Journalists looking for new angles on the click-grabbing topic of student loans should consider digging into legal and political battles over who answers the phones when borrowers call with questions, and how the bills are collected, experts told reporters at recent Education Writers Association event in Washington, D.C.
“While it may seem like a really technical and wonky process, it’s really important to understand,” because such “servicing” details impact the 44 million Americans who hold federal student or parent loan debt, said Colleen Campbell, the director of the postsecondary education program at the the Center for American Progress, a liberal-leaning think tank.
Servicing “impacts every student and parent borrower around the country,” agreed James Bergeron, the president of the National Council of Higher Education Resources, which represents some of the contractors who do the servicing for the U.S. Department of Education.
Who answers the federal student loan phones?
Though the federal government awards almost all federal loans today, it pays nine different contracting firms, called “servicers,” to collect payments, communicate with borrowers, and grant payment delays when needed.
The federal contracts call for the servicers to be paid up to $2.85 per month for handling each loan.
The servicers each have different websites, forms and support systems for borrowers. Some have computer systems developed in the 1960s, the panelists noted.
That means different borrowers often have wildly different experiences, and get different answers to similar questions, Campbell said. In some cases, servicers also have not followed federal rules, she claimed.
Multiple investigations — as well as the attorneys general of five states — accuse some of the loan servicers of intentionally mishandling loans of thousands of borrowers to keep them on the books and bringing in profits.
“The Government Accountability Office, Department of Education Inspector General and Consumer Financial Protection Bureau have all reported that contractors…have improperly serviced accounts,” said Campbell. The GAO, for example, recently found that servicers sometimes “failed to give borrowers the appropriate rundown of their options and pushed them into ‘forbearances,’ which are oftentimes the less-beneficial option to the borrower,” Campbell said.
Borrowers having trouble making their federal student loan payments can ask for accommodations such as “forbearance,” which suspends payments but allows the interest to keep building. For most, a better option is an “income-driven” repayment option (IDR), in which monthly payments rise and fall with the borrower’s income. Borrowers on IDR payment plans can eventually hope to get at least some of their debt forgiven. Forbearances do not result in any forgiveness.
Public Service Loan Forgiveness problems
One of the biggest flash points facing the Department of Education and the current servicing contractors is the way they are handling (and, in most cases, denying) applications by borrowers for Public Service Loan Forgiveness, said Aaron Ament of the National Student Legal Defense Network.
In 2007, President George W. Bush signed legislation allowing forgiveness of any remaining federal student loan debt to borrowers who worked in public service jobs (such as for government agencies or nonprofits) and had made 120 on-time monthly payments through an income-based federal repayment option.
But lawsuits across the country have charged that servicers failed to give public servants correct information on qualifying for forgiveness. And the Education Department says it has denied 99 percent of the more than 28,000 forgiveness applications filed so far
Borrowers who had counted on having loans wiped out were shocked to learn that wouldn’t happen, often because they weren’t on the right repayment plan or because their employer didn’t qualify.
“So, what happens when you get less than one percent of tens of thousands of borrowers that think they’re going to get their loans discharged?” Ament asked. “You’re going to get litigation.”
Along with class action lawsuits by individuals, the American Federation of Teachers and the attorneys general of five states — California, Illinois, Mississippi, Pennsylvania and Washington — are all taking legal action to recover money for borrowers.
Loan servicer Navient, formerly known as Sallie Mae, is a main target of those legal actions, with Great Lakes Educational Loan Services also being named in some cases.
A common allegation in the suits is that those servicing contractors failed to provide forgiveness information to borrowers so the servicers could keep receiving the $2.85 per month from the federal government. Borrowers who switch to PSLF plans are transferred to another servicing company, called FedLoan Servicing, which is operated by the Pennsylvania Higher Education Assistance Agency.
Some states are also trying to exert control over servicers by passing their own regulations.
But the servicers are battling back. Navient and Great Lakes have denied the allegations in the lawsuits. And they are trying to block new cases and laws by arguing “preemption” — that federal law preempts state law and that only the federal government has standing to pursue action against them. The Trump administration and Education Secretary Betsy DeVos have backed the servicers, arguing in court that federal law prevails over states.
Courts have so far issued conflicting rulings on preemption, which means the dispute may go to the Supreme Court.
Will ‘Next Gen’ fix the problems?
Servicers don’t deserve all the blame for confusing and misleading borrowers, said Campbell. The federal laws governing students loans are complicated. And the Department of Education has given servicers little guidance so far.
But that may be changing. In late 2017, the department proposed a massive overhaul it called “Next Generation Financial Services Environment” or “Next Gen”. The goal is to reduce the confusion and provide borrowers with one-stop shopping for loan information, applications, repayment support, and complaints.
While contractors will likely still provide some services, “this will bring it all under the Department of Education umbrella,” Campbell explained. “It will all be branded under the Department of Ed. There will be one website, one phone number, 24-hour call centers, all kinds of consistent tools for borrowers to access.”
The hope, she said, is that NextGen will have more consistent rules and enforcement, a change she called “huge for borrowers.”
Bergeron said he hoped that NextGen will give borrowers information about each servicer’s performance metrics and empower borrowers to choose a servicer, thus allowing the market to reward the best contractors.
It’s an ambitious plan that reporters should monitor, the panelists said. So far, however, it is moving very slowly. As of March 2019, the Education Department was still soliciting bids for contractors to implement parts of the plan, and battling lawsuits by some of the potential bidders.
With that in mind, the proposed fix to many servicing problems will itself likely generate headlines throughout 2019.