A Monopoly for Non-Profit Lenders

SAFRA, the latest acronym in financial aid, refers to the Student Aid and Fiscal Responsibility Act - a large and ambitious piece of legislation released in the House this week. The legislation follows President Obama's budget proposal to move all future federal student loans to the Direct Loan Program, eliminating private loan companies from the business of making and holding student loans.

But, it keeps private loan companies in the business of servicing loans - keeping track of borrowers, collecting payments, and communicating with schools and students. The companies that get to service student loans will be chosen through a competitive bidding process run by the Department of Education. Well, almost all of them that is - the legislation allows non-profit loan companies in some states to be guaranteed a monopoly on the servicing of loans in those states.

A small section of the 181-page bill guarantees loan servicing business to eligible non-profit loan companies in each state, and in states with only one eligible non-profit, it allocates the lesser of 100,000 borrowers or all borrowers in the state. When I read this, I wondered how many states this might effect - in how many states would students have no choice in who services their loans?

Fortunately, I didn't have to do the math on that. Student Lending Analytics posted about this yesterday and estimated that 24 states might end up with one non-profit servicer in the state. SLA estimates that this would be 13 percent of all borrowers - 13 percent of borrowers would not have a choice in the company they rely on for help with repayment, to get a forbearance if necessary, and for communications about their loans.

Monopolies don't lead to the best customer service, and students need very good customer service when repaying their loans. These non-profit loan companies should compete with other servicers, rather than be guaranteed business in their state. And students should have the right to decide which company will do the best job of helping them repay their loans.