Student Debt Snafu Shows The Danger Of Blending Public Good And Profit

In August 2022, President Biden announced that the US would relieve some of the student loan burdens for millions of Americans. The offer eased growing national fear about what would happen at the end of pandemic-era student loan deferral. Despite concern that student debt relief would subsidize the wealthy, the majority of these borrowers, in fact, come from low-income families that received Pell Grants and thus generally earned less than $30,000 annually. These 27 million people were offered up to $20,000 in relief. Beyond that, anyone earning under $125,000 could receive up to $10,000, impacting another 16 million Americans.

That plan will be in front of the Supreme Court this week, and it is expected to be shot down for several reasons, one quite unexpected: the claim that this would cause harm to student loan companies and banks. Which begs the question: why? And what does this imply for the mingling of public and private interests?

Missouri Fuels National Confusion

Filing suit late last year, the state of Missouri (joined by Arkansas, Iowa, Kansas, Nebraska, and South Carolina) claimed that this debt forgiveness would cause financial harm. The reasoning goes: if a loan company expects to have interest payments over a long period, a loan paid off early hurts them. For example, a $20k loan with the 5% standard Perkins interest rate yields $25,456 over ten years. And that missing $5k could be the argument for lawsuits.The complaint centered on a Missouri-based student company, the Higher Education Loan Authority of the State of Missouri, also known as MOHELA. “The consolidation of MOHELA’s FFELP loans harms the entity by depriving it of an asset (the FFELP loans themselves) that it currently owns… Consolidation of MOHELA’s FFELP loans harms the entity by depriving it of the ongoing interest payments that those loans generate.”As the original lawsuit alleges, there may have been a case that these moves would harm companies, but no such harm has been reported. Law professors and experts from across the country — even those who believe Biden’s plan is illegal — have also filed briefs with the court saying that the states’ lawsuit doesn’t make any sense. Notably, the handful of companies that might be harmed weren’t even the ones to sue. MOHELA, the Missouri-based student lending giant at the center of the debate, has specifically said it had no part in the lawsuits brought by the states. MOHELA also told Rep Cori Bush (D-MO) that MOHELA wasn’t communicating with these states about the case. The Justice Department noted this to the 8th Circuit in a filing in early November, kicking one of the main arguments of the suit out completely.

So if MOHELA is not the plaintiff, who has the right to sue? A critical element of US legal theory is that one needs to have the standing, or the right, to sue. The US doesn’t allow people to bring legal complaints on behalf of an unrelated party without their consent.And thus, Republican-appointed judge Henry Edward Autrey dismissed the lawsuit, saying that if MOHELA or anyone else wanted to sue, they could do that without the government holding their hand.”Missouri has not met its burden to show that it can rely on harms allegedly suffered by MOHELA. MOHELA, not the State, is legally liable for judgments against it,” Autrey said, adding, “MOHELA can sue and be sued in its own name and retains financial independence from the state.”Despite this legal loss, Republican lawmakers doubled down this month in a public brief, stating that this debt relief would harm the US irreparably. In response, the Biden Administration told CNBC that “the only thing notable about this brief is that, if these Republican lawmakers get their way, millions of their own constituents will be denied debt relief.” And indeed, within the districts of just the Republicans who signed the brief, 12 million of their own constituents would be denied access to debt relief, a move that may ultimately prove politically unpopular.

Fear of Private Actors Goes Beyond Missouri

Debt relief as a policy proposal is as popular as student loans are ubiquitous: 45 million Americans have school debts totaling over $1.6 trillion, more than any other type of debt beyond mortgages. All told, up to 43 million Americans could receive relief, wiping the slate clean for 20 million Americans. But not everyone is due to benefit, once again, because of fear of the response of private interests in the student loan market.

Roughly four million people have Perkins or Federal Family Education (FFEL) Loans issued by private banks but guaranteed by the federal government. These loans were common until the program was discontinued in 2010, meaning most borrowers are Gen X.

The original website for the forgiveness program said that the government was “discussing” the plan with private vendors. In the meantime, these people would qualify as long as they consolidated their loans into a Federal Direct Loan.

Surprisingly, however, the Government reversed course, editing the website to say that borrowers “cannot obtain one-time debt relief by consolidating those loans into direct loans.” The federal government was concerned enough that it pre-emptively withdrew forgiveness from borrowers that had such loans, instead focusing on loans entirely handled by the federal government.

As reported last year, “Multiple legal experts [told] NPR the reversal in policy was likely made out of concern that the private banks that manage old FFEL loans could potentially file lawsuits to stop the debt relief, arguing that Biden’s plan would cause them financial harm.”

And who are the banks? The FFEL loan business is highly consolidated, with just ten actors controlling 86% of these debts. So, while you’ll find big-name banks like Barclays, HSBCHBA
, and J.P Morgan Chase on the list, the behemoth is now Aidvantage, the student loan arm of Maximus. Until two years ago, though, Navient was the big player, holding just shy of 20% of the student loan servicing market in the US in 2021. While it still services some private loans, Navient chose to end its contract with the Department of Education, shifting many of its loans to Aidvantage/Maximus, making it the largest student loan company in the world.

What’s sad in this case is how preventable these clashes were and for just how long this alarm bell has been rung. President Biden railed against corporate greed in the student loan industry all the way back in 1995 when he spoke at a hearing on federal student aid as a Senator.

“The banks here…and people miss this at home…it’s not like the banks are out there saying, ‘Let us take a risk and lend this money. We want to be in the business of being able to lend this money.’ They are saying, look. We will lend the money to these students at a profit if you, the federal government and taxpayers, guarantee us that they will pay no matter what happens. If they drop dead, if they are dead beats, if they don’t pay, if the world blows up, you, the taxpayer, guarantee us, the banks, that we will get it back at a profit. And I can understand their silly song if the banks were in trouble. They are more profitable today than at any time in our history… so it’s not like they need the help. Secondly, it is not like the banks are out there doing a public service.Taking a risk. Where the hell is the risk? And now they want to make sure this cost is transferred to middle-class taxpayers.”

_{A Cautionary Tale for Privatization}

While the Federal Government almost always holds the actual student debt, servicing fees on the $1.62 trillion currently loaned to the American Public represent massive contracts for private companies. And that’s precisely the problem that so many Republicans themselves are quick to point out: that anytime a company is situated to profit from a public good, their motivations may not ultimately be aligned with the government’s purpose.

A Republican leader from Kentucky once explained their fierce opposition to private prisons by saying, “Republicans privatize things that we want more of—not less of.” The parallel applies here: no one wants Americans to be in more debt, particularly in exchange for education, which ultimately serves the economy we all share. Both examples clearly illustrate that, hopefully, none of us want to misalign incentives by encouraging corporations to produce more of what we don’t want. It can have disastrous consequences for millions who reasonably look to the government for a public good like education.That still may not matter to the Supreme Court. The era of the new, right-of-center court has already issued no shortage of contradictory opinions. And even though a fundamental tenet of American law is that the injured party must bring a lawsuit (something that has had major implications for US history, especially in the Civil Rights and Environmental Movements), the court will likely side with the state politicians wanting to keep their people in debt.

This story provides a major cautionary tale for the privatization of public services and the need for greater guardrails when we bring in private institutions to attempt the production of a public good. If the government wants to encourage education rather than debt, we must untangle the warped incentives between the public and private sectors.