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An indefensible defense of student loans

James Runcie, director of operations for the federal student aid office, appeared before the U.S. Senate Education Committee where he was asked how the FSA monitors the performance of the outsourced student loan services of the Ministry of Education.

Two interesting points caught my attention. The first concerns the key indicators that the service uses in its evaluation process: default levels and customer satisfaction rates. The second, an effort the ministry made directly last fall to reach out to borrowers it deemed likely to benefit the most from the government’s various payment relief programs.

The problem with metrics has to do with what constitutes default – or even default for that matter – especially when departments are busy granting deferrals and other forbearances to distressed borrowers. What is not clear is to what extent temporarily cured loans are excluded from data on delinquencies and defaults.

An overdue payment that is administratively amended to become not yet due is a payment that is not yet overdue.

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With this in mind, it is perfectly fair to ask whether service providers who are worried about their performance might not be tempted to engage in a bit of self-help by encouraging ignorant borrowers to choose short-term homes. that cost them more in the long run. This is because while today’s payments may be reduced or excused for a time, interest on the outstanding balance is not.

Runcie’s comment about the ministry’s fear that borrowers would be moved if he terminates his contract with a service agent raised even more eyebrows. Not only has the DOE overhauled the maintenance bridge previously, it also suggests a “too big to fail” departmental mindset that Senators Tom Harkin (D-Iowa) and Elizabeth Warren (D-Mass.) Find in rightly disturbing.

As for the question of contacting borrowers to talk to them about government assistance programs, two thoughts come to mind.

First, the DOE would not have undertaken this effort if the duty officers had effectively defended the relief programs it implemented. Maybe this deadline has something to do with the roughly $ 300 billion in government-guaranteed FFEL loans – half or more of all student loans currently in repayment mode – that reside in portfolios. lenders and private investors. As you can imagine, these people wouldn’t be very excited about extending loan terms, reducing payment amounts, or, God forbid, forgiving principal balances. Hence the preponderance of abstention agreements.

Second, it is difficult to understand what the DOE expected to accomplish with its solicitation program. Of the 3 million borrowers who were contacted, around 900,000 took the time to see the email explosion in the first place, and 150,000 of them actually requested relief – a result which Runcie hails as “good”.

Yet what type of selection process results in targeting less than 10% of people with outstanding education-related debts while the total estimated amount of distressed loans hovers around 40%? Moreover, what led the ministry to believe that a direct solicitation by an entity distant from the borrower (in the case of its guarantee of the FFEL contracts) would give a better result than if the lender of record (or the loan manager acting on their behalf) incorporated the relief offer into a letter borrowers are much more likely to pay attention to, such as a bill or monthly statement?

Perhaps at some point the government will come to two fairly obvious conclusions: Loan managers have divided interests that need to be considered, and managers of education loan programs should have divided interests. relevant industry experience in order to be able to manage them more effectively.

This article originally appeared on Credit.com as an opinion piece and does not necessarily represent the views of the company or its affiliates..

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