Borrowers: A new way to repay your student loans is coming. Eventually. The downfalls of the current system have been well documented; it’s complex and downright annoying for borrowers to navigate and expensive for the federal government to administer. An effort to create a new repayment platform began in 2014, but six years later, it’s still not close to becoming a reality. Though the federal government often runs at a glacial pace, the process of revamping the way that 35 million federal student loan borrowers repay $1.2 trillion in debt has proved to be a Sisyphean task. The main reason? Industry has thrown its weight behind maintaining the status quo.
This column provides a brief narrative of how the government has tried to reform the repayment system, as well as a detailed timeline of its efforts and the forces that have stood in the way. The winding path to a new repayment system is not easy to follow and spans court documents, federal procurements, and federal legislation, but this column elucidates everything that goes into such a big, structural change—and all that consumers stand to lose if others stand in the way.
What the current repayment system looks like
Under the current repayment regime, borrowers interact almost entirely with their loan servicer to manage their accounts. Each servicer maintains its own website, proprietary back-end software, customer service training programs, protocol for counseling borrowers, analytics, and outreach strategies. When borrowers switch servicers, their account and all of the information attached to it must be correctly transmitted and set up in the new servicer’s system—a process that requires significant manual processing. The borrower needs to similarly learn to navigate the new system and set up a new login and payment account. Even worse, when a borrower defaults, their account goes through multiple handoffs, pinging from a servicer to a default management company to at least one private collection agency (PCA). Should the borrower resolve the default, their account goes back into regular servicing, and the process starts all over again. The system is not only complex and expensive, but it also may have a real effect on delinquency and default rates.
The system doesn’t do the federal government any favors, either. The Office of Federal Student Aid (FSA), which manages the loan program, enters relationships with servicers and PCAs through contracts, which are the primary vehicle for procuring external work across the federal government. These relationships aren’t uncommon: In 2018, taxpayers provided about $550 billion in payments to contractors, which accounted for 40 percent of discretionary spending.
Though contracts can be a good tool for binding private entities to a set of practices, they are difficult to manage in a way that provides consumers with consistency and transparency. One of the major challenges is that FSA lacks access to servicers’ and PCAs’ back-end information systems, which are owned and maintained by the companies. Should FSA require information, it must put together a detailed request and, in some cases, pay for the extra work the contractor must perform. Perhaps worst of all, a system in which servicers operate with relative autonomy makes it extremely difficult for FSA to terminate relationships with any servicer, as the transfer of several million borrower accounts would create massive disruptions for borrowers and open up the potential for errors.
Oversight is an additional challenge. Audits require teams of FSA staff to conduct site visits with contractors to look into individual borrowers’ records to determine if processes are being performed correctly. With more than 20 servicers and PCAs in the system and contracts lasting in excess of a decade, work on the repayment system alone requires significant funding and staffing, which FSA unfortunately lacks. The office, which manages every aspect of the student aid programs, from the Free Application for Federal Student Aid to school support, has roughly the same number of staffers as the Food and Nutrition Service and is smaller than the Consumer Financial Protection Bureau and Government Accountability Office (GAO).
The long path toward reform
The Obama and Trump administrations have engaged in efforts to reform the system, including one to launch a single website where all 35 million Direct Loan borrowers will manage their accounts, make payments, and apply for repayment programs. FSA will finally be able to govern, track, and compare servicers’ behavior under this new regime, called the Next Generation (NextGen) Financial Services Environment, in its current iteration. NextGen will create a single phone number, e-mail, and mailing address for communications, and borrowers will receive consistent communications no matter which servicer was assigned their account. It will also allow programs to be rolled out more quickly, instead of FSA having to communicate and manage implementation across multiple systems and servicers.
NextGen would still allow for multiple servicers and debt collectors, but it would provide big benefits for holding them accountable. Under a single portal, FSA will be able to more easily boot poor-performing contractors from the system with minimal disruption to the borrower, as the account will only need to be assigned to a new entity rather than completely transferred. Finally, borrowers who default on their debts will not be siphoned off into a different system; they will still be able to manage their account and speak with a customer service representative through the same system where they managed their loans while in repayment.
