America Saves Week

Are student loans too big to fail?

Last month, two college professors released a 15-page report that doesn’t sound controversial when you read the title:Federal Student Loan Servicing: Contract Problems and Public Solutions.

Indeed, the first 11 pages will have many financial experts nodding in agreement, as Elon University professor Eric Fink and University of Michigan researcher Roland Zullo sum up a litany of well-known problems with the current system – which has racked up more than $1 trillion in outstanding loans. That’s more than all the credit card debt in this country.

When you get to page 12, however, you’ll read what the professors are proposing as a solution: “establishing a public loan-servicing unit” that will “serve as a credible threat that induces responsible behavior” in the private sector.

In other words, Fink and Zullo want the federal government to go into the student loan business.

Flawed or momentous?

The government is already deeper into the student loan business than ever before. In 2008, at the height of the financial crisis, President Obama oversaw what Forbes magazine called, “the government takeover of student lending.”

The two professors describe that takeover in more glowing terms…

One consequence of the 2007–2008 financial crisis was an abrupt shift from bank-based to direct federal student loans. This momentous change required the Department of Education to rapidly establish the capacity to service loans, which was achieved by outsourcing this responsibility to four large for-profit firms and a group of smaller regional entities.

What Forbes called “controversial” and full of “flaws,” Fink and Zullo call “momentous.” Basically, the government was now involved in processing payments and managing accounts. The two professors admit, “Borrowers have expressed dissatisfaction with the present system.”

Their solution, however, is to double down. Instead of getting the government out of the student loan business, they want the government to become its biggest player.

studentloanad

Just like the Post Office – and IRS

How would this work? Finak and Zullo have given it much thought: “An important consideration in establishing a public loan-servicing unit is choosing an appropriate federal agency to assume this function.”

Their top three candidates: “the Treasury Department, the Internal Revenue Service and the U.S. Postal Service.”

Yes, the IRS. The agency currently facing Congressional fury for targeting certain political groups and then losing emails. The Treasury Department is also embroiled in that scandal, since there are documents suggesting it knew about the IRS targeting back in early 2012.

The Post Office isn’t so much scandal-ridden as poorly managed. Once again, I like how Forbes put it: “The Post Office Is Broke: It’s Time To End Washington’s Postal Monopoly.”

Conclusion

These days, any discussion touching on politics is a dangerous one. I’m certainly not saying the government has no valuable role to play in the student loan industry. Its guarantees have educated generations. And its forgiveness and consolidation programs are securing the financial futures of those suffering under crushing debt.

Perhaps I’ll alienate both sides of the political divide by concluding: The way forward is neither getting the government more involved in the student loan business or removing it all together.

The real solutions lay in the mundane details. We need to address the rising costs of a college education, the financial education of our students, and the terms and conditions of existing and future restructuring programs. Those can’t be laid out in this single column or even in a 15-page report.

I’m simply cautioning against big, desperate experiments that could surely make things worse.

Howard Dvorkin is a CPA and chairman of Debt.com, an educational resource for those who want to conquer all forms of debt in their lives.

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