We wrote earlier about potential problems with the Department of Education’s new “servicer choice” consolidation application system. At that point, most, but not all borrowers were required to use the new system in order to consolidate with the Direct Loan program. The Department continues to plow ahead, announcing last week that they implemented the second phase of the system and that all borrowers, including those in default, must now use the new system to consolidate.
We are so concerned about potential abuse in this program that we sent a letter in March to CFPB Assistant Director and Student Loan Ombudsman Rohit Chopra and to the Federal Student Aid COO James Runcie highlighting our concerns. More than two months have passed and we have received no response at all to our letter. We have no idea if the Department is taking the concerns about potential abuse seriously. All we know is that they have gone ahead and expanded the program.
If you are a borrower, the main thing you need to know is that you must use the new process if you want to consolidate your federal student loans. Only applications submitted before May 18 will continue to be processed under the old system. The new system is an electronic application on StudentLoans.gov and it requires you to choose your loan servicer. (Note that you should be able to download and print a paper application if you prefer that method).
We are still very concerned about how this servicer choice process will work. Although we agree generally with enhanced borrower freedom to choose servicers (and certainly to switch servicers), we are very concerned about the potential for abuse with the new consolidation system. This could occur in a number of ways, including:
- Collection agency referrals: Phase Two includes borrowers in default. 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 survey information that is generally available only on the Department’s Information for Financial Aid Professionals (IFAP) web site. The Department recently posted the latest performance surveys. 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.
Please let us know your experiences with the new consolidation application system. You can also help us get information from the Department of Education by asking them why they haven’t responded to our letter. Why won’t the Department provide us this information? Don’t you think that borrowers and taxpayers should know how the federal aid system works, what it costs, and how private contractors benefit?