The Wrong People Are Managing Your Student Loan Debt

Senators Patty Murray (D-Wash.), Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.) received some disturbing news on leap year day 2016.

That’s when the U.S. Department of Education’s Office of Inspector General officially informed the senators that it had determined that the Education Department had failed to properly audit certain student-loan serving companies’ compliances with the Servicemember Civil Relief Act (SCRA) — a failure that appears to have resulted in the department’s unconditional renewal of the subject companies’ contracts.

Among other things, the Inspector General’s report cites statistical errors, improper sampling and review process errors on the part of the department, and its failure to take appropriately corrective actions when called for.

Now, from this damning disclosure some might infer that there’s a malevolent scheme afoot to enrich private sector enterprises at taxpayer — and borrower — expense. But let’s not confuse abject incompetence with willful duplicity.

Clearly, public-sector policymakers are no match for private-sector experts. The same folks that know loans that are temporarily accommodated with skipped or reduced payments may bypass the delinquency reports and contracts that are retroactively adjusted might dodge an out-of-compliance citation. They also know that the interests of financially distressed borrowers of government-guaranteed loans that have since been securitized run contrary to those of the investors who now own those debts. And they know how to earn even more money when loans that are serviced by one entity end up at an affiliated firm charged with collecting on the contracts that defaulted while on the former’s watch.

So while the IG’s letter may be focused on SCRA violations, it’s not unreasonable to view these findings as a broader indictment of the Education Department’s seeming inability to competently administer all of the nearly $1 trillion worth of education-related loans that currently reside on its balance sheet.

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Mitchell D. Weiss

Mitchell D. Weiss is a financial services industry executive and entrepreneur. He is also an Executive-in-Residence at the University of Hartford, co-founder of the university’s Center for Personal Financial Responsibility and adjunct faculty at Rutgers University. His most recent text, Practical Finance - A Straightforward Guide to Personal and Entrepreneurial Finance, is the basis for the course he teaches at both institutions.

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