Changes to the future of student loan servicing


On Thursday, the House Oversight Committee convened a hearing to address major errors within the Office of Federal Student Aid (FSA). Foremost on many committee members’ minds were questions about how FSA plans to manage its student loan servicing contractors going forward. Concern grew after Secretary of Education Betsy DeVos announced earlier this year that she would rescind memos from her Obama-administration predecessors detailing ways FSA should improve the student loan servicing system. Her decision raised alarms that the Department of Education may scrap the entire process or start anew. But when FSA followed through last Friday with changes to the already-underway contracting process, they didn’t seem nearly as significant as DeVos’ actions originally suggested.

The Biggest Change: One Servicer (with a potentially bad track record)

The biggest perceived change to the plan announced on Friday would move the system from a single platform that relied on multiple servicers to a single platform with a single servicer.  Instead of employing multiple additional companies to service student loans as the Obama Administration had originally contemplated pursuing in a second round of contract work, President Trump’s Education Department now plans to award just one large contract to develop the platform and service loans. (The servicer that gets that contract would be able to subcontract with other servicers to help meet capacity needs, however.) This move could actually be good news for borrowers, who will likely see more consistent, streamlined servicing. And it’s not a total departure from the Obama-era plan, which left the door open to future procurements for secondary servicers, but relied at least initially on a single servicer.

But it’s not without risk. In recent years, some federal student loan servicers have been accused of seriously neglecting their charge to help borrowers manage their debt (and one still in the running for this massive new contract even noted its obligation wasn’t to act in borrowers’ best interests).  Given the poor track record of many of the existing servicers on ED’s payroll, the Obama Administration decided that promises to do better simply weren’t enough. Then-Secretary John King instructed FSA to take a company’s past performance into consideration when deciding whom to award future contracts. That was one of the memos Secretary DeVos withdrew this year, paving the the way for an allegedly irresponsible company to take the wheel as the sole federal student loan servicer.

Moreover, some have argued that the single-contract model will weaken the Education Department’s (ED) ability to hold its servicer accountable, poor past performance or not. But the devil will be in the details. On the one hand, rather than managing up to ten different companies, ED will only have to directly oversee one–and they’ve set forth stricter requirements and expectations for that servicer and any of its subcontractors.  ED will also own the platform once it’s constructed, allowing it to sub in another servicer if the one that wins the contract proves not to be up to snuff. Depending on how involved any subcontractors are in the process, this organizational structure could mitigate some of the concern that awarding a single contract sets the stage for a flop. If subcontractors serve as understudies working closely with the primary contractor, there would be easier transitions in the event that the primary servicer’s contract needs to be terminated. On the other hand, it’s possible that switching to a new company could create additional disruptions and hiccups for borrowers. And student advocates fear an ill-fated arrangement that is too-big-to-fail. A single-servicer model used in the early days of the Direct Loan program presented some of these problems for ED.

So all told, it’s difficult to glean any firm conclusions about the effectiveness of this arrangement in the abstract. Whether it will actually improve oversight, as the Trump Administration has claimed, will depend a great deal on which company is selected, how that servicer performs as a middle manager for its subcontractors, and most importantly,  ED’s willingness to hold its servicer to the clear expectations it’s set.

Lower Service Levels Required for At-Risk Borrowers

Another change–to no longer require certain elements of high-touch servicing and special outreach to vulnerable borrowers–will almost assuredly affect how some fare in repayment.

The Obama Administration’s proposed plan would have required the servicer(s) to provide proactive, high-touch outreach to certain borrowers at-risk for default: those who had previously defaulted, who requested a forbearance, or who failed to complete their program of study (non-completers are three times as likely to default on their loans as completers). But revisions to that plan from the Trump Administration limit–or eliminate altogether–those requirements for the servicer.

