Too big to fail — again

Yves Smith at Naked Capitalism:

As a new story by Shahien Nasiripour in the Huffington Post tells us, the Administration is now giving student loan servicers the “too big to fail” kid gloves treatment. The apparent justification is that correcting the records of borrowers who may have gone into default through not fault of their own would lead schools with bad servicers to lose access to Federal student aid, which could prove to be crippling to them.

So understand what that means: the law was set up to inflict draconian punishments on schools that used servicers that screw up and/or cheat on a regular basis, presumably because the consequences to borrowers were so serious. But rather than enforce the law, which would have such dire consequences for bad actors as to serve as a wake-up call for everyone else, the Administration has thrown its weight fully behind the education-extraction complex.

The key parts of Shahien’s story:

The U.S. Department of Education is turning its back on at least 1,000 borrowers in favor of shielding their former colleges from potentially crippling sanctions that would have resulted from high rates of default on federal student loans…

“Borrowers aren’t getting any relief or similar consideration from the Education Department,” said Debbie Cochrane, research director at the California-based Institute for College Access & Success, which advocates affordable education. “If the school isn’t held accountable for the default, then the borrower shouldn’t either.”

As many as 20 schools won’t lose access to critical federal student aid programs, an Education Department official said Wednesday. Losing access to taxpayer-provided student aid would be the equivalent of a death sentence for most colleges. The institutions that were let off the hook include for-profit schools, private and public colleges, and historically black colleges and universities, the official said on a conference call organized for news media.

“As many as 20 schools” being given a waiver they clearly don’t deserve suggests that the number of borrowers being thrown under the bus is considerably larger than 1000. Huffington Post identified 13, of which seven are for-profits and four started out as black colleges. And mind you, the schools have to be abjectly bad at making and servicing loans to be subject to the loss of Federal aid:

Schools whose former students subsequently default on their federal student loans at unacceptably high rates can cost their current and future students access to federal grant and loan programs. Penalties kick in once a school’s default rate exceeds 30 percent over three straight years.

The “get out of jail for free” card applies to servicers that screwed up by billing students for only some of their loans, and later declared the students to be in default on loans they didn’t know about. While that may sound nuts, recall that students typically sign loan agreements and the proceeds go to the educational institution. Moreover, payments are usually deferred while the student is still in school. So it isn’t hard to see that a student, having signed loan documents over the years, might not realize that they were to different lenders and hence they’d down the road be facing multiple bills.