Earlier this week, over 150 Members of Congress sent a letter to Secretary of Education Betsy DeVos highlighting concerns surrounding the U.S. Department of Education’s (ED’s) decision to make changes to the student loan servicing contract procurement process. A month after withdrawing guidance intending to ensure greater consumer protections in the contracting process for student loan servicers, Secretary DeVos announced her replacement to Obama’s servicing plan.
Quality servicing is vitally important for student loan borrowers. Student loan servicers are the borrower’s primary point of contact. If the servicer is competent and efficient, many financially distressed borrowers will be able to avoid default. The main problem with the current system is that student loan borrowers do not receive consistent quality service. Unfortunately, the new plan is unlikely to make things any better.
Despite the Secretary’s claim that her modifications would “ensure the best outcome for federal student loan borrowers,” we found that for nearly all the choices the Secretary made, where there was an option to make things easier for borrowers or harder, the Secretary chose harder. Here are some examples of useful items that Secretary DeVos eliminated:
- “High touch servicing” which would ensure that vulnerable borrowers and borrowers at risk of defaulting get extra help in order to stay out of default.
- The Payback Playbook – this was a form created by the CFPB to help borrowers make sense of their options.
- Materials available in Spanish.
- The requirement that borrowers are routed to well-trained representatives after selecting a specific topic during a call.
- The requirement that servicers provide borrowers information about “Income Driven Repayment,” and “Delinquency Resolution/Alternate Repayment Options,” when borrowers call the main number.
- Notification to borrowers who send payments to incorrect locations.
- Annual user testing of notices.
- The requirement that servicers present options to borrowers who can only make partial payments or want to pay extra.
Secretary DeVos’s plan also eliminated the system of using multiple servicers and subcontractors, and replaced it with a single servicer to handle the loans for approximately 36 million student loan borrowers. This idea is nearly universally hated. Lawmakers raised concerns about this idea in their letter to DeVos. The Association of Community College Trustees (ACCT) has expressed “significant reservations” about relying on a sole servicer.
Even the servicing industry hates the idea. Education Finance Council (EFC), the national trade association representing nonprofit and state-based higher education finance organizations, including all the not-for-profit (NFP) Federal Direct Loan servicers, has raised concerns that ED’s plan would create a monopolistic environment with little to no incentive to ensure the single servicer provides the highest quality of customer service to student loan borrowers. InsideARM—the industry trade publication—stated:
It’s unclear exactly how giving one firm a monopoly over such a massive contract will provide customer protection, although on its face it may seem easier for ED to oversee a process at only one company. It is interesting that businessperson Donald Trump and the administration created by President Donald Trump do not seem consistent. Few true business people would propose a single vendor for a significant contract. The true businessperson would deem concentration risk too high. Additionally, leverage for price negotiation and creation of a competitive performance dynamic would disappear. It is shocking that ED would ignore those elements and suggest a single servicer.
On first blush, the plan to switch to a single servicer resembles recommendations by consumer advocates for a single platform. However, consumer advocates have never recommended that ED hire just one company. Rather they have recommended a single, ED-branded website and portal for loan servicing that is accessible on multiple technology platforms, but with multiple companies handling the various servicing functions.
Historically, having a single servicer has not worked well for ED. All Direct Loans used to be serviced by ACS, a subsidiary of Xerox. As ACCT highlights in its letter, ED eventually pulled ACS’ contract due to poor performance. It took ED as long as three years to extract and redistribute the student loan accounts in ACS’s portfolio to other servicers. Since that time, ED’s portfolio of loans has grown significantly, so it would be even harder to extract and redistribute student loan accounts to another servicer if it became necessary to replace the single servicer. There would be a great risk of leaving millions of borrowers vulnerable to poor quality servicing. This is especially concerning given that ED plans to lessen the weight it gives to companies’ past performance when it selects its single servicer.
Secretary DeVos’s proposal cuts corners at the expense of helping borrowers access the programs and services they need to stay current on their loans. There is no doubt that student loan servicing needs to improve, but DeVos’s plan is the wrong plan to get that done.