Student loan guidelines changed again
Education chief halts Obama-era overhaul of collection process
Consumer advocates are lambasting a decision by Education Secretary Betsy DeVos this week to rescind the Obama administration’s reform of student loan collections, saying the move will make it tougher for borrowers to make repayments and push many into default.
The reforms were to apply to student loan service companies that win federal contracts after the current agreements expire in 2019. The service firms manage student loan repayments.
“This move is a big win for companies that have run roughshod over borrowers,” says Rohit Chopra, senior fellow at the Consumer Federation of America, the former student loan ombudsman at the Consumer Financial Protection Bureau (CFPB) and a Department of Education official last year. “It will give them access to these lucrative contracts.”
Navient, the nation’s largest student loan servicer, which was sued by the CFPB in January over various alleged abuses, is a finalist for the new contracts in 2019. The withdrawal of the Obama-era guidelines makes it more likely Navient and other current servicers will emerge as winners, says David Bergeron, senior fellow at the liberal Center for American Progress and a former Education official under both Democratic and Republican administrations.
Navient says CFPB invented rules and service standards that are not part of Education Department regulations.
Last year, under former President Obama, Education officials provided new guidance to the agency’s Federal Student Aid (FSA) office, which awards contracts to servicers and oversees $1.1 trillion in government-provided student loans.
The guidance said the office should strongly consider servic- ers’ past performance in awarding contracts, and servicers should establish baseline customer service standards and create a system that “encourages optimal borrower outcomes.”
But in a memo Tuesday to James Runcie, FSA’s chief operating officer, DeVos said she was withdrawing the two agency memos to him last year that detailed the guidance.
She said the process of awarding new contracts “has been subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.”
“We must create a student loan servicing environment that provides the highest quality customer service and increases accountability and transparency for all borrowers, while also limiting the cost to taxpayers,” she added.
In a statement provided to USA TODAY, Education Department officials said they couldn’t legally provide more details because the information relates to an ongoing procurement process.
The memo came a week after the servicers’ trade group, the National Council of Higher Education Resources, sent letters to Congress urging lawmakers to direct Education to examine servicing contracts “to reduce unnecessary and burdensome requirements.”
“It’s very clear (Education is) responding to the demands from the industry,” Bergeron says.
In a report in 2015, the Consumer Financial Protection Bureau found the service companies often don’t adequately inform borrowers about affordable repayment options, lose paperwork and misapply payments. For example, certain plans allow for lower payments based on income and set timelines to forgive remaining balances.
The firms also mislead borrowers about options to avoid default, process payments in ways that maximize interest and fees and encourage forbearance, which allows borrowers to put off payments but at a high cost, rather than restructure loans, Chopra and Bergeron say.
The CFPB’s lawsuit against Navient earlier this year alleged some of those abuses, among others.
More than 1 million student borrowers were in default last year.
Chopra and Bergeron say servicers cut corners because directing borrowers to more affordable payment plans requires representatives to spend more time on the phone, increasing costs.
“If they can provide the service cheaply, they make more money,” Bergeron says.
“It’s a pattern of behavior ( by the Trump administration) that’s putting corporate interests ahead of the consumer.”
“This move is a big win for companies that have run roughshod over borrowers. It will give them access to these lucrative contracts.” Rohit Chopra, Consumer Federation of America and a former Department of Education official