For example, the servicer would previously have been required to make a call to high-risk borrowers within fifteen days of a missed payment; now, that requirement is for a call within thirty days. Furthermore, the new contract will significantly reduce the number of calls that a servicer must place overall. Instead of 30 outgoing calls before a borrower is placed in default, the servicer will need to attempt contact with an at-risk, delinquent borrower just 24 times over the course of a year of missed payments. But that runs counter to evidence that delinquent borrowers are harder to reach, and impossible to help without a conversation; for instance, Navient, one of FSA’s current contractors, has reported that extra outreach to delinquent borrowers to help them enroll in income-driven repayment plans increased successful enrollment in those plans by 50 percent. For severely delinquent borrowers, it was even higher–62 percent.

To make matters worse, the content of this communication isn’t as clearly dictated in the new version of the servicing plan. The contractor will no longer be required to direct at-risk borrowers to a trained representative who specializes in delinquency and default. Nor does the new version of the procurement require  the servicer to directly provide at-risk borrowers with a copy of the application form to enroll in income-driven repayment (IDR) plans, which can lower monthly payments for borrowers and keep them from falling behind; instead, they will only have to inform at-risk borrowers of the option. Under the original terms of the contract, servicers would also have had to provide a preset call option for borrowers to select IDR as a topic of interest for incoming calls, make two attempts to reach a borrower prior to when his annual IDR recertification is due, and issue a “payback playbook” to all borrowers explaining IDR and other payment plans in more detail when they sent their monthly balance statement. Under the new version, those provisions are all struck.

To be sure, reducing the required outreach on IDR may not necessarily have a drastic impact on most borrowers — those who enroll in IDR plans will still hear from their servicer, and the company remains accountable for helping them stay enrolled in the program. For example, the servicer will need to send notice of IDR recertification 95 and 45 days prior to the deadline, and will need to inform all borrowers about IDR over the course of three pre-repayment calls (or 6 attempts). But the high-touch provisions that have been removed were designed to correct big problems for those at-risk of slipping through cracks in the program: While major gains have been made in the number of borrowers enrolled in IDR, a jump of about 10 to 24% from 2013 to 2016, many vulnerable borrowers are still not taking advantage of these protections. A CFPB report released last week found that of a sample of borrowers who had previously defaulted on their loans and since rehabilitated, just 10 percent were subsequently enrolled in IDR. And even among rehabilitated defaulters who were enrolled in IDR, the report found a small but significant percentage defaulted again. This is likely because requiring borrowers to recertify their income annually to enroll in IDR can be a major snag for the student–among the overall population, over half fail to recertify their incomes on time. Those challenges won’t be easily addressed, and eliminating some of the servicer’s responsibility for keeping on top of the most vulnerable borrowers’ needs won’t help.

Private Loans, Spanish Translation and Borrower Feedback

In addition to overarching changes to the structure of student servicing, a number of smaller provisos would also be removed, apparently to reduce the cost of servicing federal student loans. But while every change is consequential, most constitute a comparably small trade-off and likely won’t jeopardize the core effort of improved servicing.

For instance, the move to reverse the previous prohibition on servicers speaking about commercially held loans with borrowers could be cause for concern. At worst, this revocation could open the door for the servicer to benefit financially from other loan products. Another measure mandating that information provided on the servicer’s website, phone line, and social media be available in Spanish was also revoked, introducing some obvious challenges for borrowers who can fill out the FAFSA in Spanish but can’t necessarily navigate loan repayment in their native language.  Other provisions, like inviting borrowers to provide regular feedback to a servicer and incorporating user testing into future communications and services were also struck. In the end, the high-touch servicing and some of these added components were likely some of the more expensive services (outside of core obligations), so if the goal is to trim budgets, continuous quality improvement is an unsurprising place to cut. Unfortunately, while removing borrowers’ input could save money in the short-term, it may ultimately reduce productivity and effectiveness.

Taken together, the numerous changes to the student loan servicing contract introduce some added uncertainty as to whether borrowers will get the help they need going forward. But the true implications will be tough to assess before they take effect.