The Department of Education (ED) should re-evaluate its best practices regarding its Federal Direct Loan servicing contracts to better assist borrowers, according to a report from an interagency task force created by the Obama administration.
The task force, which was created in March 2015 as part of President Obama’s Student Aid Bill of Rights, included representatives from the Departments of Treasury and Education, the Office of Management and Budget, and the Domestic Policy Council. The group was tasked with reviewing recommendations on best practices in performance-based contracting within the Direct Loan Program and consulted with the Consumer Financial Protection Bureau (CFPB) and other experts. The task force will meet quarterly to monitor trends in the student loan portfolio, budget costs, and borrower assistance efforts.
According to the task force report, several of the recommendations will serve as “complement[s]” to initiatives specifically called for in the Presidential Memorandum that created the “Student Aid Bill of Rights,” such as creating a streamlined process for borrower complaints and a centralized point of access for student loan borrowers. Many of the recommendations made by the task force mirror those made by NASFAA in the past.
Overall, the task force developed recommendations in five areas:
Their first recommendation is that ED use a compensation structure that continues to provide servicers with incentives to keep borrowers current. They also recommend that targeted incentives be provided based on the performance of borrowers deemed to be at greater risk of default when they leave school. Federal Student Aid (FSA) should test the new compensation structure to see if borrower performance improved among those with greater risk of defaulting when tied to compensation and incentives. The results should be used to determine whether to continue, modify or end the incentive for the remainder of the contract.
Second, the task force recommended that the loan allocation formula be structured to include “a comprehensive set of metrics” to indicate the performance of the servicer in three areas: driving the desired performance of the borrower; providing quality customer service; and adhering to contract requirements and maintaining strong business practices and internal controls. FSA should also publish these metrics quarterly with detailed assessments and measures of performance, which would increase transparency and competition among the servicers, according to the task force.
In comments submitted to the CFPB in July, NASFAA also called for the establishment of a new allocation mechanism for low-performing servicers.
In its third recommendation, the task force said FSA should standardize its communication and more effectively promote it, specifically by creating “a core set of clear, easy-to-read tables” with consolidated loan information that borrower find most valuable. Servicers should be required to display these tables prominently in communications with borrowers. Contractors should also be required to provide a suite of technology-enabled tools to communicate with borrowers, including online chat, direct email communication, text messaging, and digital document upload, among others. NASFAA made a similar recommendation in a final report produced by its task force on student loan servicing issues, calling for an enumerated, standardized set of consumer protections.
The task force also recommended requiring student loan servicers to use universal ED branding on all borrower communication, which is a similar recommendation made by NASFAA in the July letter to CFPB and in its student loan servicing report. In both documents, NASFAA recommended that the only branding on communication to the borrower should be from ED.
The task force also recommended allowing contractors to apply for waivers of certain requirements so they can test innovative strategies to improve borrower outcomes, so long as there are specific target outcomes and details of how it might impact FSA program goals. NASFAA suggested something similar to CFPB in July, recommending that servicers be given the flexibility to disseminate certain disclosures together and make their own determination of the best point in time for the information to be distributed. We also recommended in the task force report that servicers should have the flexibility to send information in ways proven to work best for individual borrowers.
Fourth, the task force recommended the implementation of a standardized complaint process, in conjunction with the Presidential Memorandum. The complaint process should provide for borrower rights, a process to address complaints, and a "formal escalation process" to address such complaints within FSA. In its July letter to CFPB, NASFAA recommended that CFPB provide due process for complaints before making them public.
And finally, the task force recommended that FSA use oversight and auditing to monitor servicer compliance and incorporate assessments of compliance into performance metrics. The report also recommended that contracts should include provisions for "administrative and contractual remedies" to address noncompliance or violations, including financial penalties and payment withholding where applicable. FSA should also assess the effectiveness of contractual incentives though the auditing and monitoring processes.
Publication Date: 9/1/2015