It seems as if the for-profit corporations endowed with servicing student loans are asleep at the helm as those in the D.C. crow’s nest rest in a similar slumber. Students with loans are captives on this boat, as the student loan balances of 44 million people soar to $1.5 trillion. On February 14, the U.S. Department of Education’s Office of the Inspector General released a bombshell report that details how these student loan servicers have a contingency plan to raid the stores and ditch the listing ship before it sinks.
Student loan servicers are contracted by the Department of Education to essentially manage student loan accounts. According to the Federal Student Aid Division of the Department of Education, “The loan servicer will work with you on repayment plans and loan consolidation and will assist you with other tasks related to your federal student loan.” These servicers are private, for-profit entities.
In 2010, Congress passed a law to nationalize the student loan industry, requiring all federal student loans to be originated — or loaned — by the Department of Education. This eliminated the Federal Family Education Loan Program which gave mega-banks and companies the power to obtain and profit off of loans backed by the federal government. The risk for these mega-banks decreased under this rigged structure as the loans were guaranteed by the taxpayer, where risk dissolved as incentive increased.
The government tried to put an end to that skullduggery. The 2010 law contained the Federal Direct Student Loan Program, which makes the Department of Education loan directly to the student. They loan the money out themselves, taking advantage of low interest rates, which they use to procure the funds and profit from the moderately low but still profitable interest rates of loans they grant to students.
The Congressional Budget Office forecasted in 2013 that the federal government will make more than $173 billion over a ten-year period from their endeavors in the student loan market. However, the CBO themselves say Uncle Sam might lose billions of dollars due to the market-risk of student loan default when calculating the estimated value of future dollars collected. According to the same CBO forecast, the federal government will make 26 cents off of every dollar it lends out in unsubsidized Stafford loans.
At the end of 2018, the government had a 1.43 trillion dollar student loan portfolio. The Fed originated 90% of all student loans in existence as of Spring 2016. Many banks and institutions lobbied against this law, wherein the government sought to nationalize student loans, as it was designed to direct money toward assisting student borrowers and to curb the padding of lender pockets.
It would seem the banking profiteers lost their racket to a more honest broker, the federal government. Unfortunately, the purported remedy of this law might have contained an even bigger cancer within it.
Student loan debt — as it breaches $1.5 trillion, second only to mortgages in terms of consumer debt — is a legitimate cause for concern. From 2009 to 2018, student debt balances have increased from 675 billion to 1.46 trillion. Now that the figure is past 1.5 trillion, the debt has more than doubled in less than nine years. Simultaneously, undergraduate enrollment is also on the rise — the rate has increased by 15% since 2004.
This seems like a positive outcome, but why has enrollment skyrocketed, with students so eager to take out loans? Is it a zeal for academia among prospective students paired with a benevolent investment on the part of the government and taxpayer? Surely one factor involves the passing of the Health Care and Education Reconciliation Act, preventing federal loan grantees from being subject to a credit check from the Department of Education, who originates the loans. An 18-year-old with no credit history can take out tens of thousands of dollars in loans with the flick of a pen. Even easier, it can be done electronically.
This is reflected in the numbers. According to the National Student Loan Data System, recipients of Direct Loans, Perkins Loans and Federal Family Education Loans have increased from 28.3 million in 2007 to 42.9 million at the end of 2018. That is a 51.6% increase overall. These numbers reflect outstanding debts only and do not reflect private loans. Roughly 1 in 4 American adults have student loans — student loan debt is half a trillion dollars higher than credit card debt.
Increased college enrollment may seem like a positive societal trend, but the ramifications of this increased matriculation are costly. Enrollment is up, and so is tuition. From the 1987 academic year to 2017, tuition costs have skyrocketed by more than 213% — that is with prices adjusted for 2017. That doesn’t jive well with the stat by the Bureau of Labor Statistics which shows the average wages of college grads aged 21-24 in 1989 was $16.59 per hour. In April 2013, it was $16.99 per hour. As wages for college grads 21-24 increased a paltry 2.4%, college tuition at a public four-year institution increased 213%.
Colleges have no incentive to stop the freight train of rising tuition. Universities have pricing power, meaning that raising tuition prices has no effect on the demand of enrollment. This is because the government is creating this demand by supplying billions of dollars in loans. There are only six publicly funded four-year universities in Utah. All six receive an influx of government credit supply, which increases demand. And so universities raise tuition, causing students to ask for more credit. More is given, causing more demand, which in turn causes more tuition hikes.
Because there are only six of these universities in Utah, they are the only games in town. There is little to no competition regarding public schools and most public universities are funded by local governments themselves, meaning the taxpayer foots the bill. Because residents and their families have paid into the system to fund these universities, they enjoy the in-state tuition at any public university. If the government stopped giving out loans tomorrow, universities would be forced to dramatically lower tuition costs because most students would not be able to afford it. Without a credit history, banks wouldn’t lend much to these students, and never enough to cover tuition costs. Schools would have to lower tuition or face losing millions. It is clear that these government loans incentivize public universities to raise tuition prices.
A 2015 study found that a dollar of subsidized student loans increased tuition at a typical college by 58 cents. While these universities are funded with taxpayer dollars, they are also tax-exempt. At the same time, they raise prices because the endless stream of government loans gives them the demand to do so. While it is true that students are not forced to enroll, the government tells them that it will bring more money and freedom. The homepage of the Department of Education Student Aid reads “Here’s a simple equation: a college or career school education equals more money, more job options and more freedom. As you get more education, you’ll make more money.”
