Education Secretary Betsy DeVos has made another sweeping change to the student loan system that consumer advocates claim favors student loan collectors over the American people repaying those loans.
The latest move from DeVos — who only weeks ago rescinded a number of student loan servicing protections put in place by the previous administration — will put all federal student loan servicing under the control of just one company starting in 2019.
There are currently nine student loan servicers handling these accounts for the federal government.
Late Friday afternoon, DeVos announced the upcoming changes via an amendment [PDF] to the contracting process, which will see the student loan servicing contract awarded to just one of the following: Navient (the servicer spun off from Sallie Mae), GreatNet, or the Pennsylvania Higher Education Assistance Agency (PHEAA).
Whichever company ultimately receives the contract will be required to build a platform to collect on and service an estimated 32 million federal direct student loans.
DeVos claimed Friday that the changes were necessary in order to provide superior customer service and protections to borrowers.
“The federal student loan servicing solicitation we inherited was cumbersome and confusing — with shifting deadlines, changing requirements and defacto regulations that at times contradicted themselves,” she wrote in a statement. “Internal and external stakeholders both agreed it was destined for a massive and unsustainable budget overrun.”
While education officials tell the Washington Post that by contracting with one company it can better monitor the programs and ensure borrowers are being treated fairly, consumer advocates caution that putting of its student loan-collecting eggs in once basket could create a servicer that is “too big to fail.”
“The changes may increase profits for the industry, but may do little to tame the high levels of default in the program,” explains Rohit Chopra of the Consumer Federation of America and also the former student loan ombudsman at the Consumer Financial Protection Bureau.
Less Competition; Fewer Protections
In addition to creating a single student loan servicer program, this latest change removes several other requirements previously outlined by the Obama administration when creating the contract process.
For instance, the servicer who ultimately receives the contract would not be required to provide “high-touch” (personalized, proactive) customer service for in-trouble and delinquent borrowers. This means no requirement for preemptive outreach when a borrower is late, or when they need to re-enroll in income-driven repayment plans.
Additionally, the sole loan servicer will be able to remove online options for borrowers with multiple loans to direct their payments to certain loans over others. The amendment also appears to remove requirements that certain information be provided in Spanish.
While servicers say such rules are burdensome, supporters of these requirements say they are needed to help curb student loan delinquency. An estimated $137 billion in federal student loans are currently in default, meaning borrowers have made no payments on them in at least nine months.
Suzanne Martindale, staff attorney for our colleague Consumers Union, said the changes “drastically alter” the functions of the servicer program, noting that in practice it won’t be all that helpful to borrowers.
Changes to the future student loan servicing contract come as federal regulators have attempted to hold servicers accountable for their questionable conduct.
So far this year, the Consumer Financial Protection Bureau has released two reports that found complaints of student loan servicing increase by three digits.
The CFPB’s March snapshot showed a 429% increase in complaints related to student loan servicing. That report was followed by a second in April that found complaints about student loan servicing increased in nearly every state.
The Bureau noted that many of these complaints came after it took “major enforcement action” against a student loan servicer: Navient. In January, Navient, which is in the running for the new Dept. of Education contract, was sued by the the CFPB and two states claiming the company cheated borrowers out of repayment rights.
The company responded to the complaint two months later, noting in a filing to dismiss the lawsuit that it was under no obligation to help student loan borrowers.
“There is no expectation that the servicer will act in the interest of the consumers,” Navient said in the March 24 filing, adding that courts routinely agree that servicers and lenders “do not owe borrowers any specific fiduciary duties based upon their servicer/borrower relationship.”
It’s perhaps this sentiment that borrowers have experienced in recent months. According to the CFPB’s April complaint snapshot, Navient was the most complained about student loan servicer, receiving an average of 1,400 complaints from Nov. 2016 to Jan. 2017, a 1,073% increase from the same three-month period the year before.