As the Department of Education (ED) embarks on resuming repayments on federal student loans, it must also contend with the potential exit of additional servicer contracts, all of which are slated to expire at year’s end.
According to experts the potential for all servicers to end their contracts during the ongoing negotiations is unlikely, but the process of moving a significant portion of borrowers to new servicers creates an additional hurdle for the department to contend with as it aims to ensure that borrowers are successfully put into repayment.
While Richard Cordray, Federal Student Aid’s (FSA) chief operating officer, recently doubled down on the department’s effort to ensure that borrowers are transitioned back into repayment, he acknowledged that the effort would be a significant challenge.
“After January 31 of next year – approximately four months from now – repayment will restart for more than 25 million borrowers,” Cordray said. “This is a defining moment, and it is important that we get it right.”
He also remarked on the ongoing status of negotiations over servicer contracts in which Cordray will seek to garner new performance and accountability metrics among the agency's top objectives.
“Some servicers have decided to exit the program rather than contend with these new realities,” Cordray said in regards to a pair of recent servicer exits. “Others have caught the spirit of what we are intending and have embraced a new normal of ‘putting borrowers first.’ We will work closely in partnership with our servicers to make sure we deliver quality service to everyone who faces the prospect of repaying their student loans.”
According to Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center®, Pennsylvania Higher Education Assistance Agency (PHEAA) and New Hampshire Higher Education Association Foundation (NHHEAF) have stated the reason they are not renewing their contracts is due to the complicated nature of the repayment programs.
“There's going to be things that have to be negotiated in this renewal in addition to seeing where these 10 million borrowers get placed,” Yu said, pointing out that with the current servicer exits nearly a third of federal student loan borrowers will need to be reassigned servicers before repayments resume. “We hope that this contract renewal winds up with some good consumer protections and protections for borrowers but... we haven't seen it yet.”
As the contract negotiations continue Cordray has begun to amplify messaging over what the transfer process means for borrowers but it is not yet clear who borrowers will end up with as their servicer when payments resume.
“With the repayment pause coming to an end and servicers still making decisions about their contracts, uncertainties are looming for federal borrowers,” said NASFAA President Justin Draeger. “We urge ED to use this final extension of the repayment pause to ensure that borrowers are held harmless as this transition back into repayment begins.”
Draeger added that NASFAA is particularly concerned about the 10 million borrowers who will be transferred to an existing servicer in the near future.
“Included in those 10 million borrowers are individuals who are enrolled in Public Service Loan Forgiveness, as PHEAA is the only servicer who currently handles the special loan programs,” Draeger said. “These borrowers have already faced considerable difficulties as they work toward their loan forgiveness and we will be watching how the department cares for this faction of borrowers in particular.”
In a way, until a servicer renews their contract no federal student loan borrower can be certain of who will be in charge of their loans. Though the negotiations, which are complicated and could take time to sort through, may not be an indicator that more are likely to drop out.
“I think that's extremely unlikely,” said Mark Kantrowitz, a higher education expert. “The two servicers who are dropping out of the program or were not seeking a renewal, have both told the department that they're okay with a short-term extension of their contracts to help with a transition. There's always a provision that allows for some kind of an extension.”
Kantrowitz said that the reason other servicers were likely to remain was due to the loan servicing program having economies of scale.
“If you have a computer system for servicing loans, the more loans you're servicing the lower the cost of maintaining that and developing them in the first place is per borrower,” Kantrowitz explained. “So your costs go down which means your net revenue per borrower goes up.”
However, should there be a mass exodus ED would be left with little recourse because it does not have the capacity to service the loans without external help.
“A lot of the things that appear to be in-house now, are still done by contractors. Things like the ombudsman's office, the feedback system, the default resolution group, these are all things that operate currently under the Department of Education's name but they're actually still outsourced to third party contractors,” Yu said. “The borrowers don't have the same visibility into that process.”
Kantrowitz could envision a scenario where ED might then consider adjusting the end date of the payment pause, but such an outcome would be unlikely to happen considering the stated benefits for existing servicing.
“I don't think that scenario is at all going to happen,” Kantrowitz said. “You'd be more likely to win the Powerball or Mega Millions jackpot than for that to occur.''
This lack of clarity over the continuation of contracts being negotiated makes Yu concerned about the resumption of repayment during the first quarter of 2022.
