The fact that two-thirds of college-bound students who take out loans to finance their higher education have little to no idea what they’re agreeing to, doesn’t mean these borrowers shouldn’t receive adequate protection from unscrupulous loan servicing companies. New guidelines from a pair of federal agencies are aimed at ensuring student loan borrowers get the service and protection they deserve.
Earlier today, the Department of Education, in consultation with the Consumer Financial Protection Bureau, released an outline for a series of enhanced protections and customer service standards that will guide the future of how the federal government contracts with outside companies to service federal student loans.
The principles, which were sent in a memo [PDF] from U.S. Under Secretary of Education Ted Mitchell to James Runcie, Chief Operating Officer of Federal Student Aid, are intended to strengthen oversight of education loan servicers — which often have contracts with the federal government and other private lenders to handle things like billing — while also protecting students from practices like overcharging borrowers or failing to provide required paperwork.
“This guidance has the power to strengthen our student loan financing system by providing long-overdue improvements to servicing,” Treasury Deputy Secretary Sarah Bloom Raskin, said in a statement.
According to CFPB enforcement action and reports, a number of student loan servicers — companies that manage student loan accounts — fail to meet their responsibility to inform borrowers about their options.
For example, a recent government report found that 70% of borrowers in default on a federal student loan actually had an income that could qualify them for a lower monthly payment. However, they were never informed of this option by servicers.
“For some student loan borrowers, high-quality servicing can be the difference between getting by and going broke,” Richard Cordray, director of the CFPB, said at an event unveiling the guidelines. “But for too many consumers, this level of service has proved elusive.”
Wednesday’s memo gives direction to the government on five specific servicing areas so that situations like this can be avoided in the future.
• Economic Incentives: The memo directs FSA to only include incentives in contracts that encourage servicers to help borrowers stay on top of their loans and avoid default while avoiding fixed-fee structures that create a disincentive to help struggling borrowers.
• Accurate and Actionable Information: Student loan servicers must improve oral and written communications with borrowers — especially those borrowers who are at the highest risk of default — related to account features, borrower protections, and loan terms.
• Consistency: Borrowers should receive adequate, timely, and consistent communications from servicers. The memo directs FSA to use only U.S. Department of Education-branded communications and to create web pages and printed materials that have the same look and feel to eliminate confusion for borrowers.
• Accountability: Borrowers must be able to expect a high level of accountability in their federal student loan servicing experience including quick responses to inquiries and complaints, and transparent resolutions when problems occur. The FSA should step up monitoring of servicing vendors and to integrate complaint resolution into the oversight of those vendors.
• Transparency: The memo details the expectation for better federal student loan data transparency and publicly available information on the tracking and reporting of requests for assistance, escalations, and appeals to improve accountability for loan servicing performance.
Ultimately, the Department of Education believes the new loan servicing system will make it easier for borrowers to manage and repay their loans.
“When fully implemented, these servicing standards will bring us closer to more consistency, transparency, actionability, and accountability in this important marketplace,” Cordray, with the CFPB, said.
The outline of improvements comes months after the Government Accountability Office found an immediate need for significant improvement to the way in which the DOE contracts with and monitors the performance of servicers that handle billing and other services for borrowers.
The GAO report [PDF] found, among other things, limitations in borrowers’ access to federal service call centers, the department’s complaint tracking and other areas.
Prior to that, Bloomberg delved into how lucrative the federal student loan industry can be for debt collectors, refinancers, and loan servicers.
According to the report, the government has distributed about $100 billion in education loans each year since 2009, with $200 billion expected to be issued annually in the next decade.
However, the report found that student loan borrowers generally aren’t aware of what’s going on behind the scenes with their loan originator. Instead, their point of contact is typically a loan servicer, which processes monthly payments.
Under the contracts with the Department of Education, these firms typically earn monthly fees by loan status: $2.85 for those in repayment, $1.05 when borrowers are in school and $0.45 when they’re delinquent 361 days or more, data from the Federal Procurement Data System shows.
The impact for students occurs when these servicers fail to provide accurate information or adequately service the debt.
In fact, some of these servicing companies are under investigation by federal regulators for illegal collection practices.
Navient Corp, which spun off from Sallie Mae in 2014, announced in August that it could face a lawsuit from the Consumer Financial Protection Bureau over allegedly unfair practices like overcharging and imposing excessive fees on consumers’ loans.
“It is encouraging to see the Department move toward designing a loan servicing system that provides clearer and more consistent support to people trying to pay back their loans,” Suzanne Martindale, policy counsel with our colleagues at Consumers Union, said. “Adding enforceable minimum standards to servicing contracts will give the government more tools to ensure adequate oversight of education loan servicers. Of course, the devil is always in the details. It will be essential for the Department to continue its work in coordination with the CFPB and other law enforcement agencies to correct bad behavior and protect student loan borrowers.”