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Ed Dept. Defends Loan Servicing

March 28, 2014

WASHINGTON -- A top Education Department official on Thursday faced tough questions from several Senate Democrats over how the department oversees the companies it hires to manage the payments of student loan borrowers.

Testifying before the U.S. Senate’s education committee, James Runcie, the chief operating officer of the Federal Student Aid office, defended how the agency contracts with loan servicing companies.  

Some lawmakers and consumer advocates have said that the department does not do enough to make sure the companies are helping struggling borrowers.

Runcie said that the department’s model for measuring how well its servicers are performing has worked well. The department uses a performance formula to dole out federal student loan accounts to its four main servicers.

The metrics in that formula -- which include data about loan defaults and satisfaction surveys of borrowers, colleges and department employees -- have all improved since the four-servicer program began in 2009, according to Runcie.

“That’s not saying that there aren’t instances where we could improve our oversight or the customer service operations,” he said, adding that “the performance-based contracts have been helpful in dictating behavior at the servicers.”

Those servicers’ contracts expire at the end of June, but the department last fall announced that it plans to extend the contracts. Under the terms of the contract and federal procurement rules, the department is now able -- but not required -- to continue working with each of the servicers in one-year increments through July 2019, a department official confirmed Thursday.  

Senator Tom Harkin of Iowa, who chairs the Senate Committee on Health, Education, Labor and Pensions, and Senator Elizabeth Warren of Massachusetts both pressed Runcie specifically about the department’s contract with Sallie Mae, one of the four main servicers.

Harkin said that he continued to hear negative comments from borrowers about Sallie Mae. Warren pointed to the company’s previous settlements with the federal government and the three federal agencies investigating the company over its loan servicing practices.

“We strictly monitor their compliance to the contracts,” Runcie said. “And we’re very open to looking at those contracts and seeing if there’s additional terms and things we should put in there.”

He explained to lawmakers that the department’s plan to extend the contracts of Sallie Mae and the other companies was based on “a number of different things,” including the servicers' performance thus far.

The department also considered the potential “dislocation” of borrowers if they did not continue the contract, according to Runcie.

“We would have to transfer 24-plus million borrowers if we didn’t extend the terms of the TIVAS' contracts,” he said, using an acronym to describe the department's four main servicers.

Neither Harkin nor Warren appeared satisfied with that answer.

"It sounded like your answer, Mr. Runcie, was that they're too big to fail,” Harkin said.

"The actions you’re taking and the oversight that you’re exercising has obviously not been enough to correct the problem,” Warren said. "I'm very concerned about re-upping a multimillion-dollar contract with Sallie Mae, when Sallie Mae has demonstrated time and time again that it’s not following the rules.”

Sallie Mae and the other three main servicers -- Nelnet, Great Lakes, and the Pennsylvania Higher Education Assistance Agency -- turned down an invitation to appear at the hearing, according to Harkin.

In an email, a Sallie Mae spokeswoman, Patricia Christel, said the company was “a committed partner in the shared mission of borrower success.”

“Our service helps more student loan borrowers avoid defaults, enroll in income-based repayment programs, and avoid the extra cost of postponing payments," she said, pointing to data the company released last week. “The competitive contract model is yielding improved service for customers.”

Income-Based Repayment

Runcie also provided more data on Thursday about the Education Department’s outreach campaign last fall to get more borrowers to enroll in federal income-based repayment programs, which cap monthly payments as a percentage of their income and provide loan forgiveness after 20 or 25 years.

As a result of the department’s six-week effort that involved emailing three million borrowers directly, “almost 150,000” borrowers have applied for income-based repayment, Runcie said. The department said it had targeted its email blast to borrowers whom it believed would benefit most from the programs. Only about 30 percent of those borrowers viewed the department’s email in the first place, according to Runcie’s written testimony.

Runcie told lawmakers that the response rate was a “very high number” based on industry standards for similar mailings. He added that while income-based repayment plans are useful for many borrowers, they are not the right fit for every borrower.

Thursday’s hearing was the latest in a series of hearings the Senate education committee is holding on the reauthorization of the Higher Education Act. Harkin has said that he wants the panel to approve a draft bill by late spring or early summer.

Senator Lamar Alexander, the panel’s top Republican, has said he wants to draft a new Higher Education Act from “scratch,” to weed out what he views as layers of unnecessary requirements and regulations on colleges.

Representative John Kline, the Minnesota Republican who chairs the House education committee, told Politico this week that he was hopeful for movement on reauthorization of the HEA by the end of this year. 

 

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