Last month, while the Senate and House were playing Texas Hold ‘Em with student loan interest rates (the college kids lost that hand), the Federal Student Aid office at the Department of Education was busy reshuffling the deck.
In a post dated July 26, an FSA operations director described how education loans that are currently being serviced by a company that will soon be departing the Direct Loan program are to be transitioned to other DOE subcontractors. Loan servicer replacements occur periodically, for all kinds of reasons, and certainly we don’t know why this particular change is happening at this particular time.
A quick search of the exiting company’s name revealed many complaints. But then I searched the ones that are still in the game and combined what I read online with the stories I’ve heard from borrowers who emailed and phoned. A number of those companies have problems too.
There are complaints about misapplications of principal payments, where extra remittances that were explicitly directed to be applied against unpaid loan balances were instead credited against future payments (which save borrowers nothing). And those who are struggling, and might otherwise have qualified for one of the government’s longer-term relief programs such as the Pay As You Earn and Public Service Loan Forgiveness plans were instead shunted into deferments and forbearances that amounted to little more than a negatively amortizing time-out.
Forbearance is not forgiveness. When the relief involves a reduction in payment — or even a suspension of all payments for a period of time — the unremitted interest is added to the unpaid loan balance, at which point more interest is assessed on the higher amount resulting in even higher payments for the remainder of the term.
What Are Student Loan Servicers?
Loan servicing companies are in many cases hired hands: intermediaries that stand in between the institutions that make the loans (or the investor groups to whom these loans were later sold) and the borrowers who make the payments. But they’re not doing this work out of the goodness of their hearts — they’re in it to make money. The question is whether their compensation-driven objectives are at cross-purposes with the legitimate interests of the borrowers they’ve been subcontracted to serve.
Good loan servicing helps stave off loan defaults, and staving off loan defaults saves consumer-taxpayers money. It doesn’t matter if the loans are government-guaranteed or privately financed — loan losses are ultimately passed on in the form of higher borrowing costs, which consume tax dollars.
Therefore, it stands to reason that the nation’s largest higher-education lender — the federal government — should lead the way by mandating a set of loan servicing standards that include:
- Full disclosure of the longer-term implications for the various relief options that range from short-term forbearances to permanent modifications.
- Requisite turnaround times that govern all aspects of the loan servicing cycle from first contact to problem resolution.
- Delinquency-rate targets that should approximate similarly unsecured (uncollateralized) consumer debt such as credit cards.
Thereafter, each loan servicer’s performance could then be evaluated by monitoring:
- Resolution rates (successes vs. failures) and turnaround times (from first inquiry to the implementation of the relief arrangement).
- Post-resolution payment performance for all restructured loans, which serves to validate the appropriateness of the relief plans that are being put into place.
- Delinquency rates for the aggregate loan portfolio that are tracked by category of severity (i.e. 30 days past due, 60 days past due, and so forth), to ensure that the servicer is doing all it should to avert worsening outcomes.
Contrary to what some may believe, the vast majority of borrowers — including those who are down on their luck — want to honor their financial obligations. One thing, though: What they need are for lenders, investors and their subcontractors to help them do just that when trouble hits. That means a fair deal — not a hand that’s dealt from the bottom of the deck.
This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.