The Department of Education (ED) has scrapped its previously-announced plans to overhaul the student loan servicing system, instead announcing plans to move forward with a new approach that may result in one or more servicers working with borrowers, ED announced Tuesday evening.
"Doing what’s best for students will always be our number one priority," said Education Secretary Betsy DeVos, in a statement. "By starting afresh and pursuing a truly modern loan servicing environment, we have a chance to turn what was a good plan into a great one."
The loan servicing and processing environment would allow for "a more innovative approach" delivering services to borrowers, according to a pronouncement on Federal Student Aid’s "Next Generation Processing and Servicing Environment." ED said the new system would be in place before contracts with the agency’s current nine loan servicing companies expire in 2019.
"The FSA Student Loan Program represents the equivalent of being the largest special purpose consumer bank in the world," said Dr. A. Wayne Johnson, the new chief operating officer of FSA, in a statement. "To improve customer service, we will take the best ideas and capabilities available and put them to work for Americans with student loans. When FSA customers transition to the new processing and servicing environment in 2019, they will find a customer support system that is as capable as any in the private sector. The result will be a significantly better experience for students – our customers – and meaningful benefits for the American taxpayer."
Similar to previous plans to modernize and improve the student loan servicing system, the new servicing environment would provide a single platform for borrowers to access their account information. The new system could also open the doors to more companies through separate acquisitions for database housing, system processing, and customer account servicing, ED said in a press release.
NASFAA’s Servicing Issues Task Force in 2015 recommended developing a central loan portal for borrowers, arguing that borrowers need an accessible "one-stop shop" to manage all of their loans. Ideally, borrowers would be able to access all Direct Loan, FFELP Loan, and Perkins Loan portfolios in one place. The task force also encouraged ED to work with private lenders so those loans could also be included in the database. It is unclear whether ED’s plans would include all different types of federal loans.
NASFAA President Justin Draeger said it’s not unexpected for a new leader at FSA to closely examine federal student loan servicing contracts.
"We applaud the direction the Department is taking to engage with stakeholders to get federal student loan servicing right," Draeger said in a statement. "As always, our highest priority will be ensuring that loan borrowers have a seamless experience that makes loan repayment as easy as possible and we look forward to working with our federal colleagues to make sure that happens."
DeVos in May announced her intent to amend the existing solicitation for a student loan servicing revamp – first released under the Obama administration – to seek out just a single loan servicer, an idea that was unpopular among many consumer protection advocates and Democratic lawmakers who suggested it could decrease accountability. Under this plan, the sole servicer would be selected from the three finalists announced last summer by the Obama administration – Navient, GreatNet Solutions LLC, and Pennsylvania Higher Education Assistance Agency – and would have the ability to subcontract and oversee other loan servicers.
In April, a group of 130 Democratic lawmakers wrote to DeVos to voice similar concerns over customer service and borrower protection after DeVos rescinded several Obama-era policy memos related to strengthening and improving student loan servicing.
The pressure continued to mount in the weeks that followed. Just one day before ED’s announcement on Tuesday, a bipartisan group of senators introduced a bill to derail ED’s plans to move to a single loan servicer.
"Maintaining choice and competition amongst student loan servicers is the best way to ensure they will continue improving services for student borrowers," said Sen. Roy Blunt (R-MO), in a press release on the new bill. "This bill will strengthen the performance-based incentives we have now, and prevent any one student loan servicer from becoming so large it poses a risk to taxpayers."
Draeger said there can be both benefits and drawbacks to using a single servicer or multiple servicers, depending on the situation.
"Building in the flexibility to move loan volume away from an underperforming servicer is important leverage for ED to maintain," Draeger said. "But having a federal agency manage multiple servicers is also laced with administrative challenges. The announcement from ED today leaves room for either of those scenarios. In either case, the key will be to have strong consumer-centric requirements in the contract so borrowers can get the best service possible."
Publication Date: 8/1/2017