The Education Department said Friday that it will select one company to collect student debt payments on its behalf, rather than the nine contractors that currently handle the federal government’s $1.2 trillion portfolio of education loans.
The decision, which would take effect once the existing contracts expire in 2019, reverses years of policy implemented by the Obama administration and would revive a servicing model that had an equal number of benefits and problems.
“We can better monitor the performance of one servicer and one platform,” James Manning, acting undersecretary of education, said on a call with reporters Friday.
Education officials are in the middle of issuing new contracts to student loan servicing companies responsible for placing borrowers in affordable repayment plans and keeping them from defaulting on their loans. The previous administration included contract requirements to shore up the quality of servicing in response to consumer complaints over poor communication, mismanaged paperwork and delays in processing payments. But servicing companies said the demands would be unnecessarily time-consuming, not to mention expensive.
Several of the loan servicing companies declined to comment on the Education Department’s decision to choose a single loan servicer, while others did not immediately respond to requests for comment.
In April, Education Secretary Betsy DeVos withdrew a series of policy memos issued by the Obama administration to strengthen consumer protections for student loan borrowers. She rescinded three memos that, among other things, called for the creation of financial incentives for targeted outreach to people at great risk of defaulting on their loans, a baseline level of service for all borrowers and a contract flexible enough to penalize servicers for poor service.
That decision drew backlash from consumer groups and state attorneys general, who complained that DeVos was abdicating her duty to protect borrowers. At the time, DeVos said the bid process had been “subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.” She said the department “must promptly address not only these shortcomings but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service.”
On Friday, Manning said that rescinding the Obama-era memos was necessary to simplify servicing and prevent cost overruns that the department would not have been able to afford. He said the new contract will ensure “superior customer service,” but he was short on details other than to say the reforms will streamline the payment process and borrowers’ interactions with the servicer.
A review of the amended contract solicitation shows the department plans to strip out mandates aimed at helping borrowers who fall behind on payments and people enrolled in income-driven plans. The servicer would no longer be required to have specialists on hand to aid people in delinquency, nor would the company have to remind borrowers to reenroll in income-driven repayment weeks before the deadline.
Removing those sorts of mandate reduces some of the bureaucracy of servicing but could also prove detrimental to keeping borrowers from defaulting. The high-touch service the previous contract solicitation called for was meant to stem the rising tide of defaults. As of the end of 2016, millions of people had not made a payment on $137 billion in federal student loans for at least nine months, a 14 percent increase in defaults from a year earlier.
The Trump administration is upholding some elements of the previous contract, including the creation of a single portal where borrowers can pull up information on their loans, timelines for processing applications and setting call wait times. And while there will only be one primary servicer, the department will permit that company to hire subcontractors to lighten the load. The federal agency estimates the changes will save more than $130 million in the first five years of the contract.
The new plan is a return to the way student loans used to be collected. ACS Education Services was once the sole company charged with managing the government’s education loan portfolio, a role that critics of the company said led to widespread failures in customer service and loan consolidations. Robert Shireman, a former deputy undersecretary of education under Obama, recalls the department being frustrated by the amount of power ACS held as the only servicer.
“We felt we had little leverage because the whole system was operated by them, and they knew it would be such a huge endeavor to change that, so they didn’t have to be responsive,” said Shireman, a senior fellow at the Century Foundation, a progressive think tank. “There was a move to add at least a couple servicers so you’d have competition and the department wouldn’t be stuck in that situation again.”
The Obama administration hired additional contractors such as Navient, Great Lakes and American Education Services, but the servicing system grew more complex and unwieldy. Eventually, there were more repayment plans, more borrowers, more servicing companies and not enough consistency in service across the portfolio. Consolidating the system could reduce, if not eliminate, some of the issues that have emerged in recent years, but having one company oversee such a large portfolio could also create the same problems as before.
“The approach may raise concerns that the Education Department will be overly reliant on a single student loan company,” said Rohit Chopra, a senior fellow at the Consumer Federation of America and a former student loan ombudsman at the Consumer Financial Protection Bureau. “The changes will certainly increase profits for the industry, but will do nothing to tame the high levels of default in the program.”
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