Education Secretary Betsy DeVos is inexplicably backing away from rules that are meant to prevent federal student loan borrowers from being fleeced by companies the government pays to collect the loans and to guide people through the repayment process.
On Tuesday, she withdrew a sound Obama administration policy that required the Education Department to take into account the past conduct of loan servicing companies before awarding them lucrative contracts — and to include consumer protections in those contracts as well.
The department is doing the loan industry's bidding at a time when student debt has crippled a generation financially and the country's largest loan servicing company, Navient, is facing several lawsuits accusing it of putting its own interest before that of the borrowers it is supposed to help.
A suit brought by the Consumer Financial Protection Bureau claims that Navient saved itself money by steering borrowers into costly repayment strategies that added billions in interest to their balances. But as Stacy Cowley and Jessica Silver-Greenberg reported in the New York Times, states' lawsuits are especially damning with respect to Sallie Mae — the company that spun off Navient in 2014.
The Illinois and Washington attorneys general argue that Sallie Mae engaged in predatory lending, saddling people with private subprime loans that the company knew in advance were likely to fail because borrowers would not be able to repay them. The two attorneys general — part of an investigative coalition of 29 states — argue that borrowers deserve to have these tainted private loans forgiven.
The scenario outlined in the court documents bears a frightening resemblance to the subprime mortgage crisis of a decade ago — when mortgage companies caused millions of borrowers to lose their homes by steering them into risky, high-cost mortgages they could never hope to repay.
The Illinois and Washington lawsuits argue that Sallie Mae used subprime private loans to build relationships with exploitative schools that then helped the company make more federal loans to their students. Those loans were the jackpot for the company, the lawsuit argues, because they were guaranteed by the government, which steps in to reimburse the lender when a borrower defaults.
The defaulted private loans destroyed the financial lives of students. But they benefited the schools — which sometimes made deals with Sallie Mae to subsidize the losses — allowing them to comply with federal rules requiring that no more than 90 percent of a school's revenue can come from federal financial aid. The case shows the dangers inherent in letting companies service federal and private loans simultaneously.
Navient has denied wrongdoing in these cases. But a growing body of damning evidence shows that the loan servicing industry requires more oversight, not less. The attorneys general are doing a public service by using the courts to fight for borrowers.