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Outsourcing student loan servicing won’t erase problems

The student loan servicing infrastructure in the US is ripe for an overhaul. But the Department of Education’s (DoE) plan to outsource student loan servicing to big tech and big finance may not erase all of the existing problems.

The DoE has historically relied on the same group of companies to handle the job — such as Navient, Nelnet and Great Lakes Educational Loan Services, to name a few — but their contracts with the federal government are set to expire in 2019, and big tech and big finance are more than happy to take over.

Last week, President Donald Trump’s administration and the DoE met with several of these firms, including Goldman Sachs, JP Morgan, Visa, American Express and Amazon, to look at ways to improve the servicing infrastructure and “gauge their interest in taking bids”, according to published reports.

The move to address issues with student loan servicing by the federal government is definitely one in the right direction. Existing student loan infrastructure has added fuel to the $1.4tr student debt fire. Published reports over the years have indicated that some borrowers have defaulted on their payments or had their credit ruined because their student loan payments were either not processed on time or were completely missed by the servicer.

Separately, the Consumer Financial Protection Bureau has already called out or filed lawsuits against some servicers in the past for “deceptive practices” related to faulty student debt collections.

The entrance of the big guns will definitely give student loan servicing infrastructure the overhaul it sorely needs, making it easier for borrowers to make repayments, and for student loan ABS issuers and bondholders to track payments, deferments and aggregate data for securitization purposes.

But handing over student loan servicing to these companies does not guarantee that the same deceptive practices will not happen again.

Moreover, since federal student loans are government-guaranteed, the federal government is basically giving these financial titans the ability to run a lucrative collections business, spurred on by the fact that borrowers cannot discharge student debt even after filing for bankruptcy. Meanwhile, the newly overhauled servicing infrastructure will probably give these companies the ability to track and chase down borrowers even more persistently than their predecessors.

Adding to this potentially toxic cocktail is the DoE’s intention to roll back some regulations targeting for-profit colleges, meaning that more borrowers could be misled by predatory institutions — and the astronomical amounts of debt they can heap upon students.

An overhauled servicing infrastructure is effective only if the federal government — and the regulatory climate — protect and enable borrowers to repay to the best of their ability.

But if the federal government continues to remain lax in protecting borrowers — and fails to keep higher education affordable — then perhaps all the new servicing infrastructure will be good for is reflecting the spike in defaults and deferred payments as consumer protection laws are dismantled and the cost of higher education continues to soar.