Federal student loan servicers manage nearly all aspects of student loans. They process payments, enroll borrowers in repayment plans, and are often the first line of contact for borrowers in distress. After years of creating their own policies, these servicers are in for some much higher federal standards in the future—that is, if politics does not get in the way.
In October, the U.S. Department of Education unveiled the latest set of requirements in its ongoing process to select new companies to service the loans of tens of millions of federal student loan borrowers once the current contracts expire in 2019. The standards are voluminous: There are more than 4,000 new rules in a massive spreadsheet that govern every aspect of the loan servicing process, covering topics from acceptable paperwork processing times to the stationary that borrowers receive in the mail.
These requirements implement the ambitious vision for student loan servicing outlined in a July 2016 memo from U.S. Department of Education Undersecretary Ted Mitchell. This memo lays out the federal expectation that servicers must be active guides that help borrowers navigate their way out of debt. The document also suggests a change in how servicers will be judged. Under the new requirements, they would be evaluated not only on their borrowers’ outcomes but also on whether they are reaching out to and communicating with borrowers as clearly and effectively as they should be. This way, borrowers no longer receive unclear and inconsistent information.
The consumer-friendly change most visible to the average borrower will be a single online platform to find information and submit materials, instead of the multiple sites run by individual servicers seen today. But the newly released requirements go much further, demanding that servicers identify at-risk borrowers and take steps to reach out to them—in some cases, even before they miss a payment. They also clarify how often and how quickly servicers must communicate with borrowers about their options or upcoming deadlines at various stages of the repayment process.
If implemented, the prescriptiveness of the new standards would address many of the concerns about federal student loan servicing raised by the Consumer Financial Protection Bureau, members of Congress, and consumer advocates. These concerns include insufficient customer service, payment processing delays, and failures to disclose repayment options that could save borrowers from default. As a result of this poor servicing, some borrowers lost benefits, became overwhelmed by an increase in their monthly payments, and slipped further into debt.
Unfortunately, it’s unclear if this ambitious vision will come to fruition. While the U.S. Department of Education already selected three finalists to serve as the main servicer—Navient; GreatNet Solutions LLC, which is a collaboration between Great Lakes Educational Loan Services Inc. and Nelnet; and the Pennsylvania Higher Education Assistance Agency—the department also said it is unlikely to choose a winner until the spring, after President Barack Obama leaves office. This means that the Trump administration could pursue a new direction, which is a distinct possibility given recent interest from higher education banks in finding ways to direct more money to their own pockets ahead of students. So with no clear indication of what the incoming administration intends to do in the higher education space, the future of these requirements is unclear.
Despite this uncertainty, there is still a very real chance that the requirements laid out by the department end up governing the interactions between borrowers and their servicers for years to come, specifically in four key areas: borrower communication; student loan allocation; student loan discharges; and accountability.
One of the main goals for the department’s new servicing plan is to create additional requirements for serving borrowers at a high risk of default or nonrepayment. The new standards provide greater insight into how this might look. This starts with the process of identifying borrowers. The new system would require servicers to meet with the Office of Federal Student Aid, or FSA, on a quarterly basis in order to identify borrowers in need of increased contact, or “higher touch.” These borrowers are typically individuals facing financial hardships or at greater risk of default. Each quarter, these high-touch borrowers would be pulled from three distinct categories:
- Those who had not completed their program of study
- Those who were enrolled in discretionary forbearance for more than nine months in the previous year
- Those who rehabilitated or consolidated one or more student loans out of default within the past year
For those high-touch borrowers, there are explicit guidelines that dictate when and how often a servicer must reach out to them. For example, for high-risk borrowers fewer than 15 days delinquent, servicers must make at least one successful telephone contact or two attempts to call the borrower before the borrower reaches 30 days of delinquency. By contrast, a nonhigh-risk borrower—a borrower that has not missed payments and is current on the loan—will receive a notice, via mail or email, that a payment is past due as opposed to a phone call.
And it’s not just high-touch borrowers whom servicers will need to interact with differently. The requirements set clear time frames for how long servicers have to process applications and get various types of information out to borrowers. For example, if borrowers apply for an income-driven repayment plan—an option that ties borrowers’ payments to how much they earn—but forget to fill out a section of the application, servicers will have one business day to notify them and 25 days to send a follow-up notice. This is crucial because quick, clear notification of application errors and missing information could mean the difference between borrowers obtaining relief or shouldering payments they cannot afford.
