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Betsy DeVos undoes Obama’s student loan protections

Education Secretary Betsy DeVos speaks at a conference on Feb. 15, 2017 in Washington, DC.

on Tuesday rolled back an Obama administration attempt to reform how student loan servicers collect debt. The former president’s administration issued a pair of memorandums last year requiring that the government’s Federal Student Aid office, which services $1.1 trillion in government-owned student loans, do more to help borrowers manage, or even discharge, their debt.

But in a memorandum to the department’s student aid office, DeVos formally withdrew the two Obama memos. The Obama administration’s approach, DeVos said, was inconsistent and full of shortcomings. She didn’t detail how the moves fell short, and her spokesmen, Jim Bradshaw and Matthew Frendewey, didn’t immediately respond to a request for comment.

A recent epidemic of student loan defaults and what authorities describe as systematic mistreatment of borrowers prompted the Obama administration, in its waning days, to force the FSA office to emphasize how debtors are treated rather than maximize the amount of cash they can stump up to meet their obligations.

Obama’s team also sought to reduce the possibility that new contracts would be given to companies that mislead or otherwise harm debtors. The current round of contracts end in 2019, and among three finalists for a new contract is Navient Corp. In January, state attorneys general in Illinois and Washington, along with the federal Consumer Financial Protection Bureau, sued Navient over allegations the company abused borrowers by taking shortcuts to boost its own bottom line. Navient has denied the allegations.

The withdrawal of the Obama administration’s guidelines could make Navient a more likely contender for that contract, government officials said.

The Obama administration’s vision for how federal loans would be serviced almost certainly meant that the feds would have to increase how much they pay loan contractors to collect borrowers’ monthly payments and counsel them on their repayment options. Already, the government annually spends around $800 million to collect on nearly $1.1 trillion of debt. DeVos, however, made clear that her department would focus on limiting costs.

"We must create a student loan servicing environment that provides the highest quality customer service and increases accountability and transparency for all borrowers, while also limiting the cost to taxpayers," DeVos said.

With her memo, DeVos has taken control of the complex and widely derided system of how the federal government collects monthly payments from tens of millions of Americans with government-owned student loans. The federal consumer bureau said in 2015 that the manner in which student loans are collected has been marred by "widespread failures."

DeVos’ move "will certainly increase the likelihood of default," said David Bergeron, a senior fellow at the Center for American Progress, a Washington think tank with close ties to Democrats, who previously worked under Democratic and Republican administrations during his more than 30 years at the Education Department before retiring as the head of postsecondary education.

During Obama’s eight years in office, some 8.7 million Americans defaulted on their student loans, for a rate of one default roughly every 29 seconds. DeVos may be betting that things can’t get much worse.