This Is Why You Don't Watch Sausage Being Made

by Andrew Gillen

Ben Miller does an ill-advised thing that no one in their right mind should do. He actually read the SAFRA bill. He was immediately punished with the task of trying to reconcile statements such as "service the loans at a competitive market rate, as determined by the Secretary" with the actual meaning of those words.

SAFRA:

In determining such a competitive market rate, the Secretary shall set such rate so that (i) the rate is commercially reasonable in relation to the volume of loans being serviced by the eligible not-for-profit servicers, and (ii) in the Secretary’s judgment, the eligible not-for profit servicers can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded.

Miller comments:

In general, for a rate to be competitive in the market, it needs to be set by, you guessed it, the market. Having an auction or some sort of market-clearing bidding process is how you determine this rate, not depending on the secretary, Congress, or the guy in the hot dog cart down the street to pick a number that seems right. But the text gets better...

It’s a competitive market rate picked by the secretary and then arbitrarily increased so that they can provide some additional functions. Even worse, the text also calls for the payment rate to be raised again so that nonprofit servicers with fewer account will get more money per-borrower. That’s not a market rate, it’s a guaranteed payday.

So let me see if I've got this straight. The logic behind SAFRA is that FFEL loans are to be killed off because they were using an arbitrarily determined interest rate guaranteed by the government, in a program that left enough wiggle room for lobbyists to exert continous pressure on the powers that be, ultimately resulting in a guaranteed payday for lenders at the expense of students and taxpayers.

But in practice, SAFRA will introduce those exact same features into loan servicing. And here I thought SAFRA was anti-FFEL. It's really just FFEL light. I guess it's time to dust off my shovel.