Student loan borrowers brace for one vendor impact
Some see monopoly, but others say move could be ‘helpful’
President Trump believes there are too many companies servicing federal student loans. And he’s cutting that number.
Consumer advocates are concerned that granting the work of servicing federal student loans to just one company — from the current roster of nine — would worsen customer service and create a monopoly with too much power.
Secretary of Education Betsy DeVos, who wants to lessen the government’s involvement in the student loan business, says the move, announced Friday, will allow better monitoring of the selected vendor’s service and save taxpayers $130 million in five years. Here’s what borrowers can expect from the changes:
Q: WHAT ARE THE GOVERNMENT’S PLANS?
A: The Education Department says it’s juggling too many private-sector contractors and wants to streamline the process. The department, part of the executive branch, is the largest issuer of federal loans. Of $1.4 trillion of student loans outstanding, more than $1 trillion of the total is issued by the Education Department.
But the department outsources the work of handling payment, collection, payment deferment and general customer service to nine private companies. Borrowers generally deal with these firms if they want to modify loans or have questions answered.
In the next few months, the Education Department will give the loan servicing work to one vendor after reviewing bids from the companies that are interested in winning the job. Four of the nine companies will bid for the contract — Navient, Great Lakes Educational Loan Services, Nelnet, FedLoan Servicing (also known as Pennsylvania Higher Education Assistance Agency, or PHEAA). Great Lakes and Nelnet have formed a joint venture.
Q: HOW WILL THIS AFFECT MY LOANS?
A: Loan terms, such as interest rates and monthly payment, will remain the same. But the selected vendor will have a new system — including a new website and an updated payment processing mechanism — in place within 18 months of landing the contract.
Borrowers who have their loans serviced by the winning bidder likely will be familiar with the look and feel of the new website. But if you’re dealing with any of the other eight companies not chosen for the contract, you will have to learn to deal with a new website, customer service numbers and generally different ways of doing business.
Q: SOME CONSUMER ADVOCATES SAY SERVICE WILL BE HURT. ARE THEIR CONCERNS LEGITIMATE?
A: That outcome remains to be seen. But many, including student advocates, agree the current system needs improvement.
“There’s no question that the federal student loan servicing system can be improved, as evidenced by the stubbornly high levels of delinquency and default,” according to a statement from the American Student Assistance, an advocacy group for student debtors.
But handing over the contract to one company will effectively create “a trillion-dollar bank,” says Natalia Abrams, executive director of Student Debt Crisis, an advocacy group.
The winner will wield significant influence in how student loan debtors repay, refinance, change payment schedules or seek lower monthly payments.
“We are very concerned that this model will create a monopoly with no competitive incentives to innovate or provide high-quality service,” the ASA says. “Any revamp of the student loan servicing system must include comprehensive counseling and support for borrowers.”
Q: WHY IS DEVOS MAKING THIS CHANGE?
A: The streamlining process actually started under the Obama administration, which wanted to cut the vendor list to four companies.
DeVos says it’s difficult to oversee the work of nine service providers, and monitoring will be easier with one company. The selected company and its subcontractors will have to sign “level-of-service” agreements to ensure federal standards. And one of the Education Department’s selection criteria will be how user-friendly the bidders’ website and processing systems are for consumers.
Having a single company offer loan servicing will “provide a common and consistent experience for all customers” and eliminate confusion stemming from multiple “brands” that now operate, the department says.
“Having a single servicer would be helpful, provided it’s done well,” said Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project.
“Implementation would be key, and implementation means having the resources to handle the job properly.”