We issued a policy brief in June on student loan servicing. We urged the Department of Education not to renew the current servicing contracts. We said that borrowers and taxpayers deserve better than five more years of the same old system. We are sorry to report that the Department went ahead and renewed the contracts. But there is still hope and the Department claims that all options are still on the table.
The timing was confusing. First, President Obama announced that the Administration planned to renegotiate the federal student loan servicing contracts. Eventually, the word also got out that the Department had already renewed the existing contracts. They had previously said they intended to renew the contracts, but could have changed their minds and developed contingency plans. Meanwhile, the Department says it is currently investigating Sallie Mae, focusing on allegations in the recent settlement between Sallie Mae, the Department of Justice and FDIC for violations of the service member relief law and other laws AND it says that the contracts should and will be renegotiated. But in the meantime, the Department went ahead and renewed the contracts.
In a July 8 letter, Senator Claire McCaskill, Chairman of the U.S. Senate Subcommittee on Financial and Contracting Oversight, Senator Elizabeth Warren of MA and Senators Tammy Baldwin, Richard Blumenthal, Sherrod Brown, Richard Durbin, Patty Murray, Jack Reed, and Jon Tester expressed concern that renewing the contracts will undermine the President’s efforts to renegotiate the terms of the contracts. The Senators highlighted particular concerns about continuing to contract with Navient (formerly Sallie Mae) without adequately considering current investigations into the company’s loan practices.
In the letter, the Senators request a list of essential information to understand the current state of the contracts, including:
1) A list of all contractors involved in the administration of student loans;
2) All audits of contractors;
3) Final contracts and modifications;
4) Independent cost estimates;
5) Payment histories and invoice histories;
6) Reports regarding performance;
7) Information about planning for future loan servicing contracts, including information on expanding the pool of potential bidders and
8) Performance metrics and evaluations and information about how performance is measured.
The Senators requested a response no later than July 29, 2014 and also requested a briefing no later than August 8.
We applaud and support these Senator’s efforts to shed light on the servicing system. The servicers hold the keys to borrowers’ futures. Yet too often, they are unwilling or unable to counsel borrowers properly on the range of options available to prevent student loan distress. We will write more in future posts with examples of problems our clients and other borrowers encounter and recommendations to improve the servicing system. In the meantime, as the Senators realize, we need more information about what is going on behind the scenes in order to protect borrowers and taxpayers and provide realistic and comprehensive ideas for reform. We also need to know that the Department is actually listening to the voices of borrowers in this process. We are very concerned about the secrecy surrounding the servicing negotiations. We fear that the Department of Education is moving toward a model in which it justifies withholding basic information about private servicers because of supposed proprietary contract arrangements. This may work well to avoid accountability, but it does not work best for borrowers and taxpayers.
In our experience, Department staff have been more willing lately to provide information and respond to requests, but there is much more to be done in terms of transparency and reform. The July 8 letter sprearheaded by Senators McCaskill and Warren is a critical first step. We urge the Department to not only respond to Congress, but to also respond publicly.
Department staff say that renewing the contracts does not tie their hands in any way. They claim that all options remain on the table, including full performance evaluations, possible termination or other sanctions against the existing servicers, and opening up bids for new servicers. We believe more should have been done before renewing, but it’s too late for that. It is not, however, too late to consider all of the other options and restore integrity to the servicing system.