Charlene CrowellColumnistsFinancial Literacy

Education Department Helps Loan Servicers Instead of Borrowers

In an increasingly competitive global economy, highly skilled workers have a sharp advantage in securing and keeping employment. And as technological advances result in lifelong learning in many occupations, many worker-students turn to federal student aid, the largest source of funding for higher education, to expand and/or hone their value in the marketplace.

But a newly released audit report finds fault with how the Department of Education is managing both its loan funds and its 15 contract student loan servicers. According to an Office of Inspector General (OIG) report released Feb. 12, “borrowers might not have been protected from poor services, and taxpayers might not have been protected from improper payments.”

That statement covers a range of student loan concerns and includes loan payments, loan consolidation, principal and interest payments and repayment options like income-driven repayment plans and forbearance. But its content takes direct aim at the Federal Student Aid (AID) division of the department, charged with being a thrifty steward of the billions of dollars dedicated to higher education.

Could it be that the current student loan crisis is facing the same threat today that was rampant a decade ago during the mortgage crisis? Are borrowers’ payments being properly applied? Or are unchecked and unaccountable loan servicers bilking consumers into unwarranted costs and payments?

I’m betting that the 44 million borrowers who together owe more than $1.4 trillion in student loan debt seriously want to know.

“FSA’s not holding servicers accountable could lead to servicers being paid more than they should be (the contracts with servicers allow FSA to recover amounts paid for loans not serviced in compliance with requirements),” the report states.

“FSA management rarely used available contract accountability provisions to hold servicers accountable for instances of noncompliance,” the report continued. “By not holding servicers accountable for instances of noncompliance with Federal loan servicing requirements, FSA did not provide servicers with an incentive to take actions to mitigate the risk of continued servicer noncompliance that could harm students.”

According to OIG, all student loan servicer contracts are supposed to be awarded on the basis of performance measures in five weighted areas. Two factors, borrower satisfaction and the percentage of borrowers who were not more than five days delinquent, together account for up to 60 of a contractor’s overall score. Servicers are also evaluated on the percentage of borrowers whose loans were more than 90 days late but less than 271, and a percentage who were more than 270 days delinquent but less than 361, and an FSA employee satisfaction survey.

Although the department has 15 student loan servicer contracts, four were the biggest beneficiaries during the OIG’s audit period. As of Sept. 30, 2017, federal student loan debt was $1.147 trillion with 93 percent of those loans assigned to PHEAA ($319 billion), Great Lakes ($236 billion), Navient ($215 billion), and Nelnet ($180 billion).

In February 2017, the Consumer Financial Protection Bureau (CFPB) sued Navient Corporation and two of its subsidiaries for allegedly using shortcuts and deception to illegally cheat 12 million borrowers out of their rights to lower loan repayments. These practices, according to CFPB, led to an additional $4 billion in borrower costs.

Much of the unnecessary costs were the result of Navient’s widespread use of forbearance that boosted corporate profits by minimizing time spent advising distressed borrowers. For example, three-years of deferment on $30,000 in student loans would cost a borrower an additional $6,742.

Navient also had another dubious distinction. In 2017, more consumers filed complaints about Navient than any other student loan servicer. Complainants identified dealing with the servicer or lender as the key issue, compared to only 34 percent whose problems were based on an inability to pay their loans.

“The Inspector General’s damning revelations that the Department of Education failed to track all instances of non-compliance or to hold servicers accountable for errors demonstrates its lack of commitment to protecting student loan borrowers,” said Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “Unfortunately, this revelation is consistent with the department’s prior actions, which have repeatedly put the interests of big business ahead of the interests of student loan borrowers.

“In this past year, Department of Education has justified its aggressive steps to shield student loan servicers from liability by claiming that it rigorously oversees its servicers,” added Yu. “This report from the Inspector General demonstrates that claim is false.”

Many consumer advocates would agree with the Trump administration’s mounting actions that favor businesses before consumers. The recently-announced rule reversal on payday loans is another example. In 2018, guidance that protected people of color from discrimination in auto loan financing is yet another.

“Policies and practices must assure student success while minimizing costly debt errors that become unnecessary burdens,” said Whitney Barkley-Denney, a policy counsel for the Center for Responsible Lending.

Charlene Crowell is the deputy communications director of the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.

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