It has been busy lately in the student loan servicing arena. State and federal regulators have begun to wake up to the rampant problems caused by sloppy, inaccurate, and incompetent servicers and the heavy costs for borrowers. We have been writing about these issues for some time.
The stakes are high. Student loan servicers are the borrower’s primary point of contact. If the servicer is competent and efficient, many financially distressed borrowers will be able to avoid default. The main problem with the current system is that student loan borrowers do not receive consistent quality service. Combined with lax oversight and no clear way for borrowers to enforce their rights, too many borrowers never obtain options that could relieve their debt burdens and help them make fresh starts in life. For too long, the Department of Education has used an opaque contract system, repeatedly hiring the same old players to administer servicing contracts with little or no accountability.
This sad story keeps going… with more and more reports of systemic failure. The Department of Education Inspector General reported on problems with the servicing contracts a few years ago. More recently, the GAO issued a comprehensive report on servicing failures, including low levels of participation of eligible borrowers in the income driven and public service loan forgiveness programs. There are serious problems as well with borrowers seeking to recertify income driven repayment plans. In 2015 rulemaking sessions, the Department provided data showing that over half of all borrowers in an income driven plan do not recertify. This indicates critical problems with the ways in which servicers interact with borrowers and their failures to provide accurate and comprehensive counseling and service.
The CFPB has been sounding the alarm for some time. Just yesterday, the Bureau released a comprehensive report detailing repayment roadblocks borrowers encounter when working to repay their student loans. Specifically, this report discusses comments from student loan borrowers and other stakeholders, who reported:
- A wide range of sloppy, patchwork practices by servicers that create obstacles to repayment, raise costs, cause distress, and contribute to driving struggling borrowers to default.
- A lack of assistance for struggling borrowers that can lead to loss of critical student loan benefits and protections, borrowers being victims of debt relief scams, and ultimately default, and
- The need for market-wide student loan servicing reforms to stop harmful practices and protect borrowers.
Additionally, the Bureau, the Department of Education, and the Department of the Treasury published a shared set of principles on student loan servicing, echoing many of the same recommendations included in the Bureau’s report and proposing a framework to reform student loan servicing and expand consumer protections.
It is good news that other agencies, such as the Department of Treasury, are pushing for market reform. Deputy Secretary Sarah Bloom Raskin spoke a few days ago about her “acute focus” on student loan issues since arriving at the Treasury Department. She noted concerns she has heard about the lack of consistent quality servicing and discussed the need for market reform.
The question is what will happen next. The CFPB said in issuing its report that it has made it a priority to take action against companies that are engaging in illegal servicing practices. We know, for example, that Sallie Mae/Navient has reported that the CFPB is considering litigation. The company has also reported a multistate investigation led by Illinois.
But how can we get system-wide reform that will include all of the following??
- Consistent servicing standards that borrowers can enforce,
- Contracts that incentivize servicers to provide comprehensive service and inform borrowers of all possible options, including discharges, AND
- Real consequences when servicers violate the law, including loss of contracts, sanctions, and public and private enforcement. (To get to real consequences, we need real investigations…not the shoddy types of investigations, for example, the Department recently announced in absolving servicers of violating servicemember relief act rules).
The Department of Education has said that it intends to “re-compete” the Direct Loan contracts next year. This is an opportunity to reach out beyond the same old players. We know the Department has a lot on its plate, but the political window could be closing. It is past time to send these contracts out for open bid and open up the process to the light of day. In the meantime, the Department must engage in rigorous oversight of the existing servicers and make sure that borrowers can access rights they are entitled to. When they do investigate their contractors, the government must do so honestly and accurately and let the public know what is really going on.
The CFPB says that it also intends to explore potential industry-wide rules to increase borrower protections. We support this effort, but again, there must be a sense of urgency to develop strong borrower protections and standards.
It is good news that the regulators are waking up, but borrowers have known about these problems for years. Let’s get moving with servicing reform.
