There’s a lot to like in the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA), the legislation ending wasteful subsidies for student loan companies, which passed the U.S. House of Representatives last week. But while the provisions expanding funding for community colleges, early learning programs, and Pell Grants are all exciting steps, the bill also has its flaws, especially with respect to the inclusion of special benefits for non-profit servicers.
Nonprofit servicers provide the exact same functions that their for-profit counterparts do in the current, bank-based federal student loan program. They work with borrowers to check that loans are repaid and assess fees or file default claims if payments are late. It’s certainly an important part of a loan program, but it’s also a standard and fairly straightforward responsibility.
The work of nonprofit servicers also has little to do with college completion. Servicers monitor enrollment through the National Student Loan Clearinghouse and don’t work with the borrower until he or she enters repayment, which only occurs after either graduating or dropping out.
Unfortunately, the SAFRA bill seems to think otherwise, including them in several parts of the College Access Completion and Innovation Fund. As part of an amendment to the bill, nonprofit servicing companies are now explicitly eligible to receive grants for functions such as, closing persistence and completion gaps for underrepresented students, improving coordination between two-year and four-year institutions, and developing statewide longitudinal data systems. Even worse, applications containing subgrants for these nonprofit servicers are to be given priority consideration by the secretary of education.
Now I’ll admit that I haven’t seen the research, but it’s a safe assumption that calling a borrower and telling him or her to make their payment will fix exactly none of those goals articulated above. In fact, it’s more likely to have a detrimental effect by siphoning these federal resources away from those important reform programs so that a servicer can have slightly more money to put out a brochure about how students should repay their loans.
That point notwithstanding, it’s also unnecessarily duplicative to write nonprofit servicers into the College Access Completion and Innovation Fund. That’s because thanks to another amendment, the federal government is already going to be spending an unnecessarily large and undetermined amount on vague “financial literacy” programming these entities provide.
Here’s the actual text that got stuck in, with some commentary along the way:
In each State where at least one eligible not-for-profit servicer has its principal place of business, the Secretary shall contract with each such servicer to service loans … provided that the servicer demonstrates that it meets the standards for servicing Federal assets and providing quality service and agrees to service the loans at a competitive market rate, as determined by the Secretary.
That last line is a great bit of language twisting. In general, for a rate to be competitive in the market, it needs to be set by, you guessed it, the market. Having an auction or some sort of market-clearing bidding process is how you determine this rate, not depending on the secretary, Congress, or the guy in the hot dog cart down the street to pick a number that seems right.
But the text gets better:
In determining such a competitive market rate, the Secretary shall set such rate so that (i) the rate is commercially reasonable in relation to the volume of loans being serviced by the eligible not-for-profit servicers, and (ii) in the Secretary’s judgment, the eligible not-for profit servicers can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded.
That’s right. It’s a competitive market rate picked by the secretary and then arbitrarily increased so that they can provide some additional functions. Even worse, the text also calls for the payment rate to be raised again so that nonprofit servicers with fewer account will get more money per-borrower. That’s not a market rate, it’s a guaranteed payday.
But set aside the individual questions about the inclusion of nonprofit servicers in the College Access and Completion Innovation Fund and their “market rate” for servicing and look at the two in tandem. On the one hand, the bill would now let these servicers get money through the completion fund to presumably pay for their default aversion/borrower contact work (it’s a sfe bet they would not be developing a longitudinal data system). At the same time, servicers would get more money, as determined by the secretary, to fund their default aversion work in the servicing part of the bill.
Funding the same activities out of two funds meant for different purposes is a waste of taxpayer dollars. So here’s a thought. If default aversion and borrower outreach are so important, set aside a specific pot of money under the servicing part of the bill to pay for them. Award this money competitively to the nonprofit servicers that are most successful at averting default and assisting borrowers. But also make this money a firewall—if these type of activities are what servicers want to do, keep them out of the completion fund, where institutions, and state systems can use their own expertise to bring about needed reforms.
Nonprofit servicers have done a good job convincing legislators that their added default aversion work is worthwhile. If that’s truly the case, then reward them with their own defined pot of money and stop the forays into completion work or attempts to mess with payment rates.