Remember when you were a kid and your folks made you wait patiently before tearing into a pile of presents that were just beyond your reach? How you rubbed your hands together so quickly that your palms heated up and the skin-on-skin sound you made could be heard in the next room?
Well, imagine a bunch of blue-suited, white-shirted, red-tied, black-shoed lenders doing the same thing as they not-so-patiently wait for a new administration to divest some or all of the roughly $1 trillion of student loans that currently reside on the federal government's books and supplant the Federal Direct student loan program with a modern-day version of the one that enriched them years ago.
According to a recent Wall Street Journal article, the banks and other lending institutions that were once the middlemen of choice for the government-guaranteed Federal Family Education Loan program have good reason to believe that the incoming Trump administration — in tandem with a Republican-controlled House and Senate —will move to resurrect what the Obama administration discontinued in 2010 because of cost. (The Trump transition team did not respond immediately to Credit.com's request for comment on this possibility.)
When that happens — and in all likelihood it really is a matter of when more than if — we can expect a triumphant resurgence in the secondary financial markets as securitization after securitization of government-guaranteed education loans are flogged out to an investment community that's clamoring for an opportunity to earn more than 1% on a virtually risk-free gambit. At the same time, though, we should also worry about what that portends for the tens of millions of financially distressed borrowers who may well find themselves at the mercy of loan administrators that are more concerned with the interests of their benefactors (the aforementioned investors) than they are them or the taxpayers who will be left holding the bag when they default.
An inescapably bleak scenario? Doesn't have to be.
The simple truth is that trees don't grow to the sky: The government's balance sheet is not infinite. At some point, the Department of Education will have no choice but to rid itself of some portion of the Federal Direct loans it owns, not least because the nearly dollar-for-dollar amount of debt that the federal government incurs to fund that program has the potential to interfere with its other financing needs. But that doesn't mean that education borrowers should be left to fend for themselves.
The incoming administration and its legislating compatriots can move to extract much-needed debtor and taxpayer-guarantor protections in exchange for the governmental backstop against default that will be necessary to move these debts into private hands.
It can, for instance, mandate specific loan servicing standards, such as those that require responses within a reasonable period, and prohibit servicers from moving financially distressed borrowers into temporary and expensive forbearances (because of the interest-compounding effect) instead of permanently modifying their contracts by extending loan durations. It can also prohibit any after-the-fact contractual changes, such as for prepayment penalties or requiring loan cosigners, in exchange for granting relief.
Better yet, given that roughly half of all student loans that are currently in repayment are either delinquent, in default, temporarily accommodated or participating in some form of income-based repayment plan, wouldn't it make more sense to restructure the entire portfolio by extending the remaining terms for every contract before any of these are sold into the private marketplace?
The fundamental problem that plagues the modern-day student loan program is structural — too short a repayment duration for the high level of borrowing that's currently taking place.
This needs to be addressed before Washington lets the financial services industry have its way at the party table.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.