The Looming Student Loan Servicing Crisis | #Education

Four years ago, the U.S. Department of Education unveiled an ambitious proposal to transform servicing of federal student loans. Under the new system, all borrowers would go to a single website to manage their loans. The department would also create a common software platform for the companies it contracts to service loans, making it easier to hold servers accountable for helping borrowers pay down their debts. This would have been a significant improvement over the nine different sites and four platforms that exist today—with higher standards, stronger accountability, and more transparency to boot.

Yet after nearly half a decade of cancellations, restarts, mismanaged congressional relationships, expensive distractions, and a procurement process that appears to hand infinite veto power to companies that lose competitions, the entire system is at a precipice. The servicing arrangements that have been in place since 2009 will expire in little more than a year with nothing to take their place. Moreover, if the department’s latest attempt to head off catastrophe fails, it will be facing a massive rise in servicing costs—or even worse, the federal government may have no system in place to help 33 million borrowers navigate their loans.

Members of Congress cannot sit on their hands and wait for this disaster to take hold; they must be prepared to fund increased servicing costs. However, they should also be asking hard questions about why the agency canceled multiple solicitations and what happened to the nearly half a billion dollars in increased funding that the Office of Federal Student Aid (FSA)—the part of the agency that administers the financial aid programs and oversees student loan servicers—has cumulatively received over the past five years.

How we got here

The current student loan servicing system started amid the last major national economic crisis. In late 2008, the Education Department suddenly needed to service millions more federal student loans because private banks that previously originated most loans sold them to the government during the credit crunch. In mid-2009, the agency signed contracts with four companies to accommodate this volume. These organizations became known as Title IV Additional Servicers (TIVAS), after the section of the Higher Education Act that authorizes the federal financial aid programs. Later, in 2011, the Department of Education started inking deals required by statute with several smaller nonprofit companies to provide similar services. Five of these nonprofits still participate, so there are a total of nine student loan servicers today.

The Department of Education did not run a new competition when it signed new contracts with the TIVAS in 2014. Those deals improved the payment structure, and the agency has changed the measures used to judge servicer success; but that has also meant changing the incentives for companies already on the job, not terminating or adding new servicers.

The Department of Education published its first solicitation for a new servicing competition in 2016 and named three finalists in October of that year. Since then, the process has been a mess, and a winner has yet to be chosen. The explanation for these delays and failures is a long and complex story, but to summarize, the Department of Education under Secretary Betsy DeVos has taken the following actions:

  • It rescinded consumer-friendly elements of the first solicitation, including requirements for more proactive servicing and higher-touch support for at-risk borrowers.
  • It amended the first solicitation to propose selecting only one servicer. This is a bad idea on policy grounds because past instances of a single federal loan servicer have resulted in bad borrower experiences. But it also prompted bipartisan frustration, especially from the Senate, due to concerns about the quality of borrower service as well as for political reasons—such as the fact that one of the servicers is located in the state represented by the chairman of the appropriations subcommittee on education.
  • It canceled the first solicitation in August 2017 and issued a relatively similar one a few months later, only to cancel it in December 2018.
  • It issued a third solicitation in January 2019, only to cancel parts of it in April 2020 and July 2020.

To be fair, FSA has made some progress. It contracted for and launched a new single website for borrowers and selected five companies to staff call centers and interact with borrowers. The website makes it easier to communicate with borrowers, gives them new tools to manage their debts, and is testing out functionality for borrowers to make payments on the website instead of needing to go to the servicer.

Nor are all the delays FSA’s fault. Congress has inserted appropriations language requiring the agency to design the servicing system in certain ways, which has created delays. While this involvement is unfortunate, some of it was driven by the agency’s repeated failure to recognize that choosing a single servicer was not going to fly politically. Companies that didn’t progress past initial rounds of the solicitations also keep extending timelines by challenging the agency’s decisions through the bid protest process administered by the U.S. Government Accountability Office. Finally, the Education Department included set-asides for small businesses in its servicing contracts—presumably to meet agencywide goals for giving a certain amount of contract dollars to these entities, which has led to at least one protest and is questionable on policy grounds given that the servicing system needs to reach tens of millions of people.

