New Guidelines on Loan Servicing

Education Department's 56-page memo details new guidelines for student loan servicers.

July 21, 2016

U.S. Education Secretary John King Jr. on Wednesday announced new guidelines that aim to provide more transparent information for borrowers and more accountability for the companies that manage repayment of federal student loans.

The Education Department released those standards in a 56-page memo in coordination with the Treasury Department and the Consumer Financial Protection Bureau. They focus on several areas, but a primary aim is ensuring that loan servicers are providing borrowers with complete information about the kinds of repayment plans they qualify for based on their income levels. Plans to create a single streamlined web platform for borrowers also reflect the goal of increased transparency.

The new student loan protections will be implemented through contracts awarded this year as part of the department's procurement process for several key services. King said the guidelines reflect extensive input from student borrowers across the country as well as consumer advocates and other stakeholders.

“Every borrower deserves access to the right information and resources to manage and ultimately pay off their debt,” he said. “When loan servicers make mistakes or don’t provide the right information at the right time, borrowers pay the price.”

King was joined on a press call announcing the new protections by CFPB Director Richard Cordray, Treasury Deputy Secretary Sarah Bloom Raskin and Illinois Attorney General Lisa Madigan. Madigan said that in Illinois, regulators are seeing the same trouble brewing in the student loan market as in the housing market a decade ago. She said too often loan servicers steer borrowers toward the quickest resolution for payment of their loan, even if they qualify for more affordable income-based repayment plans.

"It's not good for borrowers, their families or our economy," Madigan said. "Servicers must make borrowers aware of and put them into payment plans they can afford."

While servicing of student loans is a less high-profile issue than college affordability, the Obama administration has made improving that area a focus since the Department of Education became the sole originator of federal student loans in 2010. The department has been criticized by advocates for student borrowers for not providing tougher oversight of the companies who provide those services. In March 2015, the administration issued a Student Aid Bill of Rights, calling on multiple agencies to work together to improve the experience of borrowers.

That same month it directed the two agencies to consult with the CFPB, which led to the release of a joint statement of principles last fall on servicing of student loans agreed to by the Department of Education, the Department of the Treasury and the Consumer Financial Protection Bureau.

That framework committed the agencies to getting borrowers information they need to avoid default, providing protections so that borrowers are treated fairly and creating tools to hold loan servicers accountable for their behavior. The memo released Wednesday spells out how those protections will take shape, including increased monitoring by the department of complaints from an online feedback system launched this month.

The department earlier this month announced that a pilot program in which the agency used less aggressive methods resolved defaulted student loan debt at a lower rate than a control group made up of private contractors.

The American Federation of Teachers said in a July 15 letter to the department that too often members report student loan providers are failing to carry out the tasks of providing accurate, consistent and transparent information to borrowers. The organization also praised the department’s decision to develop a single online servicing platform for borrowers. But AFT said the finalists to develop the platform have a history of “widespread servicing failures.”

The Student Loan Servicing Alliance, which represents loan servicers for federal loans, did not respond to a request for comment on the guidelines. The Pennsylvania Higher Education Assistance Agency, one of those loan servicers, referred questions back to the Office of Federal Student Aid in the Department of Education.

Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, said the guidelines reaffirm the Department of Education’s commitment to a single student loan web portal, transparency in provider practices and timeliness of communications.

“These are all very positive things, and they align with recommendations we made [last year],” he said.


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