The Trump administration on Tuesday canceled a contract solicitation that would have handed the management of the federal government’s $1.2 trillion portfolio of education loans to a single company amid growing complaints from industry stakeholders and lawmakers.
Education Secretary Betsy DeVos said the Office of Federal Student Aid will create a single online platform for use by one or more loan servicers, a move that is largely aligned with the terms of the contract solicitation issued by the Obama administration. DeVos amended that solicitation in May to have one company build the portal and collect all federal student loans on the department’s behalf.
Now, DeVos says the department will devise a new approach to servicing that will require separate acquisitions for database housing, system processing and customer account servicing that will provide the opportunity for many companies to submit proposals for contracts.
“By starting afresh and pursuing a truly modern loan servicing environment, we have a chance to turn what was a good plan into a great one,” DeVos said in a statement Tuesday. She said the new head of FSA, Arthur Wayne Johnson, has “identified potential ways to modernize FSA and to leverage new technology that will not only enhance the customer service experience for borrowers but will also protect taxpayers.”
DeVos faced a flurry of criticism when she announced plans to have one contractor instead of nine manage the federal student loan portfolio. The changes, which would have taken effect once the existing contracts expire in 2019, riled some lawmakers, advocacy groups and at least one servicing company.
The Missouri Higher Education Loan Authority, commonly known as MOHELA, filed a protest last month with the federal Government Accountability Office over the revised solicitation. The terms placed the company at risk of losing its stake in managing the portfolio because the department was set to select a servicer from a pool of finalists for the old contract: Navient, the Pennsylvania Higher Education Assistance Agency and a joint venture of Nelnet and Great Lakes.
On Monday, a group of Senate Republicans and Democrats advanced the fight against the revised servicing contract with the introduction of legislation to cancel the competition for a single student loan servicer and require the participation of multiple companies. The bill would instruct the department to allocate loans to servicers based on measures of their performance, such as borrower satisfaction with their service.
“Maintaining choice and competition amongst student loan servicers is the best way to ensure they will continue improving services for student borrowers,” said Sen. Roy Blunt (R-Mo.), who sponsored the bill with Sens. Elizabeth Warren (D-Mass.), James Lankford (R-Okla.) and Jeanne Shaheen (D-N.H.).
In the wake of DeVos’s reversal, Warren praised the department for the decision, but insisted the legislation was still needed to prevent the agency from reversing course.
“Secretary DeVos’ plan to hand a trillion-dollar federal loan portfolio over to just one private company would have created a ‘too big to fail’ federal contractor, eliminated market competition, and ultimately harmed borrowers,” she said in a statement. “It will be important to continue watching the department to evaluate whether its decisions are good for the millions of struggling federal student loan borrowers.”
When DeVos announced the revision in May, she said it was necessary because the previous contract solicitation “was cumbersome and confusing — with shifting deadlines, changing requirements,” and that it was “destined for a massive and unsustainable budget overrun.”
The Education Department had estimated that switching to one servicer would have saved more than $130 million in the first five years of the contract. And although there would have been only one primary company in control of the portfolio, the department said it would permit that firm to hire subcontractors to lighten the load.
The revised servicing model would have been a return to the way student loans were collected. ACS Education Services was once the sole company charged with managing the government’s education loan portfolio, a role that critics of the company said led to widespread failures in customer service and loan consolidations.
Tuesday’s news from the Education Department is being well received by the higher education community.
Justin Draeger, president of the National Association of Student Financial Aid Administrators, applauded the department for being willing to engage stakeholders to improve the servicing system.
“The key,” he said, “will be to have strong consumer-centric requirements in the contracts so borrowers can get the best service possible.”
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