Wherever you find a debt of that magnitude, especially if it’s concentrated among younger individuals who are just getting started in their careers, you’re going to find a lot of defaults. Almost 5 million Americans are now behind on their student loans. That number has more than trebled in just the past 10 years, and its growth is showing no sign of slowing down.
Crowd-pleasing policy proposals in higher education will, as a rule, do nothing for these millions of people. Reducing the interest rate on federal loans for new students, for instance, as Sen. Elizabeth Warren (D-Mass.) wants, won’t help anybody with existing debt. Neither will making college free. So while it’s important to help the students of the future, let’s be sure not to leave behind the students of the present and the past, who are graduating with tens and sometimes hundreds of thousands of dollars in life-crimping debt.
This isn’t an easy problem to tackle: Once debt has been taken on, after all, it’s hard to extinguish. Student debt, which survives even bankruptcy, is especially pernicious. But one area ripe for reform is debt servicing. One servicer alone, Navient, is the subject of at least nine states investigations (and part of an hour-long investigative documentary airing on Fusion this Sunday); Illinois and Washington have already filed lawsuits against it. Other servicers, while not quite as bad as Navient, are still bad: wrongdoing has been found at Nelnet and alleged at both the Pennsylvania Higher Education Assistance Agency and FedLoan.
Most of the time, these investigations are depressingly predictable. A state attorney general will find some wrongdoing, the company will deny it. Eventually, the two sides announce a no-fault settlement, where the accused corporation pays some sum of money, partly to the state and partly to those directly affected by its actions. Such settlements generally do nothing to change corporate incentives, any more than they change how the company goes about its business. The AGs might win the battle, but enormous loan servicers ultimately continue doing what they were always doing.
It doesn’t need to be this way. During the financial crisis, the various different state AGs showed themselves surprisingly adept at joining forces to become formidable even by the standards of too-big-to-fail banks. In 2012, for instance, 49 different states were involved in a $25 billion settlement over financial-crisis mortgage servicing. Put 10 AGs together, and they could almost certainly put any servicer’s feet to the fire enough to extract significant concessions. Not in terms of money, but rather in terms of behavior. If you’re an executive sitting across the table from one attorney general, your inclination is to pay them off with a no-fault cash settlement. But that becomes much more difficult and expensive when you’re dealing with a dozen of them, and so you become more inclined to look for noncash alternatives.
Loan servicers have been accused of dreadfully mistreating their borrowers. If you’re a borrower facing payment difficulties, and you get through to a human being on the telephone, that call-center operator has the servicer’s best interests at heart rather than your own. That means she’s incentivized to get you off the phone quickly — to put you into plans that may do nothing to reduce your debt load, and generally to ensure that you stay in debt for as long as possible. After all, the more years you are actively paying off your debt, the more money the servicer gets in servicing fees.
The AGs can change this. Instead of concentrating on fines and narrow restitution, they should negotiate a much broader agreement that requires changes in behavior at all of a servicer’s call centers, as well as covering all of its borrowers, past and future. Using an instrument known as a consent decree, the AGs have the power to force servicers to change their ways and put borrowers first.
Such decrees have real teeth: Once signed, they force a corporation to demonstrate its compliance to the satisfaction of outside observers. If it fails to live up to its promises, it can be dragged straight back to court and face immediate punishment. For instance, after Wells Fargo got caught opening up some 1.5 million fake bank accounts, it didn’t just need to pay a fine; it was also forced to give its employees ethical-sales training and change its performance measurements and sales goals.
What should the AGs demand in this case? That borrowers be treated respectfully by well-trained financial counselors who know all the options and can walk people with student loans through what is generally a highly confusing and complicated thicket of financial choices. That servicers be willing to spend time on educating their borrowers, one at a time, until they reach an agreement. That instead of the kind of behavior usually only engaged in by psycho ex-boyfriends, with debt collectors sometimes calling a dozen times a day, servicers take a more constructive path.
Realistic debt repayment plans, presented with compassion and understanding, are not only much more pleasant for the borrower; they generally end up with more money for the creditor, too. They’re just more expensive to implement, because they require more time on the phone, more attention being paid to individual circumstances, more money spent training and staffing those call centers.
It’s possible that such reforms would raise loan servicing costs, and at the moment, servicers compete mostly on price. That’s one reason their service tends to be so bad. The federal government, then, which underwrites the vast majority of student loans, must also commit to only hiring loan servicers that adhere to certain standards when it comes to the way they treat their borrowers. The mechanism for making this happen already exists: The federal government does assign loans to servicers based partly on how well the loans are serviced. So let’s simply make servicers compete first on quality, and only secondarily on other factors like price.
Our government can easily afford slightly higher servicing costs, and the servicers themselves can easily afford to treat their borrowers better. Navient alone, after all, is making more than $100 million in profits every quarter. What’s unaffordable is the status quo, where millions of Americans are harassed and abused by a faceless, heartless corporation through no fault of their own. The servicers won’t change on their own. But the government can force them to.
“The Naked Truth: Debt Trap” airs on Fusion TV on Sept. 10 at 9 p.m. ET.