WASHINGTON — Complaints of predatory lending practices — outlined by students and amplified in January by lawsuits from two attorneys general and a federal watchdog — prompted the Obama administration to spend months creating a 51-page guideline designed to protect college students from loan servicing companies.
A one-page letter from the new education secretary two weeks ago gutted those protections and tilted the playing field strongly in favor of the businesses at the expense of the students, educators, lawmakers and students, advocates say.
“A skeptical person would say this was only done to benefit the people who service the loans at the expense of the students who need them, and I’m not sure you can look at this any other way,” said Rep. Mark DeSaulnier, D-California, a member of the House Committee on Education and Workforce. “This makes it easier to take advantage of students. So when the administration said this is done to simplify things, they are talking out of both sides of their mouth.”
Universities will likely have to ramp up their efforts to keep students informed of all their options, educators said.
Education Secretary Betsy DeVos wrote in an April 11 letter to staff that the Obama administration requirements suffer from a “lack of consistent objectives” and must be stopped immediately. DeVos’ letter rescinds recommendations produced last summer by career Department of Education staffers to address what they called dishonest and misleading practices that hurt student borrowers.
DeVos’ order to James Runcie, the Education Department’s chief operating officer for federal student aid, did not provide specifics of what was wrong with the existing rules or introduce any new measures.
“We have a duty to do right by both borrowers and taxpayers, and I look forward to working with your team at FSA, as well as others, in order to acquire new federal student loan capabilities that will provide borrowers with the tools necessary to efficiently repay their debt,” DeVos wrote.
The federal government, which guarantees federal student loans against default, awards multibillion-dollar contracts to private companies to service more than $1 trillion worth of loans, make collections and handle any problems that may arise for the students.
Federal law offers students an array of options for repaying the debts, including a program that allows students to make monthly payments commensurate with their post-college salaries. They still must repay the loans, but can do so in ways that don’t cripple their finances.
However, the private companies, particularly Navient, hid those options from students, tricking them into programs that cost them billions of dollars in unnecessary interest charges, according to a lawsuit by the federal Consumer Financial Protection Bureau.
Navient, the largest loan servicer, preyed on students who were “permanently disabled, including veterans whose total and permanent disability was connected to their military service, by making it appear as if those borrowers had defaulted on their student loans when they had not,” the lawsuit says.
“Through shortcuts and deception, the company also illegally cheated many struggling borrowers out of their rights to lower repayments, which caused them to pay much more than they had to for their loans,” the CFPB said in a January statement announcing the lawsuit.
DeVos’ decision is expected to help Navient secure a new federal contract up for bids in 2019. The company’s stock jumped 2 percent the morning after her announcement, according to Bloomberg News.
Educators, lawmakers and advocates said the new secretary’s decision not only hurts student borrowers, but represents a sharp change in the Obama-era philosophy of siding with students over businesses.
Flip-flopping on student loan protection
In 2016, the Education Department under President Obama set out to fulfill two primary objectives, the memo said. The first was to make it easier for students to repay their loans, the second to set “higher standards” for companies to follow if they wished to service student loans.
Under Secretary of Education Ted Mitchell wrote a July 2016 memo outlining a detailed list of requirements and financial incentives aimed at getting lenders and those who service the loans to be more responsive to the needs of borrowers, particularly “at-risk” students who were often issued loans they had no chance of repaying.
DeVos’ order sent a clear message that those protections no longer apply, educators and advocates said.
“The people who win are the incumbent contractors who service federal student loans. The losers are the students and their families,” said David Bergeron, a fellow at the Center for American Progress, an independent, left-leaning policy institute in Washington. “The Obama-era memos were changing the rules of the game, which meant that those incumbents would have to change the way they do business and be more responsive to the needs of the taxpayers and students. Now they don’t.”
The impact of DeVos’ order won’t be known for quite some time, educators said. The order also reinforces the perception that the current administration is more likely to listen to the wishes of powerful business interests than those of students, they said.
“It’s not immediately clear what the full impact will be, but it opens the door for more potential abuses,” said Daniel Klasik, assistant professor of higher education at George Washington University. “The financial aid process is a very opaque process to begin with, especially when you are dealing with young students who are the first generation ever to attend college.”
Bergeron, who spent 35 years at the Department of Education as a career employee and five years in the Obama administration before leaving in 2013, said DeVos’ decision reflects a shift in philosophy.
“The general trend of the current administration is to roll back anything that the Obama administration did,” Bergeron said. “I am not surprised, but I am disappointed that Secretary DeVos has done this. Clearly she didn’t listen to the advice of experts and career people in her administration, or she simply decided not to take it.”
The Obama rules would have given student borrowers more protections and encouraged loan providers to work out payment plans and provide more flexible repayment procedures, according to Bergeron and the memo. With that policy no longer in force, harsher collection actions and increased litigation are certain to follow, he said.
Colleges and their financial aid departments may have to fill the information void that the Obama administration rules were designed to stop, Klasik said. But that may not be enough.
“Schools certainly could try to fill in this information gap giving students about loans, and that is already happening,” he said. “The concern here is the previous guidelines were specifically written to address the organizations that handled the student loans and stopped the student loans.
“This is a continually burning issue, so the secretary’s decision isn’t going to make the problem go away,” he said. “There is going to be more public pressure to resolve it somehow. It’s unclear whether this administration and this Congress will be the ones to do that, but it is going to be addressed at some point.”