Education Secretary Betsy DeVos on Tuesday rolled back an Obama administration attempt to reform how student loan servicers collect debt.
Obama issued a pair (PDF) of memorandums (PDF) last year requiring that the government’s Federal Student Aid office, which services $1.1 trillion in government-owned student loans, do more to help borrowers manage, or even discharge, their debt. But in a memorandum (PDF) to the department’s student aid office, DeVos formally withdrew the Obama memos.
The previous administration’s approach, DeVos said, was inconsistent and full of shortcomings. She didn’t detail how the moves fell short, and her spokesmen, Jim Bradshaw and Matthew Frendewey, didn’t respond to requests for comment.
DeVos’s move comes a week after one of the student loan industry’s main lobbies asked for Congress’s help in delaying or substantially changing the Education Department’s loan servicing plans. In a pair of April 4 letters to leaders of the House and Senate appropriations committees, the National Council of Higher Education Resources said there were too many unanswered questions, including whether the Obama administration’s approach would be unnecessarily expensive.
A recent epidemic of student loan defaults and what authorities describe as systematic mistreatment of borrowers prompted the Obama administration, in its waning days, to force the FSA office to emphasize how debtors are treated, rather than maximize the amount of cash they can stump up to meet their obligations.
Obama’s team also sought to reduce the possibility that new contracts would be given to companies that mislead or otherwise harm debtors. The current round of contracts will terminate in 2019, and among three finalists for a new contract is Navient Corp. In January, state attorneys general in Illinois and Washington, along with the U.S. Consumer Financial Protection Bureau, or CFPB, sued Navient over allegations the company abused borrowers by taking shortcuts to boost its own bottom line. Navient has denied the allegations.
The withdrawal of the Obama administration guidelines could make Navient a more likely contender for that contract, government officials said. Navient shares moved higher after the government released DeVos’s decision around 11:30 a.m. New York time. Navient stock ended up almost 2 percent.
The Obama administration vision for how federal loans would be serviced almost certainly meant the feds would have to increase how much they pay loan contractors to collect monthly payments from borrowers and counsel them on repayment options. Already, the government annually spends around $800 million to collect on almost $1.1 trillion of debt. DeVos, however, made clear that her department would focus on curbing costs.
“We must create a student loan servicing environment that provides the highest quality customer service and increases accountability and transparency for all borrowers, while also limiting the cost to taxpayers,” DeVos said.
With her memo, DeVos has taken control of the complex and widely derided system in which the federal government collects monthly payments from tens of millions of Americans with government-owned student loans. The CFPB said in 2015 that the manner in which student loans are collected has been marred by “widespread failures.”
DeVos’s move “will certainly increase the likelihood of default,” said David Bergeron, a senior fellow at the Center for American Progress, a Washington think tank with close ties to Democrats. Bergeron worked under Democratic and Republican administrations over more than 30 years at the Education Department. He retired as the head of postsecondary education.
During Obama’s eight years in office, some 8.7 million Americans defaulted on their student loans, for a rate of one default roughly every 29 seconds.
Former Deputy Treasury Secretary Sarah Bloom Raskin worked on student loan policy during the latter years of the Obama administration, in part over concern that borrowers’ struggles were affecting the management of U.S. debt. DeVos’s decision to reverse some of her work “with no coherent explanation or substitute” effectively means that the Trump administration is placing the welfare of loan contractors above those of student debtors, she said.
In a statement Tuesday, Illinois Attorney General Lisa Madigan, who is suing Navient, agreed: “The Department of Education has decided it does not need to protect student loan borrowers.”