If NextGen sounds like a big shake-up, that’s because it is. Though there is bipartisan support for NextGen, and many of the changes in it have been on the wish lists of consumer advocates—including former President Barack Obama and Sen. Elizabeth Warren (D-MA)—for years, industry has tried to stand in the way of reform.
Outsize industry influence in the repayment system
NextGen is happening now, because contracts for all nine loan servicers are due to expire, thus new ones must be put into place. Servicing and collections contracts can last up to 12 years and collectively pay out hundreds of millions of dollars per contractor, which puts huge stakes on getting one. In this case, not only does a new repayment system require servicers to change up their business practices, thus costing them money in the short term, but it also means that entities could lose contracts altogether, potentially leading to significant blows to revenue, job losses, and even the termination of operations.
The Competition in Contracting Act (CICA) of 1984, which requires “full and open competition” for federal contracts, further burdens new proposals. CICA opens the door for all manner of protests and lawsuits by entities shut out of new awards, which often result in what one federal judge called a “firehose approach” to protests—that is, PCAs in particular protest on just about every grounds imaginable, hoping that one will stick and prevent a solicitation from going forward. While FSA has some contracting flexibility due to its status as a performance-based organization, it is not immune to challenges, which can take years to resolve. As more than 50 companies have been involved in servicing and collections over the past decade, it is all but guaranteed that any proposal from FSA will be met with protests and lawsuits, especially as FSA attempts to become more efficient and thus award fewer contracts.
Where things stand now
Since 2014, there have been countless protests with the GAO to stop NextGen. More than a dozen servicers and PCAs have taken FSA to court, with some mixed results—and a big price tag—for the government. But finally, everything seems to be coming to a head. The contract for the NextGen website is moving forward; the GAO has denied every servicer and PCA protest over the past year; and in the past month, a suit from two loan servicers has been settled, and the PCAs lost a major court battle. Now, the path seems clearer than ever for NextGen to move forward, though many roadblocks could crop up over the next year, including political posturing to claim credit for the system and additional protests from industry.
The timeline that follows notes many of the major landmarks in the path to a new repayment system. Though NextGen is not a done deal, the pressure is on to get contracts awarded and work started on the back end of the system. Should the plan be stopped for legal or political reasons, it will throw a wrench in all of the progress that has led to this point. The clock will not only restart, but due to time constraints on the current contracts, any hope for a new repayment system could be dashed, locking in the current system for another decade. Borrowers and taxpayers can’t afford that. With 1 million borrowers defaulting every year, a big change needs to happen now.
FSA awards 11 small-business debt collectors with contracts that can extend to up to 12 years.
FSA solicits market research for a new loan servicing system.
FSA announces it will “wind down” involvement with five of its 22 PCAs—Coast Professional, Enterprise Recovery Systems, National Recoveries, Pioneer Credit Recovery, and West Asset Management—based on an inspection that revealed they were misleading borrowers.
- FSA reverses its decision to wind down contracts for two of the five PCAs, Coast Professional and National Recoveries, citing that the companies took “corrective action.”
- FSA awards two-year contract extensions to five large PCAs: Windham Professionals, GC Services, ConServe, Account Control Technology and Financial Management Systems. Four debt collectors—Coast Professional, National Recoveries, Enterprise Recovery Systems, and Pioneer Credit Recovery—whose contracts were not extended file suit.
The U.S. Department of Education, U.S. Department of the Treasury, and Consumer Financial Protection Bureau release a joint statement of principles for loan servicing.
The Education Department releases a report detailing recommendations for an improved loan system.
- FSA cancels the existing large PCA solicitation and issues a new one.
- Congress passes the Consolidated Appropriations Act of 2016, which requires FSA to use common performance metrics to allocate new student loan borrower accounts among the Title IV Additional Servicers—Great Lakes, Navient, Nelnet, and the Pennsylvania Higher Education Assistance Agency (PHEAA)/FedLoan Servicing—and the nonprofit loan servicers, which were brought into the system later.