Yet after four years of work, the agency has a sandwich with no meat—a website for borrowers, improved outreach tools, and people to pick up the phone, but no servicing platform in place. This is a big deal. While a new platform wouldn’t be as obvious to borrowers, it would allow the Education Department to track borrowers’ accounts to make sure that their payments are accurate and that they are making progress toward forgiveness. This is in contrast to the current system, where detailed payment information is locked away on individual servicers’ systems that are inaccessible to the Department of Education. A single servicing platform is also the key to improved accountability, as it would make it easier to move borrowers to new servicers without the significant disruption that is involved today.

Time is running out

The agency is running out of time. There are limits on how long the Education Department can extend its contracts with the TIVAS or nonprofit servicers. The former cannot go past December 2021, while the latter will likely run out sometime in the following year.

Any replacement system, however, needs to be in place much sooner. Loans will have to be moved off the platforms of losing companies to those that win new contracts. This is a daunting and delicate task. Each TIVA has between 6 and 8 million borrowers, while the nonprofits have nearly 7.5 million borrowers combined. Moving millions of loans must be done carefully; any mistakes could end up costing borrowers, for example, by having them miss payments and go delinquent or by not giving them credit for all the payments they’ve made toward public service loan forgiveness. As a result, this process will take many months at the very least.

The agency’s latest hope is its Interim Servicing Solution (ISS), a proposal released in September that would eventually award contracts to two companies to service loans while the Education Department keeps working toward a single-platform system. But decreasing the number of student loan servicers from nine to two could be met with resistance. As Congress and these companies have repeatedly shown, any attempts to winnow the number of servicers generates massive pushback that can bog down the entire process.

The Department of Education will be in trouble if the ISS fails or cannot be awarded in time. It would then have to sign new contracts with some or all of the existing loan servicers. These companies will have massive leverage in those negotiations, and there would be no backup options. Without servicers, borrowers would have no way to get help sorting through payment options. Applications for student loan forgiveness or payment plans that help borrowers tie their monthly payments to their income would slow if not stop outright. Therefore, it is almost certain that servicers will demand a lot more money to keep working—especially considering that the agency has not increased the per-borrower payment rates since 2014.

Pay first, ask tough questions later

There’s no elegant solution to this problem. The time lost by the Trump administration in 2017 and 2018 cannot be retrieved. A cost increase seems inevitable, which would make some sense if it was resulting in higher-quality service for borrowers, but is unfortunate if all it does is avoid making the existing worse. While this is far from ideal, it’s a better option than leaving 33 million borrowers high and dry.

Congress should, however, ask a lot of questions about how the Department of Education ended up in this predicament. These questions should touch on why the procurement process did not work, especially given that FSA has special flexibilities. Congress should also look at what the office did with the funding increases provided in the 2017, 2018, and 2020 fiscal years, which have given FSA $217 million more per year than it received in 2016—and nearly $500 million more over the past five years. In addition, Congress should investigate how much unnecessary distractions may have taken away precious time and money, such as a pilot to award student aid funds on a debit card. And Congress must be honest with itself and ask what role its involvement has played in delays.

This situation must also prompt a broader conversation about the true costs of servicing. The Department of Education currently pays for servicing through an annual appropriation from Congress. That amount does not automatically adjust based on the size or status of the portfolio and must compete with most other major domestic policy priorities if the agency needs more funds. This approach should change to one in which servicing is paid for out of automatically provided mandatory funds—just like the money used to issue loans. Doing so would allow funds to scale with the portfolio and better reflect what reasonable costs should be, not just what FSA can afford with its annual appropriation. Moreover, moving servicing to the mandatory part of the budget would make it possible to transfer money spent on punitive debt collection to higher-quality servicing. Finally, Congress also must be willing to accept that servicing must be about helping students repay their college loans, not saving companies. This means hiring enough servicers so that they must compete to offer the best service but not giving guaranteed business to nine companies and four platforms.

What this situation should not turn into, however, is a rationale for bringing back the private banks that issued federal student loans until 2010, when Congress eliminated the program that showered them with lavish subsidies. Bringing private lenders back would likely be even more expensive and would come with its own set of concerns about illicit behavior.

Conclusion

The next six to nine months will be a crucial time for ensuring the stability of the student loan servicing system. This issue cannot fall prey to politics or delays. Once FSA has some breathing room, though, there should be a thorough investigation into how we got here.

Ben Miller is the vice president for Postsecondary Education at the Center for American Progress.


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