Why Don't We Know More About Student Loan Debt Collectors?

One hundred years ago, U.S. Supreme Court Justice Louis D. Brandeis wrote a series of articles for Harper’s Weekly in which he made the case for the merits of public disclosure: “…sunlight is said to be the best of disinfectants…”

That light has finally begun to shine on the secretive dealings between the Department of Education and the companies it hires to administer its student loan programs.

Over the past few months, some of the biggest names in the business have been hit with multimillion dollar fines for their wrongful practices. The ED has also elected not to renew contracts with subcontractors that fail to meet its minimum performance standards.

The problem is, no one knows just what those standards are. Nor does anyone (outside the ED that is) know how these firms are selected in the first place — let alone monitored, evaluated and compensated after the fact — because the department has steadfastly refused to share that kind information in any meaningful detail.

Given the high volume of consumer complaints that continues to flow into regulatory inboxes, however, something is clearly wrong with the quality of the ED’s management of the overall process. Couple that with the extraordinarily broad latitude that loan servicers and private collection agencies enjoy — thanks to lawmakers — and the department’s lack of transparency is not just frustrating, it’s downright infuriating.

Now, the National Consumer Law Center, a nonprofit consumer-advocacy organization, is hoping to change that dynamic.

Seeking Transparency

The NCLC has commenced a legal action under the federal Freedom of Information Act to compel the ED to disclose its evaluation methodologies for the private collection agencies that are hired to pursue borrowers who’ve defaulted on their student loan obligations. Hopefully, other organizations will follow the NCLC’s lead and sue for disclosures on the rest of the department’s student-loan administration processes.

There are several reasons the student loan issue is so highly charged at this particular moment in time: education-related debt loads are mushrooming, a third or more of all borrowers are having difficulty making the payments and potentially ruining their credit in the process. Despite all that, the government is earning record profits from the program. So the sooner that department officials address the epic credibility gap that stems from its stonewalling tactics, the better.

At the very least, the ED should reveal its criteria for company selections and ongoing assessments. The same goes for the fundamental rationale behind and the (hopefully) continuous oversight of its various compensation schemes. In particular, it would help to understand how the department limits (if it indeed limits at all) remuneration for companies that enjoy double-dipping, and in some cases triple-dipping, privileges.

For example, how does the ED guard against the potential for gaming that exists when different subsidiaries of a single company are engaged in the origination of government-guaranteed loans, servicing of the resultant contracts and collections of defaulted debts a loan-servicing unit fails to avert?

Let’s face it. The student-loan industry has long benefitted from the best of all worlds: a captive market, relaxed consumer protection laws and light-handed oversight. As unsustainable as all that may seem to the casual observer — after all, too much of a good thing never lasts for as long as those who relish the windfall would like — consider the borrowers who have no choice but to endure the consequences: unresponsive customer service, routinely misapplied payments and relief programs that exacerbate their already difficult financial circumstances, to name only a few. Since student loans play such a large role in the financial futures of so many Americans, impacting their creditworthiness for years, there needs to be more transparency from the largest student lender – the government. (You can see how your student loans are impacting your credit for free on Credit.com.)

Their plight warrants more than legislative solutions that stand little chance of passage. The deals the Department of Education has already made and the policies and protocols it’s since put into place all deserve to see the light of day.

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