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How to Stop a Neverending Student Loan Nightmare

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Last month, the U.S. Department of Education’s Office of the Inspector General lobbed a grenade at the federal student aid program.

In a harshly critical memorandum to the Federal Student Aid’s Chief Operating Officer, the assistant inspector general condemned the agency’s repeated failure to validate the accuracy of certain subcontractor invoices before authorizing payment.

These weren’t just any nickel-and-dime invoices.

The remittances in question were for commissions and bonuses totaling nearly a half billion dollars. They were paid to private collection agencies (PCAs) that claimed to have recovered cash on previously defaulted student loan accounts — those that had become so past due, they were at the point of foreclosure.

I have absolutely no quarrel with the IG’s rebuke, nor am I opposed to rewarding for extra effort. However, I am concerned about the operational controls that govern incentive compensation plans, especially those that pertain to something as problematic as the student loan program. I wonder in particular whether the feds are ensuring that the collections companies are doing all they should to prevent past-due payments in the first place or worsening when they do.

Stopping a Bad Situation Before It Gets Worse

Experienced lenders know how important it is to quickly nudge back on track the borrowers who’ve fallen one or two months behind in their payments, lest they become chronically delinquent — or worse, headed toward default. That’s why it’s surprising the DOE’s PCA Procedures Manual doesn’t mandate such proactivity or even establish guidelines for acceptable levels of payment delinquency when mega-bonus dollars such as these are at stake.

Moreover, according to Consumer Financial Protection Bureau, education borrowers are complaining about the difficulties they’re having understanding the terms and conditions of their agreements, confirming that their remittances have been promptly and accurately recorded, and complying with instructions that seem to change with each customer service call they make.

The college grads who’ve contacted me also frequently complain about being pitched negatively amortizing forbearances and graduated payment plans instead of provided more helpful information regarding the government’s superior debt-relief programs.

This merry-go-round of misinformation and obfuscation is the reason the CFPB announced in March a proposal to oversee the largest nonbank student loan servicing companies, just as it currently supervises the largest bank-owned operations.

A Real Solution to the Student Loan Problem?

Now that the public comment period for this has passed and the bureau is at work crafting the rules that will govern its new activity, we can only hope the guidelines that are put into place will comprehensively address the fundamental process of managing this enormous level of debt — more than for credit cards or auto loans — at a time when student loan-payment delinquencies are at record high levels.

I say that because there’s no point in attempting any legislative solution to this serious problem unless it also universally overhauls the manner in which the loans are serviced, not only by the companies the CFPB plans to oversee but also by the bevy of newcomers that successfully lobbied for a piece of this lucrative loan-servicing action.

In particular, we need standardized protocols for the proactive servicing of all education loans, whether performed by the originating lenders or their subcontractors. Among other things, it should stipulate:

  • A definitive timeline for contacting debtors and resolving late-payment issues.
  • Minimum acceptable levels of staff training and systems support to properly describe and accommodate loan restructures and modifications.
  • Maximum turnaround times for adjudicating customer service inquiries.

We also need incentive programs that reinforce these standards without causing additional harm to cash-strapped borrowers, or added costs for the federal government.

For example, servicers should be held accountable for limiting:

  • Each category of delinquency — 30, 60 and 90-days past due, worse — to levels that are consistent with other forms of unsecured consumer debt.
  • Past-due payments that migrate from one month to the next (which are known as receivables agings in financial services-speak) so that the collection companies are not undeservedly rewarded.

The validation process should incorporate these important performance measurements before the bonus checks are cut or the servicing agreements renewed.

Meantime, borrowers who are frustrated in their dealings with unresponsive loan-servicing companies should continue lodging complaints to the CFPB and their legislative representatives, as well as with the offices of those who appear to be attempting constructive solutions. They should also familiarize themselves with the various government relief programs that have been put into place so that they are in a better position to advocate for the help they need.

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