As Ben Miller of New America summarized, the changes address only the finances, not the structure of student loan servicing. We agree that financial incentives matter and the changes should help protect borrowers. The new incentives aim to prevent delinquencies as well as defaults and to create disincentives for servicers to steer borrowers to less optimal options such as forbearance.
These are positive developments, but relying on financial incentives to protect borrowers is not enough. Even assuming that servicers always act rationally and follow financial incentives, they still make mistakes. When this happens, regardless of financial incentives, the borrowers have no formal way to force the servicers to get it right.
Borrowers are not parties to the contracts between the government and the servicers, so they can’t directly enforce the contracts. In any case, so much of the contracting process happens behind the scenes that borrowers rarely even know what their rights are. For example, the new contracts state generally that servicers must provide good customer service, receive customer complaints, and have a system to escalate when customers are unhappy, but what happens when they don’t do this? The unfortunate answer is that borrowers are generally stuck waiting for the government to do something.
Even if the government acts, so far, this has usually been just a slap on the servicer’s wrists. More important for borrowers, even if a servicer is penalized for violating the law, this does nothing to resolve an individual borrower’s complaint.
We can’t rely solely on the Department of Education to provide rigorous oversight. To get an idea of how weak the oversight is, read this July 2014 report from the Inspector General regarding the dismal state of collection agency oversight. (We highlighted these issues in our recent report on student loan debt collection). The CFPB has oversight over servicers as well and should prioritize borrower rights when conducting examinations and aggressively enforce those rights.
This is all critical, but ultimately, public enforcement will not be enough. There must also be ways for borrowers to privately enforce their rights. This requires legislation and regulations to prescribe servicing rights for borrowers with private remedies. We need structural reform.
In the meantime, the Department should combine its positive (and hopefully ongoing) changes to financial incentives with substantive changes to the contracts including:
1. Allowing borrowers to switch servicers (the best way of all to spur competition)
2. Moving toward a single portal so that borrowers know when they are dealing with the government and are not subjected to improper marketing by servicers.
3. Developing a survey that tests not only borrower satisfaction (what does this really mean anyway), but also actual results.
4. Providing more data about how servicers are performing. (As a start, did the Department respond to U.S. Senators’ request for information about servicing that we wrote about?)
5. Creating clear ways for borrowers to complain about servicers and to get relief when servicers make mistakes.
6. Opening up competition beyond the same old players.
7. Investigating servicer performance and applying real penalties for violations. e.g. The Department has existing authority to terminate the contracts, take away existing accounts, or choose not to assign new accounts. Use those tools.
8. Providing information about the servicer choice system. What have the results been so far? What information do borrowers have to select servicers?