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The Role Of Student Loan Servicers In Borrower Experience – These policies are based on research supported by Arnold Ventures. The views expressed in this report are solely those of the author and do not necessarily represent the views of the sponsors.
In May 2022, approximately 43 million student loan borrowers in the United States are scheduled to resume repayment of nearly $1.6 trillion in outstanding federal student loan debt after a nearly two-year payment pause implemented in response to the pandemic. That relief is set to expire amid widespread anxiety over the burden on borrowers and the administration of the entire federal student loan program. At the center of this reboot are student loan servicers, a much-maligned — but also largely misunderstood — group of companies that handle many of the most important functions of student loan repayment, including managing accounts, processing payments and providing information. on payment plans and solutions for distressed borrowers.
The Role Of Student Loan Servicers In Borrower Experience
There is considerable concern about the challenges that resuming payments will pose for student loan borrowers, many of whom have experienced severe financial and health problems, exacerbated by the exit of several leading federal student loan servicers in recent months.
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However, concerns about the practices and efficiency of servicers existed long before repayment began. For example, many lenders have been subject to high-profile lawsuits, including the Consumer Financial Protection Bureau (CFPB) and state prosecutors, alleging widespread unfair, abusive, and deceptive service practices—such as providing misinformation, charging erroneous fees, preventing enrollment in certain types of repayment plans and does not respond to borrowers’ requests.
In addition to the lawsuits, consumer complaints about student loan servicing have been prominent in media reports and have been the focus of attention in Congress.
Such discontent and political posturing have led to widespread calls for reform of student loan service, a complex undertaking given the potentially competing goals of student loan borrowers, taxpayers, program administrators, and national interests. There are no easy fixes—and reform will ultimately be limited unless coupled with a broader focus on fixing our higher education financial system. In this report, I focus on three design principles to consider in reforming the student loan delivery system:
Borrowers communicate almost exclusively with their servicers once they begin repaying their federal student loans after graduating, leaving college, or dropping below half-time. Servicers maintain borrower accounts, collect payments from borrowers, and process requests for deferment, forbearance, and forgiveness. They are also expected to serve as an information resource to help borrowers navigate complex repayment options and debt repayment solutions. Despite this critical role that servicers play in repayment and borrower education, borrowers have almost no choice in which company will service their loan. It is no exaggeration to characterize student loan servicing as one of the most critical aspects of the student loan system in the United States, yet an area that few understand and many distrust.
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The modern incarnation of the service market began about a decade ago and generally relies on the US Department of Education outsourcing services to private companies, including for-profit and non-profit entities.
Over the past decade, the servicer market has changed dramatically, including four to five for-profit servicers (sometimes referred to as “TIVAS” or additional Title IV servicers) and five to eleven not-for-profit servicers, depending on the year. . Figure 1 shows loan outstanding for the largest student loan servicers, with nonprofit servicers grouped together.
“Today’s lending environment does not require maximum responsibility. Legacy servicing agreements do not include adequate incentives to reward servicers when they successfully manage borrower accounts and do not allow for appropriate consequences to be applied to loan servicers who fail to meet contractual requirements.”
In the context of student loans, accountability is difficult and solutions to improve outcomes are difficult to produce and implement because activities and responsibilities are divided among many parties, making it easy for any individual actor to avoid blame. The federal student loan system in the United States is multifaceted and multiplayer. Each actor operates within its own constraints and is subject to specific incentives that may or may not serve the larger goal of promoting access to and success in higher education. And these actors face little systemic oversight to assess how their behavior reinforces or undermines the behavior of others. As student loan borrowers interact with a set of self-regulated and motivated actors as they move to and through college and make repayments, they experience burdens at each stage that can accumulate and multiply, resulting in disadvantages that can copy social inequality and undermine the goals of supporting socio-economic mobility.
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Servicers have become the focus of discontent with student loans more broadly and with educational institutions. Undoubtedly, service workers should be held accountable for unfair and fraudulent practices, and the Department should enforce better service practices and greater oversight in the future. However, much of the dissatisfaction with student loan service is rooted in dissatisfaction with the federal student loan system more broadly, and even more so with the postsecondary financial aid and awards system in the United States. Complaints about servicers at the CFPB illustrate some of this shifting of blame.
For example, loan interest rates are set by Congress, but borrowers routinely blame servicers for these conditions.
The federal student loan system in the United States is multifaceted and multiplayer. Each actor operates within its own constraints and is subject to specific incentives that may or may not serve the larger goal of promoting access to and success in higher education.
“Over the years, I have struggled to pay off my student loans when the interest kept me from doing so… The interest rate is criminal – and the company is making money off the backs of students trying to get an education. improve their lives… My disgust with this company and the federal government allowing loan servicers to take advantage of students continues to grow. The debt is crippling…Something has to be done – these companies have to be held accountable – even if it means their CEOs have to take a break from their luxury vacations on the backs of hard-working people.”
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Borrowers are also commonly upset about the perceived value of the education they received from a postsecondary institution, but often respond with resentment toward servicers. For example, in a complaint that he “received wrong information about his loan”, the borrower states:
“I feel like I learned nothing at this college except how to spend tons of money and get absolutely nothing in return. I was trapped. [Servisr] is trying to get me to pay for a student loan for a school that was fraudulently foreclosed. They were shut down by the government…Most employers find their license ridiculous. And he won’t even accept them and won’t even look at you. I went to college there…because they falsely tell you that you can graduate at this time.”
These, along with the numerous related complaints filed in the CFPB’s database, are legitimate complaints that deserve attention and resolution. But without discounting the disgusting behavior of servicers, it is instructive to note that servicers are often blamed for things beyond their control, such as loan terms and interest rates or the quality and value of the education received.
In an effort to reform student loan service, the Department announced the Next Gen Federal Student Aid initiative in late 2017 to improve the nature of how students and their families interact with the federal student aid system. A significant aspect of this initiative is the reform of service worker procedures, contracts and relationships, with the first set of contracts announced in June 2020. In October 2021, the ministry announced new and seemingly stricter service standards, along with a two-year contract extension. for six service workers, including new performance standards, such as how well agents answer questions and requests that service workers respond to complaints in a timely manner. But the road to reform has been slow and riddled with legal and regulatory challenges, including changes in priorities since the transition from the Obama administration to Trump, several canceled applications and lawsuits from private collection agencies and existing administrators. As a result, the lack of clarity on the strategies and timetable for student loan reform remains elusive.
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This uncertainty has already led to major changes in the student loan market. One of the largest servicers, the Pennsylvania Higher Education Assistance Agency (PHEAA), which serves more than eight million borrowers, announced in July 2021 that it is exiting the student loan service business. PHEAA also operates FedLoan Servicing, the primary servicer of the much maligned Public Service Loan Forgiveness (PSLF) program. Under PSLF, borrowers can have their loan balances forgiven after about ten years if they work for a qualified public service employer and meet other requirements. But the program faced a flood of complaints from borrowers about confusing instructions, misinformation and improper denials, leading to congressional investigations, lawsuits and government scrutiny.
PHEAA’s announcement was followed within weeks by another major servicer, Granite State Management & Resources, announcing that it would also suspend its approximately one million public student loan servicing operations
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