ANN ARBOR—As America’s student debt crisis continues to worsen, researchers at the University of Michigan and Elon University believe they have a solution—let the federal government, rather than private banks, handle student loans.

“Evidence suggests that student borrowers have not been well-served by the current system,” said Roland Zullo, assistant research scientist with the U-M Institute for Research on Labor, Employment and the Economy. “Sources have identified persistent problems with the performance of servicers, the extent and nature of which indicate serious structural shortcomings and conflicts of interests in the present contractual arrangement.”

Zullo and colleague Eric Fink of Elon University propose removing the current servicing contract model, in which four private banks service and administer all of the U.S. Department of Education’s federal student loans. Instead, they say, a government agency is better equipped to service the loans.

“An important consideration in establishing a public loan servicing unit is choosing an appropriate federal agency to assume this function,” said Fink, associate professor at Elon’s School of Law. “One option is to add this role to FSA’s existing responsibilities under the student loan program.

“Alternatively, this role can be assigned to a different federal agency, in the interest of transparency and efficiency. Under that second option, three possible candidates would be the Treasury Department, the Internal Revenue Service and the U.S. Postal Service.”

USPS is a particularly good fit, Zullo and Fink say. In January, the Office of Inspector General called for expanding the USPS into nonbanking financial services, including short-term credit opportunities for low-income borrowers and assisting people who are underserved by existing financial institutions.

The report comes on the heels of continued public pressure on the U.S. Department of Education to revise its current servicing contract language and reconsider the servicing model altogether.

“This report offers the data that affirms what we’ve been saying all along—the big banks that service federal student loans simply aren’t doing enough to help borrowers,” said Chris Hicks of Jobs With Justice, which provided a grant to support the research. “These corporations have played an active role in furthering our country’s student debt crisis, and the Department of Education has completely fallen down on the job when it comes to providing oversight and enforcement of their contractors.

“Any serious solution to our country’s crippling student loan debt now has to consider the possibility of moving these jobs to a federal agency with the capacity and inclination to help manage this crisis.”

Related Link:

• Full report: http://bit.ly/TjqzAI