Warren Blasts Education Dept. on Loan Servicing Contracts

September 11, 2014

Senator Elizabeth Warren, the Massachusetts Democrat who has been a leading critic of how the U.S. Department of Education oversees the companies it hires to service federal student loans, indicated Wednesday that she is not satisfied with the department’s effort to overhaul its agreements with those companies. Under pressure from Senate Democrats like Warren, as well as many groups representing students, labor unions, and consumers, the Education Department announced last month that it had renegotiated new contracts with the four main entities it hires to manage payments for federal student loan borrowers.

The new contracts change the payment structure for loan servicers, increasing the rate at which they are paid for accounts in good standing and reducing the amount of money they are paid for delinquent accounts. The servicers will also receive new bonuses if they keep their borrowers’ delinquency rates at certain levels.

At a Senate hearing Wednesday, Warren grilled an Education Department official over the new contracts, asking why the loan servicing companies would be paid more to manage the payments of borrowers in good standing. She cited analysis by Compass Point that showed that Navient, the loan-servicing business that was previously part of Sallie Mae, stood to receive an additional $20 million under the payment structure without making any changes to the health of their portfolio.

Navient has drawn particular scrutiny from Warren and other student and consumer groups. Federal prosecutors earlier this year accused the company of overcharging military service members. It entered into a multimillion-dollar settlement with the Department of Justice, in which it did not admit any wrongdoing.

William Leith, the chief business operations officer for the department’s Federal Student Aid office, said that while the department estimated that the servicers, in aggregate, would receive more money to service loans, the contracts were designed to help borrowers. He said that the Education Department was on track to complete a 120-day review of whether any of its loan servicers, including Navient, had illegally overcharged service member borrowers. That review will be completed in the next several weeks, he said. 

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