DeVos has rescinded three memos governing new contracts for student loan servicing companies that collect payments on behalf of the Education Department. The directives, among other things, called for the creation of financial incentives for targeted outreach to people at great risk of defaulting on their loans, a baseline level of service for all borrowers and a contract flexible enough to penalize servicers for poor service.
Servicers would have also had their compensation based on response time to answering calls, completing applications for income-driven repayment plans, errors made during communications and the amount of time it takes to process payments. What’s more, the department would have considered a company’s past performance and legal battles in divvying up the student loan portfolio — a requirement many state attorneys general praised.
State attorneys have grown weary of servicing companies in the wake of investigations and enforcement actions that they say have revealed “the havoc that student loan servicers’ poor practices and servicing failures wreak on the lives of borrowers.”
Illinois Attorney General Lisa Madigan and Washington Attorney General Bob Ferguson are both suing Navient, one of the largest student loan management companies in the country, for allegedly misallocating payments, steering people into costly plans, supplying the wrong information and ignoring borrowers’ pleas for help. The state attorneys general also allege that Navient and its former parent company Sallie Mae peddled “risky and expensive” subprime private student loans that carried high interest rates and fees. Navient denies all the charges.
In November, Massachusetts Attorney General Maura Healey reached a $2.4 million settlement with ACS Education Services to resolve charges that the servicer engaged in abusive collection practices and sloppy handling of accounts. She alleged that the company charged some borrowers excessive late fees on suspended accounts, flooded others with a barrage of debt collection calls in violation of the law and delayed processing applications for income-driven repayment plans.
State authorities are playing a bigger role in resolving consumer complaints against servicing companies, with some jurisdictions creating units to counsel borrowers. Critics of the Education Department say states are being forced to step up because the agency has been lax in holding its contractors accountable for poor service. The series of memos, they have argued, could have strengthened consumer protections to the benefit of borrowers and taxpayers.
“Too many students across the country graduate college saddled with thousands of dollars in student loan debt and fall victim to gross misconduct by loan servicers,” said Virginia Attorney General Mark Herring. “These critical reforms had been put in place to protect our students and their families, and it’s downright irresponsible for the Department of Education to roll them back.”
The Education Department did not immediately respond to requests for comment.
When DeVos withdrew the Obama-era memos, she said it was necessary because the contract process had been “subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.”
She added: “We must promptly address not only these shortcomings but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service. This must be done with precision, timeliness and transparency.”
But DeVos has yet to recommend any alternatives to the measures being rescinded or outline the department’s plan to shore up the existing servicing system.
Policy analysts have questioned the effectiveness of student loan servicing as the amount of federal education debt in default climbed 14 percent to $137 billion in 2016. Tens of thousands of people are defaulting for at least a second time, even though there are programs that limit monthly payments to a percentage of earnings. The Government Accountability Office has found breakdowns in servicers informing borrowers about those affordable repayment options, as has the Consumer Financial Protection Bureau, which is now investigating discrimination in servicing.
“With loan defaults on the rise, this rollback of student protections comes at the worst possible time,” Massachusetts AG Healey said Monday. “We are urging the secretary to change course immediately.”
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