We sent a letter last week to CFPB Assistant Director and Student Loan Ombudsman Rohit Chopra and Department of Education Chief Operating Officer James Runcie outlining our concerns about the new Direct Loan Consolidation application system.
Although we agree generally with enhanced borrower freedom to choose servicers, we are very concerned about the potential for abuse with this new consolidation system. This could occur in a number of ways, including:
- Collection agency referrals: Phase one does not include borrowers with loans in default. However, the current plan is to require these borrowers to use the new system once phase two is implemented. These borrowers are almost always dealing with a collection agency. Although borrowers should be able to bypass collection agencies and consolidate on their own, our experience is that the collection agencies pressure borrowers to allow the agencies to process the consolidation applications. Under the new system, we fear that these agencies will make servicer choices without consulting the borrowers. There is very serious potential for abuse. Kickback arrangements are one possibility. Even more directly, one of the servicers on the list, Sallie Mae, owns collection agencies.
- For-Profit Debt Relief Companies. Our 2013 report Searching for Relief focused on abuses in the for-profit student loan “debt relief” industry. The service most of these companies perform, if they perform any service at all, is processing government loan consolidation applications on behalf of borrowers. This appears to be yet another area of potential abuse if these companies seek compensation to steer borrowers to particular servicers. Our investigation found that these companies generally do not provide reliable information to consumers. Therefore it would not be surprising if they selected servicers on behalf of borrowers without informing the borrowers about their right to choose servicers. Most of these companies seek powers of attorney to act on behalf of borrowers.
We are also concerned about the lack of information available to consumers to help them make servicer choices. The only information we know of showing servicer performance is the quarterly servicer survey information that is generally available only on the Department’s Information for Financial Aid Professionals (IFAP) web site. While imperfect, this information gives borrowers some sense of servicer performance. However, it is hidden on a site that consumers rarely visit or even know about. Further, we have noticed that the most recent information has not been posted. We have not seen an update since August 2013. There are media reports that the Department is making adjustments to some of the data categories. However, we do not understand why this would preclude the Department from continuing to release updated information in the other categories.
The stakes are high for borrowers. This program allows them to choose a servicer. Once they choose, they cannot switch. It is unclear how borrowers should make this decision. The Direct loan consolidation product is the same for everyone and ultimately, servicing should be the same too. Why would there be wide variations in service? And if this is the case, shouldn’t borrowers know about it? Perhaps most important, consistently inferior service should have consequences for servicers. So far, this doesn’t appear to be the case.
We asked the agencies to send information about any and all information that is publicly available for consumers to learn about servicer performance. In addition, we requested information about any precautions the Department or other agencies have taken to avoid potential abuses and to provide information so that consumers can truly shop for servicers. Stay tuned for more information.
Let us know your experiences with your student loan servicer. What do you think is the best system for federal student loan borrowers?