An Indefensible Defense of Student Loans

James Runcie, the Federal Student Aid office’s chief operating officer, appeared before the U.S. Senate’s Education Committee where he was grilled on the manner in which the FSA is monitoring the performances of the Department of Education’s subcontracted student-loan servicers.

Two interesting points caught my attention. The first pertains to the key metrics the department uses in its evaluation process: default levels and customer satisfaction rates. The second, an effort the department directly undertook this past fall to contact borrowers it deemed would benefit most from the government’s various payment relief programs.

The trouble with the metrics has to do with what constitutes a default — or even a delinquency for that matter — particularly when servicers are busy granting payment deferments and other forbearances to distressed borrowers. What’s unclear is the extent to which temporarily remediated loans are excluded from the delinquency and default data.

A past-due payment that is administratively altered to become not yet due is a payment that is not yet late.

With that in mind, it’s perfectly fair to wonder whether servicers that are worried about their performance numbers might not be tempted to engage in a little self-help by encouraging unknowing borrowers into short-term accommodations that cost them more in the long run. That’s because, although today’s payments may be reduced or excused for a period of time, the interest on the unpaid balance isn’t.

Even more eyebrow-raising was Runcie’s comment about the department’s concern that borrowers would be displaced if it terminated its contract with a servicer. Not only has the DOE reshuffled the servicing deck before, but also it suggests a departmental “too big to fail” mindset that Sens. Tom Harkin (D-Iowa) and Elizabeth Warren (D-Mass.) rightly find troubling.

As for the matter of contacting borrowers to tell them about government relief programs, two thoughts occur to me.

First, the DOE would not have undertaken this effort had the servicers effectively advocated the relief programs it has in place. Perhaps this lapse has something to do with the approximately $300 billion government-guaranteed FFEL loans—half or more of all student loans currently in repayment mode—that reside in the portfolios of private lenders and investors. As you might imagine, these folks wouldn’t be all that keen about extending loan durations, reducing payment amounts or, God forbid, forgiving principal balances. Hence the preponderance of forbearance arrangements.

Second, it’s hard to understand what the DOE expected to accomplish with its solicitation program. Of the 3 million borrowers who were contacted, roughly 900,000 took the time to view the email blast in the first place, and 150,000 of those actually applied for relief—an outcome that Runcie hails as “good.”

Yet, what kind of selection process results in the targeting of less than 10% of the people with outstanding education-related debt when the estimated total amount of troubled loans is hovering around 40%? Moreover, what led the department to believe that a direct solicitation by an entity that is one step removed from the borrower (in the case of its guaranty of FFEL contracts) would yield a better result than if the lender of record (or the loan servicer acting on its behalf) had incorporated the relief offer into mail that borrowers are much more likely to pay attention to, such as a monthly invoice or statement?

Perhaps, at some point, the government will arrive at two rather obvious conclusions: loan servicers have divided interests that must be taken into account, and education loan program managers should have pertinent industry experience so they can more effectively manage them.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.