- A single web portal through which all loan borrowers can manage their accounts
- Standardized, Education Department-branded communications
- Common, consistent, and high-quality customer service standards
- Improved oversight of the portfolio and stronger accountability for loan servicers
- A single servicing platform owned by FSA through which all servicers and other vendors will be able to plug in
- Then-Undersecretary of Education Ted Mitchell publishes a policy memorandum that details the Education Department’s vision for the new loan servicing system.
- A federal judge determines that protests filed by two PCAs in March 2015 are valid.
FSA selects three bidders to move forward to the second phase of the solicitation process. The offerors selected are the three companies that own existing servicing platforms: GreatNet, a merged entity of Great Lakes and Nelnet; Navient; and PHEAA.
Donald Trump is elected president.
FSA awards contracts to seven large debt collectors, which launches a series of protests. This is somewhat expected, as 48 companies initially submitted proposals and 17 had current contracts.
Betsy DeVos is confirmed as secretary of education.
- Secretary DeVos cancels three Obama-era policy memos, including the Mitchell memo and an addendum, as well as a memo from former Secretary John King.
- FSA amends an Obama-era servicing solicitation to make way for a single loan servicer and removes several consumer-friendly features.
- FSA extends the award terms for two of its current PCA contracts, Alltran, formerly Enterprise, and Performant.
FSA Chief Operating Officer (COO) James Runcie resigns over disagreements with Secretary DeVos.
A bipartisan group of senators raises concerns over the amended servicing solicitation.
- Wayne Johnson is named the new COO of FSA.
The amended Obama-era solicitation and its amendments are scrapped by FSA, which announces plans for a new model.
Johnson describes preliminary plans for the servicing solicitation at an FSA conference.
- FSA solicits market research for NextGen.
- FSA cancels the awards for the seven PCA contracts it awarded in December 2016, replacing those contracts with new ones with two large vendors, Performant and Windham Professionals.
Congress passes the omnibus spending bill requiring multiple servicers compete for accounts based on their performance.
Contractors submit their proposals for NextGen.
Eight PCAs file suit against FSA for its cancellation of the large PCA solicitation.
- A federal judge enjoins FSA from canceling PCA solicitation, which means current awards stand.
- The Consolidated Appropriations Act of 2018 makes funding for NextGen available only if certain requirements are met, including having servicers manage “a unique portfolio of borrower accounts” and basing awards off past performance.
- FSA selects nine offerors to move forward in NextGen. The vendors include current servicers Edfinancial Services; Navient, teamed with General Dynamics Information Technology; Missouri Higher Education Loan Authority (MOHELA); Nelnet; Oklahoma Student Loan Authority; PHEAA; Utah Higher Education Assistance Authority, commonly called Cornerstone; and newcomers Teleperformance and Trellis Co.
- PCA FMS Investment Corp. files a suit against FSA, claiming the specifications for the second round of NextGen illegally bundle servicing and collections work. Several others follow.
Navient sues FSA over NextGen solicitations, stating amendments to the solicitation process precluded it from fairly competing for an award.
The Education Department cancels NextGen solicitation due to lawsuit and new appropriations requirements, promising an amended solicitation within a month.
- Two current nonprofit loan servicers, MOHELA and Granite State Management and Resources (GSMR), sue the Education Department over new NextGen solicitations.
- Mark Brown is named COO of FSA, taking over from acting COO Jim Manning.
- FSA cancels the 2016 large PCA solicitation.
- President Trump includes a directive in an executive order for the Education Department to explore “reforming the collections process for federal student loans.”
FSA awards a contract of up to eight years and $577 million to Accenture to build the NextGen repayment portal.
FSA issues no-cost extensions to existing nonprofit loan servicers, whose contracts were due to expire. Contract extensions for all servicers are likely until NextGen goes live.
- MOHELA and GSMR withdraw their suit against FSA and NextGen.
- Debt collectors lose their suit against FSA.
Colleen Campbell is the director of Postsecondary Education at the Center for American Progress.