Student Loan Servicers Face Tighter Federal Standards, Scrutiny
Posted By Derek Johnson on August 19, 2016 at 8:43 am
Three federal agencies have announced actions to target the questionable and predatory practices of some private student loan servicers. In a 56-page memo, U.S. Undersecretary of Education Ted Mitchell detailed regulatory reforms designed to streamline and improve customer service around student loans, as well as to “clarify for borrowers that the U.S. Department of Education is the servicer of their loan.”
The directives represent the culmination of a years-long effort by borrowers and student debt advocates to develop industry-wide standards to govern the tactics and behaviors of third-party student loan servicers. Though the federal government is the primary lender for student borrowing, it outsources management of the loan repayment process to multiple third party contractors.
Last year the Obama administration rolled out a student aid Bill of Rights that included an online system for reporting and collecting complaints about loan servicers and debt-collectors. It also called for higher standards and consumer protections around debt collection, an action that led to Mitchell’s memorandum.
The role of student loan servicers
According to the Consumer Financial Protection Bureau (CFPB), contractors handle an array of customer service duties related to student loans:
“Servicers are a critical link between borrowers and lenders. They manage borrowers’ accounts, process monthly payments, and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. The servicer is often different than the lender, and a borrower typically has no control over which company services a loan.”
Student debt advocates have long criticized the behavior of third party debt collection agencies in both the public and private student loan market and have questioned whether their tactics square with the overall mission of federal student aid. In September 2015 the CFPB released the results of a public inquiry into loans servicers that included comments from thousands of stakeholders. That report revealed widespread errors and deficiencies in the way many servicers processed payments, failed to adequately inform students of their options to lower or mitigate monthly debt payments and handling and resolving customer complaints.
“As policymakers consider proposals to address the key drivers of rising student loan debt, including potential changes to the structure of higher education financing for future generations of student loan borrowers, the thousands of comments that informed this report should serve as a public reminder that millions of current student loan borrowers may not be well-served by the status quo,” writes the CFPB in its conclusion.
In a piece for Yahoo.com, Sarah Hamilton of the credit counseling nonprofit Take Charge America lists eight common ways that student loan servicers keep student debtors in the dark about their options for reducing their student loan burdens, such as changing their tax status, consolidating their loans and eligibility for loan forgiveness programs. In many cases, these moves can lower a student’s overall debt obligations – and in turn reduce potential revenue for loan servicers.
“The trick is to ensure you’re in the right repayment program, but this is easier said than done. Loan servicers are in the business of collecting payment – not educating borrowers,” writes Hamilton.
Wholesale reform, tighter rules on student loan servicers
Along with the report, the CFPB, along with the Department of Education and Department of the Treasury released a joint statement detailing the principles that should govern the behavior of student loan servicers. The memo released by Mitchell echoes these principles by targeting five aspects of the student loan repayment system for improvement: financial and regulatory incentives for contractors to provide high quality service, clear communication to student borrowers about baseline standards their servicer must follow, consistent practices among all contractors, ensuring timely responses to complaints and public transparency about each contractor’s customer service record.
The new directives outlined by Mitchell will impact the way many loan servicers operate, the performance metrics by which they are scrutinized and the information they are encouraged or required to disclose to the public. For example, the Department of Education will create a single web portal for student debtors to make payments, apply for benefits and stay up to date on the latest news regarding federal student loans, regardless of who is servicing their loans.
The department is also looking to tweak language in current federal contracts with loan service providers to offer financial bonuses to companies who work to enroll students at high risk of default or delinquency in income-driven repayment plans. Income-driven repayment ties monthly loan payments to a certain percentage of a debtor’s monthly income, and for many students who are unemployed or work low-income jobs out of college, this can lower their monthly loan payments but also increase their overall debt obligations over the long haul.
The memo also calls for contracts to be “reviewed on a regular basis through audits of records, systems [and] complaints” and to include “specific customer service standards” which impact the level of compensation that companies receive. For example, failing to process paperwork related to a student’s account, not responding to consumer questions in a timely manner and having a shoddy or unresponsive phone hotline that excessively drops calls or puts consumers on hold for too long can all diminish the total value of a servicer’s contract. Similar Service Level Agreements (SLA’s) are common in many public and private sector contracts, but the loan service industry currently lacks such standards.
In addition, the federal government will publicly release data to public every three months showing how each loan servicer performs in these metrics.