DeVos drops plan to overhaul student loan servicing

Source: Michael Stratford, Politico, August 1, 2017
 
Education Secretary Betsy DeVos on Tuesday abandoned her plan to overhaul how the federal government collects payments from the nation’s more than 42 million student loan borrowers after it faced growing resistance from congressional Republicans and Democrats.  The Trump administration announced that it was scrapping plans to award a massive contract to a single company to manage the monthly payments of all student loan borrowers, and said it would come up with a new proposal aimed at improving customer service for student loan payments. …

Related:

Betsy DeVos Picked A Student Loan CEO To Run The Student Loan System
Source: Molly Hensley-Clancy, Buzzfeed News, June 20, 2017
 
When the Trump administration announced its pick to run the $1.3 trillion federal student loan system on Tuesday, there was one notable thing about the candidate that wasn’t mentioned in the press release: He’s the CEO of a private student loan company.  The Education Department’s statement described A. Wayne Johnson as the “Founder, Chairman and former CEO” of a payments technology company called First Performance Corporation. … But what wasn’t noted was Johnson is currently the CEO of Reunion Student Loan Services, a detail confirmed by a company representative reached by phone on Tuesday afternoon. Reunion originates and services private student loans, and offers refinancing and consolidation for existing loans. …

Betsy DeVos undoes Obama’s student loan protections
Source: Danielle Douglas-Gabriel, Chicago Tribune, April 11, 2017

Education Secretary Betsy DeVos on Tuesday withdrew a series of policy memos issued by the Obama administration to strengthen consumer protections for student loan borrowers.  The Education Department is in the middle of issuing new contracts to student loan servicing companies that collect payments on behalf of the agency. These middlemen are responsible for placing borrowers in affordable repayment plans and keeping them from defaulting on their loans. But in the face of mounting consumer complaints over poor communication, mismanaged paperwork and delays in processing payments, the previous administration included contract requirements to shore up the quality of servicing. Companies complained that the demands would be expensive and unnecessarily time consuming. … DeVos has withdrawn three memos issued by former education secretary John King and his under secretary Ted Mitchell. One of the directives, which was later updated with another memo, called on Runcie to hold companies accountable for borrowers receiving accurate, consistent and timely information about their debt. … The Obama administration requested routine audits of records, systems, complaints and a compliance-review process. … The exhaustive list of demands were a direct response to an outpouring of complaints to the Education Department and the Consumer Financial Protection Bureau. The CFPB, in particular, has documented instances of servicing companies providing inconsistent information, misplacing paperwork or charging unexpected fees. Because the federal government pays hundreds of millions of dollars to companies such as Navient, Great Lakes and American Education Services to manage $1.2 trillion in student loans, advocacy groups and lawmakers argue that more should be required of these contractors. …


Federal Student Loan Servicing: Contract Problems and Public Solutions
Source: Eric M. Fink, Roland Zullo, Elon University School of Law, University of Michigan, June 2014

One consequence of the 2007–2008 financial crisis was an abrupt shift from bank-based to direct federal student loans. This momentous change required the Department of Education to rapidly establish the capacity to service loans, which was achieved by outsourcing this responsibility to four large for-profit firms and a group of smaller regional entities. Loan servicing involves routine payment processing, account management and borrower communication, as well as the non-routine yet more labor intensive role of assisting borrowers that face hardship with debt repayment. Borrowers have expressed dissatisfaction with the present system. Complaints jumped significantly in the first two years of the loan servicing contracts and remain at historic highs. Several factors contribute to this increase, including the lackluster job market for graduates. However, upon close inspection it appears that loan servicers bear part of the blame for neglecting their responsibility to counsel borrowers with distressed loans. The Student Loan Ombudsman’s Office of the Consumer Finance Protection Bureau has issued several reports that further validate this assertion. To understand why the system is underperforming, we draw attention to the public-private contract. A question for any public-private contract is whether the incentives within are adequate to encourage contractor behavior consistent with the mission of the service. In our review of the contract terms, we conclude that the incentives to reduce operational costs far outweigh the incentives to be responsive to the needs of borrowers…This case illustrates the inherent limitations of a performance-based contract as an administrative tool. Regardless of design, contractors will strive to minimize operational commitment to any labor-intensive task, in this instance attending to the personal needs of borrowers….