Student loan servicers are also complicit. The word “servicing” implies that they are a benevolent force merely there to help the students, to handle and caress our debt accounts on our behalf. Sounds pretty benign, if not altruistic, right? Yet, these Student Loan Servicers are hand-picked and contracted by the federal government and it is the taxpayers who bear the burden of paying these servicers the big bucks for what they do (or don’t) accomplish for students.
In 2009, Navient Corporation — a spin-off of Sallie Mae, which has the lowest customer service rating out of all the student loan servicers in the United States — was tasked with servicing federal loans on the government’s behalf. In 1973, Sallie Mae began as a government-chartered agency to service student loans. They privatized operations in 2004 when their charter ended. Sallie Mae, while separate from Navient, exists within the same purview. Like Navient, it has faced litigation. In 2007, documents showed that Sallie Mae was trying to use the FOIA act to force colleagues to hand over personal information on students. In 2014, the Attorney General of Illinois announced an investigation into Sallie Mae’s debt collection and loan servicing practices.
Navient itself is now the largest holder of federally guaranteed student loans. Those loans were part of the program which was discontinued in 2010 after the signing of the Health Care and Education Act, but as of August 2018, Navient still holds $80 billion of these loans. Navient benefits from the servicing of these loans via late fees, service charges and securitizing loans into Student Loan-Backed Securities called SLABS, which are identical to the 2008 wrecking ball of mortgage-backed securities. Navient creates SLAB securities using Wells Fargo as the trustee with government-backed loans originated before the 2010 law.
Securitizing student debt pools with the debt of thousands of other students wraps it up with a ribbon and a stamp from a bond rating agency and sells it. They profit millions all while the taxpayer pays for their $100 million federal contract. In the fourth quarter of 2018, Navient scored a net income of $147 million only from the government-backed loans they service. Navient admits they “from time to time securitize some of our student loan assets by selling student loans to Navient Student Loan Trusts.” Are these Stafford Loans or Perkins Loans? Is the federal direct student loan program being used as a Christmas ham for hedge-funds?
This servicing looks more like the abuse of students. This dealing of mortgage-backed securities was a focal cause of the utter calamity of the 2008 economic crisis. Navient does the same thing with student debt. Consider this quote — “At first, student loan-backed securities allowed more people to go to college. During the student loan boom, the government made loans with no credit score evaluation. That allowed people to get into colleges they couldn’t afford. The lenders didn’t care. They knew they could sell the loans (securities), and not pay the consequences when and if the borrowers defaulted.” Sound accurate? This quote actually is about the 2008 housing crisis, not student loans. Yet, despite replacing the language of mortgages with student loans, the resemblance is uncanny.
Navient has not only been selling student debt for millions of dollars, but it has also failed in servicing the largest portfolio of government-backed student loans in the U.S. The Consumer Financial Protection Bureau alleged in their lawsuit that Navient “between 2010 and 2015 added nearly $4 billion in interest to student borrowers’ loans through the overuse of forbearance.” Presidential candidate Elizabeth Warren called Navient’s actions “tragic and infuriating.” In March of 2017, Navient was audited by the Federal Student Aid division of the Department of Education. As part of the audit, the Department of Education listened in on 2,400 calls from borrowers from 2014 to 2017. Navient neglected to mention options other than forbearance, which capitalizes interest and costs the student more. Auditors wrote that many Navient reps didn’t mention to the borrower if an income-driven repayment plan would be better than the lucrative forbearance.
Navient responded by saying “if the Education Department chose to require all servicers to discuss income-driven repayment plans with all borrowers, the department needs to redo its contract with Navient.” Auditors found that in 220 calls with Navient reps, they “neglected to offer the borrower any other option other than forbearance. And in some instances, interest was capitalized when other options may have prevented it.” According to Moody’s bond rating agency, the value of those student loan-backed securities that Navient hawks on Wall-Street decrease when more students sign up for the income-based repayment plans that they steer you away from. Yes, that’s right — they are trying to sell debt for a higher price by further indebting students.
Worse, the Federal Student Aid office — who audited Navient —was audited itself by the Inspector General of the Department of Education. The IG concluded in the audit that the Federal Student Aid office was failing in the oversight of Navient. The Federal Student Aid Office criticized Navient for negligence yet was found negligent itself.
The report states, “About 61 percent (210) of the reports disclosed instances of servicer noncompliance with various areas of Federal loan servicing requirements. These instances included noncompliance with requirements relevant to forbearances, deferments, income-driven repayment, interest rates, due diligence, and consumer protection.” The report found that Navient consistently did not inform borrowers “all of their available repayment options,” and also that the FSA rarely penalized these servicers for non-compliance.
One would think the stewards of our debt would be held accountable. Instead, citizen tax dollars are helping Navient turn a profit. Taxpayers continue to shell out roughly $100 million for Navient’s services. Despite numerous lawsuits over the years, Navient was recently re-awarded a sub-contractor role in President Trump’s overhaul of the loan servicing system. One lawsuit alleges that Navient “illegally failed borrowers at every stage of repayment.” Navient services loans for more than 12 million borrowers — most of which are contracted with the Department of Education. In 2017, they serviced over $300 billion in federal and private loans, which is more than one-fourth of college borrowers in the United States. We continue splitting the waters, moving ahead on this ship of fools. Navient was found asleep at the helm by the FSA, and only for the FSA to be found asleep at the crow’s nest. We as students need to make sure we shout until our voices wake up the passengers and the crew, or we will be underwater soon enough.