in this week’s announcement by Starbucks to provide that benefit for their workers, though important caveats apply. Most important, it’s not free – benefits for the first two years of schools are partial, and generally speaking, it requires a layout from the student of up to $10,000 before they get their first dollar reimbursed. In addition, Starbucks tossed out its more modest tuition reimbursement plan, forcing students using this benefit to attend solely the online branch of Arizona State University. This creates a corporate monopoly, funneling to a for-profit institution that may not be tailored to all students’ needs. Studies demonstrate that online courses disadvantage the very type of low-income students that would go to ASU out of the Starbucks program.

We shouldn’t confuse Starbucks’ plan – mostly a business decision – with the promise of a free education at the public college and university of one’s choice. Higher education is too important to put in the hands of employers, the way healthcare has been for so long. And eliminating the burden of debt – and the dysfunction that it’s causing among young graduates – helps everyone in the economy, whether a college graduate or not.

So that’s the long-term vision. In the meantime, there’s a seemingly small fix that would significantly relieve student debt burdens and reduce defaults: eliminating the student loan servicer middleman.

Like mortgage servicers, student loan servicers collect monthly payments and help borrowers with payment options. And like mortgage servicers, student loan servicers are terrible. The Consumer Financial Protection Bureau has amply documented this. Student loan servicers routinely misapply payments, lose paperwork, robo-sign critical documents, prevent borrowers from learning about cheaper repayment options, push them into plans that increase their overall debt burden and even harass customers after their co-signers die, just to name a few abuses. Sallie Mae, the largest student loan servicer, just paid a $139 million fine last month for, among other things, overcharging active-duty military with high interest rates.

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As Susan Dynarksi of the University of Michigan points out, the problem is one of financial incentives. Similar to mortgage servicers, student loan servicers have no reason to help borrowers stay out of default, and plenty of reasons to collect lucrative fees on borrowers in default. Dynarski describes it as a classical principal/agent problem: the agent (the servicers) do not act in the best interest of the principal (the owners of the loan).

However, there’s one key difference here. Mortgages are issued by private companies, and often sold in pieces to thousands of investors, who don’t have the ability to collect payments themselves, and must hire an agent to do it for them. But the vast majority of student loans these days are issued by the federal government. If there’s one thing the government knows how to do, it’s collect a check. The U.S. government runs the largest accounts receivable department in the world, known as the Internal Revenue Service. There is no real need to subcontract out monthly payment collection of direct student loans to servicers like Sallie Mae.

Not only would this save taxpayers lots of money – the Education Department’s contract with Sallie Mae costs nearly $1 billion. But the government would control the customer service side, ending the principal/agent problem and preventing unnecessary defaults.

In fact, we already know the government wants to take control of this process. President Obama’s executive actions on student debt last week included a number of measures to literally go around student loan servicers and directly provide services to borrowers. For instance, the Treasury secretary will work with private companies like Intuit and H&R Block to identify at-risk borrowers and make them aware of the government’s array of repayment options. This is a good explanation of a core part of the servicer’s job! In another order, the Education Department will automatically reduce interest rates for eligible service members; again, if servicers did their job properly, there would be no need for the work-around.

It turns out that the Education Department’s contracts with student loan servicers expire this month. Instead of renegotiating the terms of the contract, another one of the president’s executive orders, the department could just cancel them. This would not be a “government takeover of student loans,” because that’s already happened. The feds already issue the loans; they should simply take responsibility for collecting the payments. There would be some administrative costs involved, but it couldn’t possibly be as high as the already appropriated cost of paying Sallie Mae* and their colleagues – not to mention the cost to the economy in needless defaults. And since this concerns implementation of a program previously passed by Congress, the Education Department has the leeway to do this as soon as today.

I asked Randi Weingarten, president of the American Federation of Teachers union, why student loan servicers still exist, given all these facts. “We’ve been asking the same question,” Weingarten told Salon. “We called on the feds to de-register Sallie Mae as a servicer, because they’re more interested in their profits than ensuring that kids can go to college. And whenever we brought it up, the administration would basically say that they were too big to fail.”

Servicers of federally issued student loans should not exist. They provide no expertise beyond the government’s capabilities. They routinely break the law and privilege their bottom line over that of the government agency that hired them. The president likes to brag that he removed the middleman in student loans, by having the government provide them directly instead of going through big banks. But Obama didn’t eliminate the middleman; he just shifted it, from the banks to the servicers. His executive branch should finish the job.

A long-term vision and a short-term, tangible goal – overall, it forms a good two-track process to end the student debt crisis. All it will take is some organizing.

Update, 10:00 a.m.:  Last month, Sallie Mae spun off its loan servicing unit into a separate entity called Navient. Sallie Mae did share the $139 million fine with Navient for past servicing abuse, but all servicing of federal student loans now goes through the new company. So where I wrote that the government should cancel its contracts with student loan servicers like Sallie Mae, I should have been more specific, writing instead that the government should cancel its contracts with the company formerly known as Sallie Mae, now called Navient. I regret any confusion.

David Dayen
David Dayen is a contributing writer for Salon. Follow him on Twitter at @ddayen.

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