The New York Times had a piece on how education secretary Betty DeVos is trying to block state efforts to prevent abusive practices by student loan servicers after she had weakened federal protections. Her argument is the same one that the federal government used to weaken state rules on mortgage lending practices during the housing bubble years — that federal law preempts state law.
I'll leave it to the lawyers to decide the legal question here, but the economic one is straightforward. If servicers can make money from abusive practices (e.g. harassing phone calls, illegal threats, and charging arbitrary fees), they will. That is what we expect in a free market economy, businesses try to maximize profit.
While the piece treats this as a consumer protection issue, which it is, it is also one of economic efficiency. If it is possible to make lots of money by ripping off students in servicing their loans, then businesses will devote resources to ripping off students rather than something productive.
Think of it like making stealing cars legal. If people could make lots of money by stealing cars, many will quit their day job and spend their time stealing other people's cars.
We should also understand the issue of government-issued or government-insured student loans for tuition at for-profit universities the same way. Many of these universities provide little in the way of education and do not give students a marketable skill. As a result, the default rate on loans at many of these schools is often over 40 or 50 percent.
For these for-profit colleges, the students are simply intermediaries to access to government money. They allow students to make tuition payments which they could not possibly do otherwise. The students basically get nothing for their money, but in a world where the government requires no accountability from the schools, this doesn't matter.
It seems that for Betty DeVos, the point of the student loan program is to make the people who own these for-profit colleges richer with taxpayer money. In this respect, it is probably worth noting that she made the dean of DeVry University, one of the biggest for-profits with a very high default rate, head of the student loan fraud division at the Education Department.