Friday, June 2, 2017

Betsy DeVos's Confused Logic on Student Loans By Jonathan D. Glater

The evolution of education policy rationales can make for interesting study.

Last week, Betsy DeVos, the secretary of education, explained in a Wall Street Journal column why the structure of federal student loan servicing needed to change.  Instead of maintaining a stable of companies that service loans for student borrowers – servicing entails receiving and keeping track of payments, keeping track of borrowers, ostensibly trying to keep borrowers out of default – the Education Department would move to a single servicer model.

“Simply put, the current systems used by Federal Student Aid are not designed to put customers – students and their parents – first,” DeVos wrote in explaining the move. The process, which she went on to characterize as “complicated and rife with confusion,” makes it too burdensome for students to get questions about their loans answered, for example. 

Shifting to a single student loan servicers instead of using nine different servicers will “create one platform with a single and consistent brand, improving user’s experience,” DeVos wrote, and will “eliminate duplicative and confusing notices when customers make payments.”

Thus, a Republican administration is shifting toward a single provider model, just one that happens to be a private sector provider.  Competition among servicers, a potential incentive to improve quality, has “duplicative and confusing” results.

For those with memories stretching all the way back to the years of the financial crisis, one of the concerns about shutting down the old federal student lending regime, in which the Education Department guaranteed loans by private lenders to students, was the elimination of both competition and a role for the private sector. 

For example, Senator Lamar Alexander, Republican of Tennessee and himself a former education secretary, criticized the shutdown of the guaranteed loan program as “another Washington takeover” in The New York Times

And indeed, one of the claimed virtues of the guaranteed loan program was the competition among lenders and between private lenders and the government as lender.  (However, interest rates on these loans were generally not set by lenders, so that was not the dominant form competition took.)  For an overview of the arguments, one financial aid director wrote this column in defense of the guaranteed program.

While Congress approved a move to direct lending, under which the Education Department made loans directly to students, both the administration and lawmakers stated that the private sector would have roles as contractors servicing the loans.  Hence the current system decried by DeVos.

The Obama-era policy change limited the private sector role and tried to harness the potential benefits of competition.  The Trump Administration’s reboot runs counter to the rationale for that role by reducing competition. 

Not that competition has been a panacea, mind you; the Consumer Financial Protection Bureau has reported on complaints of “widespread servicing failures” by student loan borrowers. 

DeVos described benefits of moving to a single servicer in the form of better customer service, and good customer service is, well, good.  But nothing in her column addressed, for example, the complex mix of repayment plans students must choose from (although, to be fair, Trump’s budget proposal called for that).

One last observation.  In her column, DeVos refers to students as “customers” in the direct loan program.  This is a telling characterization of student lending as a commercial venture, not a collective investment in college access.  Caveat emptor.

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