Who Can You Trust?
The Obama administration made the right call in 2015 when it barred debt collectors from gouging borrowers who default on student loans and then agree to payment plans that let them make good on the debt and rebuild their ruined credit.
Education Secretary Betsy DeVos, showing more concern for the lending industry — which is essentially on the federal dole — than the borrowers the industry ought to serve, recently rescinded the directive, allowing the companies, known as guaranty agencies, to charge a predatory 16 percent fee on the debt.
Federal student loan defaults are dragging on the economy — making it impossible for people to buy cars or homes — and are increasingly following people into old age, where their Social Security benefits are being garnished for loan payments. People who default often do so because they do not know about income-based repayment plans that might cost as little as zero dollars per month. The guaranty agencies, which collect defaulted federally guaranteed loans made through banks, share some responsibility. But the loan servicers, which collect direct student loans and are supposed to guide people through the repayment process, can be especially destructive.
Many of them neglect to inform borrowers of their options, because doing so takes too much time, and will now be allowed to once again collect exorbitant fees when borrowers end up in default. This problem was highlighted in lawsuits that the federal Consumer Financial Protection Bureau and the attorneys general of Washington and Illinois filed against the country’s largest loan servicer, Navient. Among other things, the suits charged that the company saved itself money by steering borrowers away from affordable payment plans and toward options that cut company costs but were more expensive for borrowers. In a particularly striking admission, the company argued in its court filings last month that it had no responsibility to act as a “fiduciary counselor” and that there was “no expectation that the servicer will act in the interest of the consumer.” Given that thinking, it should come as no surprise that more than 1.1 million people in the federal direct student loan program defaulted in 2016 alone — a rate of about 3,000 per day.
The Education Department’s decision to let guaranty agencies gouge struggling people is indefensible — not least because the additional fees bear no relationship at all to the expenses incurred by the companies. In addition to being unfair on its face, the decision to allow these fees will be likely to make the default problem worse.
Originally posted on NY Times