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The provision in the budget agreement that could radically change student loan servicing

House Speaker Paul Ryan (R-Wis.) takes a question during a news conference on Capitol Hill  on De. 16  following a GOP meeting.  (Andrew Harnik/AP)

Congress handed a big win to a group of nonprofit companies that manage student loan payments for the government in the massive budget deal unveiled Wednesday.

[Congress reaches year-end deal on taxes and spending]

As a condition of a $155 million bump in funding for the Department of Education, lawmakers are requiring the agency to toss out a formula for divvying up its portfolio that gives preference to four student loan servicers — Navient, Nelnet, Great Lakes and American Education Services.

Instead, the department would have to allocate new loans based solely on the quality of a servicers’ work and ability to keep borrowers current. That could shift a significant share of business to nonprofit companies, like the Missouri Higher Education Loan Authority and Oklahoma Student Loan Authority.

“We appreciate that Congress also wants to ensure borrowers receive the highest quality service and are currently reviewing the appropriations language and its implications for borrowers,” said Department of Education spokeswoman Denise Horn.

Industry groups have lobbied Congress to level the playing field for nonprofit student loan servicers, arguing that if the companies managed a larger share of loans there would be fewer consumer complaints. The Consumer Financial Protection Bureau has tracked thousands of complaints of the big servicers losing paperwork, processing payments too slowly or sending inaccurate billing statements.

[The surprisingly high number of people who are behind on their student loans]

“This provision is a win for student loan borrowers, ensuring that they receive effective, personalized loan servicing that guides them through their repayment period successfully, and for taxpayers, who deserve a system that maximizes existing and proven resources,” said Michele Streeter of the Education Finance Council, a trade group representing nonprofit and state-based student loan servicers.

As it stands, the four companies manage nearly 70 percent of the entire $1.1 trillion federal student loan portfolio, even though there are a total of 10 servicers managing the loans.

The lopsided allocation dates back to 2009, when the department began using four companies, instead of one, to collect and apply student loan payments. At the time, the department received an influx of loans as it repurchased debt from struggling private lenders at the advent of the financial crisis.

A year later, Congress gave nonprofit companies, some of which guaranteed federally insured loans, a stake in the portfolio in a political trade that ended the bank-based lending program. Since then, there’s been a two-tier system in place.

[How the attempt to fix student loans got bogged down by the middlemen]

Although companies in each tier only compete among themselves for new business, they all receive accounts based on how they score on two customer satisfaction surveys and three default prevention metrics.

Using the current metrics at the department, Ben Miller, senior director for postsecondary education at the Center for American Progress, created a projection of how the new loan servicing changes could shake out:

The nonprofit firms primarily manage older loans that were originated by banks, which tend to have fewer defaults because borrowers have been repaying the debt for some time. As a result, some question whether the nonprofits are capable of handling newer loans that are more susceptible to late payments and defaults. Any changes they say would need to take into account the type and age of the loans when judging performance.

Streeter said her members “have more than enough capacity to easily handle 100 percent of the anticipated new loan volume, along with any repeat borrowers, for the 2015-16 academic year and beyond, while retaining their excellent results and customer service.”

Still, funneling more loans to the nonprofit servicers could make an already complicated system even more daunting to colleges and borrowers, said Miller at CAP.

“If you go from dealing with four different servicers to 10, that’s a lot of difference people to keep track of,” he said. “The department could control for that by limiting the number of servicers at any one school, but it just feels like another layer of complexity.”

Want to read more about the student loan servicing? Check out these stories:

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