U.S. Government, Not Banks, Should Service Loans, Professors Argue

Report: “Federal Student-Loan Servicing: Contract Problems and Public Solutions”

Authors: Eric M. Fink, an associate professor at Elon University’s School of Law, and Roland Zullo, an associate research scientist at the University of Michigan at Ann Arbor’s Institute for Research on Labor, Employment, and the Economy

Summary: Students are not well served by the student-loan-servicing industry, the researchers argue, as there is an inherent conflict between the profit motive and responsive, quality service. Given the large number of complaints against loan servicers by students, Mr. Fink and Mr. Zullo argue that the current loan-servicing model should be reimagined.

A federal agency should assume responsibility for servicing loans and compete with the private sector. The researchers cite the direct-loan function of the Agriculture Department’s Farm Service Agency as an example of what they propose for higher-education loans. Such a job could be allocated to a new agency or incorporated into the functions of the Treasury Department, the Internal Revenue Service, or the United States Postal Service, which has expressed an interest in entering the nonbanking financial-services sector.

Bottom Line: Student-loan servicers are not doing enough to help borrowers. Mr. Fink and Mr. Zullo argue that the federal government should consider moving the responsibility to an agency with the capacity and inclination to help manage the student-loan crisis.

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