For years economists have debated whether the growth and size of the nation’s student loan debt is really a cause for concern.
Some argue that the numbers tell all: Americans owe $1.3 trillion in student debt. It’s second to the country’s mortgage debt in size, which looms at $8.3 trillion. Just a basic bachelor’s degree is enough to leave a student with years of debt long after he or she leaves university, points out MarketWatch reporter Jillian Berman, who has been following the student loan debate for more than a year.
“Research indicates that the [$1.3 trillion (2017)] in student loan debt may be preventing Americans from making the kinds of big purchases that drive economic growth,” Berman says.
Others will counter that it’s a matter of perspective: A good quarter of the debt is owned by people who can afford it, says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators. “Those in the lowest income brackets hold only 11percent of all outstanding loan debt,” he explained in an op/ed on Forbes.
The real issue, Draeger argued, is how the debt is managed by debtors, parents, and institutions before and while it is being accrued. Students, he said, are often “so confused by the mind-boggling number of loan repayment plans” that they fall hopelessly behind and end up defaulting on their first major financial transaction.
Last week the Consumer Financial Protection Bureau added one more element to the debate when it sued loan servicer Navient and two subsidiaries for what it says are misleading and illegal lending practices.
Navient, charges the CFPB, “created obstacles to repayment by providing bad information, processing payments incorrectly, and failing to act when borrowers complained.”
And when it came to those who needed the help the most, alleges the CFPB, the company “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 country’s consumer watchdog isn’t alone in this fight. Illinois and Washington are also suing, alleging violations in state laws.
Washington has been tracking its student loan debt problem for some time. Its attorney general asserts that Navient’s system of loan approval not only deceived borrowers, but also roped in family members through a deceptive “co-signer release” that “put up arbitrary barriers and failed to disclose that very few borrowers ever achieve co-signer release.”
But what makes this story even more troubling is how Navient gained its footing in the loan servicing business in the first place.
Navient was originally part of Sallie Mae, what was more formally known as the Student Loan Marketing Association. After Congress took a number of steps in 2010 that redesigned how student loans were originated (effectively placing more control in the hands of the Department of Education and less under Sallie Mae), the company announced restructuring plans. In 2014, Sallie Mae and Navient became separate publicly-traded companies — with distinct, though similar, focuses on student loans.
For their part, Washington and Illinois are also suing Sallie Mae, which Illinois Attorney General Lisa Madigan asserts “put student borrowers into expensive subprime loans that it knew were going to fail.” Madigan says Navient’s actions led to “billions of dollars of debt” that unnecessarily inflated the burden being carried by student borrowers.
Some analysts are quick to point out that the country’s student loan problems have overtones similar to what happened during the mortgage crisis.
As early as November 2015, the crisis was already beginning resembling the subprime mortgage fiasco that sent the country into recession in 2008, reports Shahien Nasiripour, chief financial regulatory correspondent for the Huffington Post.
New regulations under the Department of Education that made it much harder for borrowers to get relief was just one of several escalating factors to the crisis.The other, maintains the CFPB and the state AGs, was Navient’s failure to ensure that those who did qualify for having their payments lowered were actually given that option.
Instead, say those investigating Navient, borrowers were shepherded into programs that benefited the loan company financially, not the borrowers.
The question that may still need to be asked, however, is why the federal agency with the power to oversee student loan management didn’t catch these problems earlier.
If the Department of Education was charged with originating the loans when the Obama administration took steps to offset ballooning debt, why were Navient and its subsidiaries given what would appear to be unchecked oversight on how rules were applied? Why did it take four years — the entire length of the company’s infancy — for regulators to discover there were problems inflating the nation’s tally of student debt?
With the new pro-business Trump administration setting its sights on revamping the way business is done in both the public and private sectors, it’s unclear what the outcome will be of this suit.
Trump has made it clear he wants less government involvement in managing education and public resources, hinting that he would like to see a return to the days when banks issued federally-backed loans.
For the 12 million Navient customers representing some $300 billion in loans, however, those changes offer no real relief. Nor do they spell out how government watchdogs, in the post-subprime mortgage crisis, will quell the public’s sense of uncertainty about private loan companies that fall below the radar of government regulators.
Image credit: Flickr/Kazuhisa OTSUBO