U.S. Alters Rules for Picking Student Loan Servicers

New federal memorandum rescinds previous guidance governing selection of loan servicers, removing some consumer protections.

April 12, 2017
 
Education Secretary Betsy DeVos

Education Secretary Betsy DeVos on Tuesday withdrew guidance issued by the Obama administration aimed at improving the contracting process for student loan servicers.

That guidance, issued by former Education Secretary John B. King Jr. and former Under Secretary Ted Mitchell, directed the Office of Federal Student Aid to consider past behavior of servicers in awarding contracts and to include consumer protections in those contracts. The procurement process was an opportunity to improve the experiences and outcomes of student loan borrowers, King said last year.

DeVos echoed those sentiments in a letter to Federal Student Aid Chief Operating Officer James Runcie. But she said the process had unfortunately been "subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives." That new guidance followed warnings from one industry group that contracts have become too burdensome for servicers of federal student loans.

"We must create a student loan servicing environment that provides the highest-quality customer service and increases accountability and transparency for all borrowers, while also limiting the cost to taxpayers," DeVos added in the letter.

Borrowers make payments on federal student loans to one of several student loan servicers contracted by the department. The largest of those are Navient, Great Lakes Educational Loan Services Inc., Nelnet and the Pennsylvania Higher Education Assistance Agency. The department is in the midst of a procurement process to re-award those contracts. It also last year started a process, announced by Mitchell, to create a single web portal for federal student loan borrowers to use, no matter their servicer.

Weeks after King issued the guidance on servicers' past performance last June, he joined state and federal officials on a July conference call to announce new guidelines for servicers to provide more transparent information to borrowers. Those guidelines were based on a joint statement of principles released by the Department of Education, the Department of the Treasury and the Consumer Financial Protection Bureau in 2015 that focused on access to accurate information and consistent service for students, increasing transparency, and adding accountability for servicers.

The Tuesday letter was the first time DeVos has weighed in on federal student loan servicing policies since she began her tenure at the department. Last month, the department announced it would delay deadlines for colleges to submit appeals of debt-to-earnings ratios under the gainful-employment rule -- a decision many proponents of the rule took as signaling DeVos's priorities on accountability for for-profit institutions.

Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, said the organization was pleased with the July guidelines because they would have implemented several loan servicing recommendations from financial aid officials -- among them, the single web portal for borrowers, removing servicer branding from communications and standardizing consumer testing.

"Whether those commitments are still in play, delayed or off the table entirely is unclear. But I don't see how FSA can provide the 'highest-quality customer service' by abandoning those commitments en masse," Draeger said.

The National Council of Higher Education Resources, which represents servicers, guarantee agencies and collection agencies, wrote to key House and Senate lawmakers last week urging that the awarding of the contract for the borrower web portal be delayed and warning that federal servicing contracts as currently written are not financially viable.

"The servicing of the Federal Direct Loan Program and its portfolio has changed significantly over the last five years; under the current contract, servicers have been required to meet a growing number of new requirements -- many around compliance that have questionable impacts on borrowers and others mandated by the CFPB ‐- without getting adequately compensated," NCHER President James P. Bergeron wrote to lawmakers. "The lack of adequate funding and imposition of new compliance requirements are resulting in fewer services being provided to struggling borrowers."

The department did not respond to a request for comment on whether it would follow through on any of the recommendations from previous guidance, including the creation of the web portal.

American Federation of Teachers President Randi Weingarten, who will join DeVos at a visit to an Ohio public school later this month, said rescinding the Obama-era guidance opens the door for "rogue operators" to win lucrative government contracts.

"If Secretary DeVos were serious about curing America’s trillion-dollar student loan crisis, she would strengthen, not rescind, these protections," Weingarten said. "Instead, she is enabling and empowering bad actors. It’s just another clear example of Betsy DeVos and the Trump administration putting the interests of predatory profiteers over the needs of the little guy -- in this instance, the millions of people trying to go to college or acquire career skills without being crippled by debt.”

Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said the CFPB's lawsuit against Navient has demonstrated that problems with servicers are widespread and their practices can create obstacles to repayment that become costly for borrowers.

"Today’s action by Secretary DeVos could make it easier for the department to hire servicers with a track record of harming borrowers," Yu said. "The Department of Education should ensure that servicers who work for the taxpayer embrace student loan borrower-centric policies and are held accountable when they fall short, rather than rescinding basic rules that assist strapped borrowers."

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