Changes to Student Loan Processing in 2016 Budget

Posted By Eliana Osborn on January 21, 2016 at 11:07 am
Changes to Student Loan Processing in 2016 Budget

Your federal student loans aren’t handled by the government, even though the money flows from them.  Instead, loan servicing companies serve as the go-betweens.  There are four major loan servicers that handle nearly three-fourths of all student loans.  As complaints from students grow, the new congressional budget is changing how the system works.

Up until now, loans were assigned to servicers based on statistics of repayment and delinquency.  There’s a new formula now that gives smaller companies a chance to compete.  Everyone will be measured based on capacity—if they can handle more loans—and in comparison to how others are doing.  The playing field is a bit more level.

A Consumer Financial Protection Bureau report released in late 2015 tallying loan holder complaints.  With more than 300,000 comments, CFPB came up with proposals for improving the loan servicing system.  These include:

  • Create consistent, industry-wide standards for the entire servicing market.
  • Ensure information from student loan servicers is accurate and actionable.
  • Hold student loan servicers accountable.
  • Ensure transparency continues.

The budget deal doesn’t address all the needs of student loan overhaul, but it may increase competition and give students more options.  Two loan companies, Higher One and Wex Bank, have both been fined for misleading consumers about their products.  Greater scrutiny of higher education finance will mean more such fines and penalties, especially concerning for-profit schools.

Bloomberg Business recently investigated the $1.2 trillion student loan industry, a confusing system even for those who follow it.  More than $100 billion each year is paid out in education loans and has been since 2009.  In the next decade, that number is expected to double.

Loan originators and loan servicers are separate companies, each paid by the Department of Education for their part in managing student loans.  Profits are being made on a system that was designed to help more people get higher education.  According to Bloomberg, the amount of money involved qualifies the DOE as the fifth-largest bank in the United States.

The more complicated the student loan system is, the more middle men are involved.  Each step between a student and the source of funding means dollars spent without educational benefit. The Atlantic says the financial issues of 2016 will continue to include student loan debt as a major concern.  With high levels of student debt or credit issues from default, Millennials cannot fully participate in the economy.

Eliana Osborn
Eliana Osborn is an associate English professor at Arizona Western College, with degrees from Brigham Young University and Northern Arizona University. She’s published widely in forums such as The New York Times, the Washington Post, the Christian Science Monitor, and the Chronicle of Higher Education.

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