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.

The reason this is important — apart from the obvious — is that at some point, the political tide will turn and the feds will once again look to the private sector for liquidity, as it had before the Obama Administration discontinued the Federal Family Education Loan in program in 2010 in favor of the current Federal Direct loan program.

When that happens — and I believe the time for that is at hand — unless the Education Department has its act together and can properly administer the administrators, the nightmares that today’s debtors continue to experience will be visited upon the next generation of borrowers.

To that end, there’s been a lot of talk about curtailing the flow of financial services professionals into public policymaking positions — fox in the henhouse, and all that. But not as much about those who leave public service for positions in the private sector, where they are able to put to profitable use their knowledge of how to work with — or around — the rules.

Perhaps instead of populating the Education Department with career public-sector policymakers, it would do better to recruit private-sector experts who can use their bona fide operational experience to guard the henhouse.

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

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