ED Outlines New Student Loan Borrower Protections, Servicer Standards
By Allie Bidwell, Communications Staff
Millions of federal student loan borrowers would have expanded protections when it comes to the servicing and repayment of their federal loans under new guidance issued by Under Secretary Ted Mitchell to Federal Student Aid Chief Operating Officer Jim Runcie issued on Wednesday.
The policy directive, which was outlined in a 56-page memorandum, details how the Under Secretary’s office would like to make it easier for borrowers to manage and repay their loans, through five pillars. Mitchell also provides ways FSA should hold servicers more accountable for the information they give to borrowers and how they respond to questions and complaints. The guidance builds on joint principles ED released last fall with the Consumer Financial Protection Bureau (CFPB) and the Department of the Treasury.
Overall, the guidance, which aligns closely with several of the recommendations put forth last February in the final report issued by NASFAA and the Higher Education Loan Coalition's joint task force on Servicing Issues, aims to create “a more transparent and accountable loan servicing system for tens of millions of federal student loan borrowers,” said Education Secretary John B. King Jr. in a call with reporters on Wednesday.
“Servicers are the main touch point for the 40 million Americans working to pay off their federal student loans,” King said. “The bottom line is this: Every borrower deserves access to the right information and resources to manage – and ultimately pay off – their debt. When loan servicers make mistakes, or don’t provide the right information at the right time, borrowers pay the price. I’m concerned that less-than-stellar student loan servicing is tripping up borrowers as they seek to climb the economic ladder.”
Just last week, a group of 10 Democratic senators wrote a letter to King, urging the department to hold loan servicers to a higher standard as it moves forward with its overhaul of the federal student loan servicing system. As ED has previously outlined, the new loan servicing system will be centered around a single loan servicing platform that all federal loan borrowers can use to manage and repay their loans.
The five specific areas that will guide FSA’s implementation of the new system include:
- Economic Incentives: Incentives in student loan servicers’ contracts should be aligned with the best interests of borrowers, the memorandum said. Those incentives should push servicers to keep all borrowers current with their loan payments, while also providing help to borrowers who might be struggling. Moving forward, FSA is instructed to develop a performance-based compensation model for servicers, monitor servicer performance on a regular basis, and penalize servicers not in compliance with their contracts.
- Accurate and Actionable Information: Breakdowns in communication between borrowers and their loan servicers, as well as the rise of fraudulent third-party debt relief companies, have added to borrower distress. This guidance instructs FSA to direct servicers to “designate, train, and appropriately compensate” a specialized group of personnel to help at-risk borrowers who contact them, and to provide proactive outreach to borrowers who might be at risk of default. The framework also provides guidance for servicers to more directly help borrowers through the recertification process if they are enrolled in income-driven repayment plans, and to train a specialized group of staff to help military borrowers with their specific benefits and protections.
- Consistency: The multiple numbers of loan servicers and branded communication has caused confusion for borrowers, which ED hopes to solve through the creation of a single, centralized loan servicing portal. This section of the guidance also outlines more specific guidelines for servicers to provide timely communications related to loan servicing and repayment, and for the development of baseline standards. Borrowers who overpay without giving specific instructions can expect their servicer to apply the payment in a way that saves them the most money, for example. This section also states that all borrower information and websites will be ED-branded.
- Accountability: This section gave additional direction for expanded oversight, including the use of the FSA Feedback System, which allows borrowers to submit complaints, provide feedback, and report allegations of suspicious activity. The new system will allow ED and FSA to more closely monitor suspicious activity and respond to borrower complaints. This section of the guidance also directs servicers to develop their own complaint resolution plans that are “consistent and compatible” with ED’s feedback system, among other borrower rights.
- Transparency: This section of the guidance calls for an expanded publication of aggregate data on student loan and servicer performance. A detailed dashboard of performance indicators would be made available to the public. Servicer-level data would include a filterable dashboard for volume and percentage of borrowers and dollars for loan status, delinquency status, default, repayment cohort, loan type, repayment rate, school, school sector and type, and repayment plan, for example. A separate customer service dashboard would feature aggregate servicer-level data on performance metrics such as average speed of answer, average time to process requests for assistance, average time to resolve account disputes, and more.
“When done well, servicers provide an important line of defense against unnecessary and costly delinquencies and default,” said Sarah Bloom Raskin, deputy secretary of the Department of Treasury, in a call with reporters. “Yet we all know that absent proper supervision … servicers can fall far short of performing these functions well.”
Publication Date: 7/21/2016