Home > 2016 > Students

Do the New Student Loan Servicing Rules Go Far Enough?

Advertiser Disclosure Comments 0 Comments

Last month, the Department of Education announced a new set of directives to target systemic problems that have plagued federal loan servicing for years. Will the new recommendations help, or will they end up being just another stack of papers piled on to an already labyrinthine federal loan bureaucracy?

How Borrowers Are Shortchanged

One of the main criticisms of the student loan servicers hired by the government is that they are prioritizing profits over helping federal loan borrowers. This isn’t entirely unexpected, since federal loan servicers are private for-profit companies. With a steady drumbeat of negative press surrounding federal loan servicing, there have even been calls for the entire federal loan servicing process to be run by the government.

Still, instead of scrapping the private contractor loan servicing system and replacing it with another government department, the Department of Education is making a serious effort to align the private loan servicing companies’ incentives with its vision for a streamlined process. The fact that this directive is a joint effort by the Department of Education, the Consumer Financial Protection Bureau, and the Treasury Department shows that the government is serious about reforming student loan servicing.

The newly released policies aim to address some of the biggest functional problems with federal loan servicing, such as borrowers not being fully informed about options for different payment plans, or how to use Direct Consolidation to make Federal Family Education Loans eligible for other programs like Public Service Loan Forgiveness. How they do this is, first and foremost, by changing the way loan servicers are compensated for helping students in danger of default stay current on their payments.

From a business standpoint, it doesn’t make sense for loan servicers to spend more time only to receive the same payment. Since loan servicers are for-profit companies, it is up to the Department of Education to provide them with incentives and contracts that align with its overall goals of reduced defaults and better communication with borrowers. When a loan servicer is compensated with the same amount whether they place someone in a forbearance (a short-term solution) versus an income-related payment plan (a long-term solution), they will inevitably do what is the most economically feasible — using the option that requires the least amount of time. This is just one example of how a fixed-rate financial incentive system shortchanges borrowers who need effective student loan counseling from their loan servicers.

Going a Step Further

The Department of Education implemented a policy in 2014 to reduce loan servicers recommending forbearance as a first-choice option to struggling borrowers. This was in favor of longer-term solutions like income-driven payment plans. These new policies go a step further to provide financial incentives for loan servicers to keep borrowers current by changing from a fixed-rate compensation system to one that rewards loan servicers for taking additional time and effort to provide specialized assistance to borrowers who are at the highest risk of default.

For loan servicers that have drawn more regulatory scrutiny and complaints than others, there needs to be more monitoring and accountability, which is emphasized in the new policy directives. By holding loan servicers accountable and not blindly renewing their servicing contracts despite some performing much worse than others, the Department of Education creates another financial incentive for loan servicers to improve. If they don’t, their bottom line could suffer as a result of fewer loans being allocated to them.

Streamlining the Process

By having loan servicers use Department of Education-branded letterhead for all communications, borrowers won’t be as confused as when they receive letters from their servicer — especially if they have switched servicers or aren’t aware who their servicer is after leaving school and beginning repayment. The Department of Education also wants to reduce any unnecessary loan transfers (those not initiated by the borrower). Being unable to determine which loans are private and which are federal is one of the most common issues I hear about from student loan borrowers. Creating uniformity with letterhead and branding for federal loans regardless of which company is servicing them should help solve that problem.

Establishing a single online portal will also make it easier since borrowers now can log into Studentloans.gov and separate loan servicer websites as a federal loan management portal. It makes sense to just have one web portal to eliminate the overlap and any resulting confusion.

Improving overall customer service metrics such as hold time and response time, as well as implementing a guideline for processing any income-related payment plan application in 10 days or less, are common sense ideas that are aimed at increasing federal loan servicing efficiency and borrower satisfaction.

Another goal is to make sure loan servicers are reaching out to borrowers who have made mistakes on their income-related payment plan applications, or who have submitted incomplete applications. This is important because the newly redesigned income-related payment plan paper applications have been criticized for being harder to complete than the previous versions.

There is increased emphasis on recertification notifications for borrowers on income-related payment plans that require yearly reverification of income and tax filing status, so that borrowers don’t fall off the plan and end up back on a payment plan they can’t afford, which can lead to default.

Another part of the initiative is to ensure that borrowers aren’t being punished for processing delays that are not their fault, and that they will remain on their income-related payment plan as long as they get the recertification in by the deadline — and if they miss the deadline, that they will receive guidance from their loan servicer for getting back on track.

Some other directives in the new policies are also a continuation of previous attempts to fix loan servicing problems. Disabled borrowers who may be eligible for Total and Permanent Disability Discharge were having their SSI payments offset due to defaulted federal loans. Part of the servicing recommendations are aimed at continuing to improve that. The Department of Education has been working closely with the Social Security Administration to do a “data match” of borrowers who are on disability and then trying to proactively reach out to them to inform them about the possibility of a loan discharge. Earlier this year, the Department of Education identified hundreds of thousands of borrowers who may be eligible for TPD discharge by coordinating with the SSA to identify them.

Addressing Other Problems

All of these new policies combined could also go a long way toward reducing the need for outside assistance that “student debt relief” companies try, and often fail, to provide. These companies charge hundreds or even thousands of dollars to prepare applications for free programs like Direct Consolidation and IBR — often without disclosing that the borrower could have applied for free on their own. Even worse, many “student debt relief” companies try to use official-sounding names so that borrowers confuse them with legitimate federal loan servicers.

By addressing the core structural problem with loan servicing — financial incentives — and moving away from a fixed-rate compensation system regardless of servicing outcome, the Department of Education may be able to reform loan servicing with the ultimate goal of reducing defaults and improving the overall experience for student loan borrowers.

Whatever the outcome, one thing that is clear from this policy directive is that the Department of Education has identified some of the main problems with loan servicing after intensive study, research, and coordination with other federal agencies.

If serious efforts are then made by the loan servicers to put these policies in place, there’s a real chance that borrowers will have a better experience repaying their loans, and that fewer borrowers will experience the devastating financial impact of student loan default.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: BraunS

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team