The timing of an article in The New York Times couldn’t have been more ironic.
There we were, the day before we celebrate America’s Declaration of Independence, and the Times published an exposé on the hardball tactics that the State of New Jersey allegedly takes against student-loan borrowers who are unable to continue making their payments.
It seems that for those who fund their college education with state-sponsored money — which all 50 states and the District of Columbia offer — the word independence is actually two words: in and dependence.
How Student Loan Management Can Differ
I say that because, generally speaking, the principal difference between the loan programs run by the individual states and those run by the federal government is the government’s willingness to work with financially distressed borrowers so they can remain independent.
Something else that distinguishes federally backed higher education loans from those originated by all others — including the states and private-sector lenders — is the outsize influence the government wields on distressed-loan restructuring without regard for the ultimate disposition of the underlying contract.
In other words, even if a government-guaranteed student loan is sold to another entity — public or private, as has been the case with the discontinued Federal Family Education Loan (FFEL) program — the feds reserve the right to mandate a change in the contract’s repayment schedule, even though such a move would likely to have a deleterious aftermarket effect on noteholder rates of return (for example, when the repayment term is extended or a portion of the principal is forgiven).
This helps to explain why there has been so much foot-dragging on the part of loan administration companies that are subcontracted by noteholders to service FFEL contracts that have subsequently been securitized.
And then there is the matter of what constitutes a government loan.