“No matter what kind of outreach they do, there are going to be borrowers who never find out about the payment suspension ending,” Yu said, calling for those borrowers to receive additional protections once the pause ends. “There has to be some kind of ‘hold harmless’ period, which I know a number of folks have also advocated for, too.”
However Yu said that ED and policymakers need to sort through what that ‘hold harmless’ period looks like, and sorting through a targeted policy amid processing repayments could take up a lot of resources.
Andrew Pentis, certified student loan counselor and higher education expert, also said communicating the servicer change following nearly two years of non-obligatory payments could sow confusion for borrowers.
“That kind of throws a chink into the plans of borrowers who may be kind of expecting to make their monthly dues to the same federal loan servicer that they had way back in March 2020,” Pentis said. “Unfortunately many borrowers are going to be caught by surprise and their loans will be transferred to a different federal loan servicer, perhaps even one of the new loan servicers that they've never heard of. So that's going to be a real challenge for the Department of Education to make sure that that's communicated to these borrowers.”
However due to agency requirements and legislation provided through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, borrowers will be provided with a billing statement or other notice in the weeks before the first payment due date.
Additionally, when a borrower is transferred to a new servicer they will also receive a notification indicating the impending change.
“When FSA transfers your federally-owned loans from one federal loan servicer to another, you’ll be notified by email or letter (or both),” according to a recently published article by FSA. “These communications will include an initial notice about the transfer and your new servicer’s name and contact information.”
For this reason it is important for borrowers to be as proactive as possible and ensure that their contact information is up to date with their current servicer.
“Essentially their federal loan servicer is going to be transferring their account to whichever servicer takes it over,” Pentis said. “In terms of a record of their past payments, if a borrower has the time and energy to take that step, that would be great as well. That way, if you're assigned to a new federal loan servicer and you find that your monthly payment or your balance doesn't seem like what it should be, you now have evidence in hardcopy to be able to take that to your new servicer and say ‘Hey, you know there's mistake on your end. Here’s what my records show.’”
While there is a lot of uncertainty when it comes to the logistics of student loan repayment, some in the higher education field, as well as congressional progressives, see the prospect of some form of loan forgiveness becoming more salient as the repayment pause winds down.
Outside of the potential economic relief for borrowers, the benefit could significantly reduce the burden on servicers. According to Kantrowitz, President Joe Biden’s campaign promise to offer $10,000 of federal student loan forgiveness could eliminate almost a third of student loan borrower accounts.
In order to implement that level of funding Kantrowitz said the most succinct and timely way would be for Congress to approve the spending for all borrowers. While means testing could be more targeted to borrowers in the most difficult of financial circumstances, the implementation costs associated with the relief could significantly delay the funding and not alleviate the servicing burden since payment would resume without removing any borrowers from the system.
For this reason the timeline for debt forgiveness could more easily be tied to the resumption of repayments.
Currently congressional Democrats have their legislative plate full as they sort through a number of budgetary deadlines and aim to coalesce around a wide ranging reconciliation package that could deliver significant funding for the annual Pell Grant and provide for free two-year community college.
Due to these competing timelines, Kantrowitz said that Democrats would likely wait until after October 1 to formally unveil legislation that could address concerns surrounding the student loan portfolio.
“They probably don't want distractions until those have been enrolled and signed into law,” Kantrowitz said.
Should Democrats succeed in implementing this portion of Biden’s infrastructure agenda and overcome the fiscal stalemate within the annual appropriations process that will require some Republican support, leadership could then turn to policies that were kept out of the current reconciliation process.
“Once that occurs then it'll be a new federal fiscal year, which means a new opportunity for budget reconciliation,” Kantrowitz said. “They still have plenty of time. Repayment begins on February 1 and they have time to pass, and implement, an automated loan forgiveness proposal in the next few months if they want.”
The prospect of any student loan forgiveness remains very murky as ED continues to sort through its potential legal authority to administer blanket forgiveness and potential barriers to managing the return to repayment being coupled with cancellation.
While the impending wind down of the federal benefit could spur a needed overhaul of the student loan system it could also lay bare inequities.
For Yu, a nightmare scenario would be for a low-income borrower to find out that the payment pause has ended due to an auto debit from ED having depleted their funds as they go to pull out money for groceries or rent.
“We need to do everything that we can to make sure that that doesn't happen,” Yu said. “But we need to recognize that inevitably somebody will fall through the cracks and we need to have some way in place to make sure that they're made whole, when that does happen.”
Publication Date: 9/28/2021