The new requirements will also change borrowers’ perceptions of whom they are talking to when they reach out for help on their loans. Currently, servicers can use their own company name and branding when communicating with borrowers, simply noting they are working on behalf of the Department of Education. This can create confusion because even if servicers note that they are working on behalf of the department, it is not always clear to borrowers that the servicer is representing the government. The new requirements fix this problem: All emails and letters that servicers send to a borrower must have the Department of Education logo and FSA-approved branding. In addition, if a servicer calls a borrower, “Dept. of Ed.” will display on the borrower’s caller ID, and all email correspondence from a servicer must come from a “.gov” address. All this is being done in order to ensure that communication is consistent and clear and that the borrower has no question that information received is on behalf of the Department of Education.
Student loan allocation
One of the biggest questions about the new servicing proposal is how loan volume would be divided between the winner of the initial contract and the other companies that currently participate as servicers. The new requirements state that the primary servicer will get a steady 15 percent of new borrowers who enter the system. The remaining 85 percent will be divided between what the department calls “contact center providers.” These entities seem to perform functions very similar to servicers in that they will be in charge of handling direct communication with borrowers, such as incoming and outgoing calls, chat sessions, and emails. Loans will be assigned to these contact centers based on the following factors:
- Percentage current or fewer than 31 days delinquent (10 percent)
- Percentage 91 to 270 days delinquent (10 percent)
- Percentage 271 to 360 days delinquent (15 percent)
- Percentage of defaulting borrowers more than 360 days delinquent or who were sent to a debt collection agency (15 percent)
- Borrower surveys (25 percent)
- Quality of customer service determined via FSA monitoring (25 percent)
These metrics are similar to the way new student loans are currently allocated to servicers, so if this system does not move forward, it’s up in the air if business will continue as usual or if the new administration will pursue a different direction.
Student loan discharges
The new rules also clarify the role that servicers will play when borrowers attempt to discharge their loans. This matters because many students who attended schools that have shut down or defrauded them have yet to apply for the relief they are eligible for—likely because they are unaware that they are eligible to get their student loans discharged in the first place.
The new system would call on servicers to proactively identify and contact students who are eligible for closed-school discharges. The servicers will be required to monitor a government database on a monthly basis—the Postsecondary Education Participants System, or PEPS—to identify schools that have closed. Then, servicers would have to find borrowers who attended those institutions and who may be eligible for the closed-school discharge based on factors including the dates during which they attended the defunct college. The servicers will be expected to send those borrowers written notice with the discharge application included and instructions on how to apply.
After receiving notice, the borrower could go to the new servicing portal, fill out the discharge paperwork, and submit it online. The servicer would then make a pre-determination of eligibility for the FSA on the request. If the FSA issues a denial, the servicer must inform the borrower within five days and make clear that the borrower has the right to reapply.
The new requirements also lay out a new, detailed “compliance management system.” As a part of that system, the servicer would monitor all operational activities—including calls, chat sessions, emails, processing, payment applications, adjustments, and social media—to ensure that all activities are operating the way they should. Also, an independent audit must be conducted at least annually and the results reported to the FSA within a month. The requirements do not detail what would be included in the audit or what would be considered a mistake, but if an audit of borrower records reveals errors exceeding 4 percent of the materials reviewed, the servicer will be required to implement a corrective action plan. That plan would need to rectify the uncovered mistakes and address how the servicer planned to avoid making them again.
This compliance audit process appears very similar to the way that the Department of Education already approaches oversight of federal financial aid dollars that go to for-profit colleges and universities. This includes elements such as setting targets for acceptable error rates, which if tripped, result in greater scrutiny. Unfortunately, as a prior Center for American Progress review of college audits showed, if this process focuses too much on catching small inaccuracies, it will miss bigger-picture problems. For example, student loan servicers already undergo audits from the FSA, yet borrowers have still complained of poor customer service and misinformation. So going forward, the FSA should not only pay attention to how accurately each servicer is processing the information but also to how well the servicers are actually communicating with and helping borrowers in need.
These requirements are a step in the right direction. They set clear guidelines on accessibility and emphasize proactive communication. Importantly, they place a much-needed emphasis on compliance and quality assurance and set clear rules for the type of service that borrowers can expect.
Looking forward, however, it is imperative that the Trump administration advance this initiative and work with both servicers and advocates to implement these requirements in a way that will hold servicers accountable and decrease the number of borrowers that land in default. These new requirements lay a clear path to a better system, and with billions of dollars in federal student loan debt on the line, the new administration cannot afford to leave vulnerable borrowers in the lurch.
Sara Garcia is a Research Associate on the Postsecondary Education team at the Center for American Progress.