Education says a new system will help borrowers — lawmakers aren’t so sure

The Education Department has been working for nearly a decade to overhaul student loan servicing. It says that recent contracting changes will simplify processes for the tens of millions of borrowers with federal student loans, but a group of Senate Democrats say that they’re worried that the switch will actually stymy accountability.

“This new system lacks transparency,” Sens. Elizabeth Warren, D-Mass., Ron Wyden D-Ore., Chris Van Hollen D-Md., and Bernie Sanders I-Vt., wrote in a recent letter to Education.

“While we applaud the Biden administration’s efforts to modernize and improve student loan servicing… it will be difficult for borrowers and the federal government to hold servicers and contractors accountable” because of the move for all servicers to be under the Education Department brand, they write. 

Since at least 2019, Education has been working to improve the customer experience through an initiative it calls Next Gen.

That includes the replacement of legacy contracts for student loan servicing last year as part of its Unified Servicing and Data Solution. The Education Department describes it as a “long term loan servicing solution that will provide federal student loan borrowers with a 21st-century customer experience.”

The system is meant to eventually replace the current, “disjointed” environment — where borrowers have to go across the websites and contact centers of the several different loan servicers in addition to FSA — with “a single, [Federal Student Aid]-branded repayment interface for borrowers.”

Changes in the years-long, phased effort have started already, with federal student loan servicer websites updating from “.com” to “.gov” and adding FSA branding alongside servicer branding, the department said in April. A simplified login process is due this fall, where users can bring their StudentAid.gov credentials to their servicer’s website. 

Eventually, StudentAid.gov will house all functionality, “simplifying and streamlining the repayment process for borrowers,” Education says.

Student loan servicers have a history of poor performance, said Mike Pierce, executive director of the nonprofit Student Borrower Protection Center, an organization cited in the footnotes of the letter.

The new contracts include new oversight mechanisms for Education and financial disincentives for vendors to minimize errors, according to a report by the nonprofit National Consumer Law Center, also referenced by lawmakers in the letter. That includes service-level metrics.

But also — “four of the five servicers that have been awarded [Unified Servicing and Data Solution] contracts are legacy servicers with a history of borrower complaints, lawsuits, and findings of servicing problems,” the report notes.

That includes problems like servicers sending incorrect account statements and giving false information about loan cancellation or repayment plans, according to the Consumer Financial Protection Bureau, which takes complaints on student loan servicers from borrowers. Education itself disciplined three servicers earlier this year for failing to send timely billing statements when repayments started back up after the pandemic.

“What they're doing here is hiring the same bad companies that got themselves in trouble when they were operating under their own brand,” said Pierce, who formerly worked at CFPB on these issues. “All you've done is create a situation where the secretary of Education now takes the headline risk.”

The senators are concerned about accountability, and note that borrowers won’t necessarily know what servicers are behind any issues they encounter in Education’s future state. 

It’s unclear how the department routes complaints regarding the already Education-branded Business Process Operations contracts, where vendors run contact centers and speciality servicing functions, they write. 

“It is possible that the current ‘white labeling’ of specialized servicing functions and the eventual ‘single branding’ of all types of servicers under one FSA umbrella will make it much more difficult to hold individual servicers accountable,” the group continues.

The senators want FSA to include “strong transparency features that enable borrowers to identify the servicer responsible for their loan and hold that entity accountable,” and to answer a list of questions included in their letter.

Scott Buchanan — executive director of the Student Loan Servicing Alliance, a trade association representing major student loan servicers — called the idea that the changes were a way to avoid accountability a “misconception.”

“When they make a complaint to [CFPB] or to the Department of Education, the Department of Education knows exactly who the servicer is and can address that issue. It’s not like it’s unknown,” he said of the concerns for obfuscation.

Many government agencies have vendors operate call centers branded as the government's, Buchanan pointed out.

There are also benefits, he said, including the department’s ability to more easily move borrowers between servicers without disruptions and the potential for government branding to help combat fraudsters posing as servicers. 

“The Department of Education at the end of the day is ultimately responsible for the federal student loan program,” said Buchanan. “We are merely sort of the contractors who do the work that they tell us to do.”

That’s been the “party line for more than a decade,” Pierce told Nextgov/FCW over email. “Over that time federal and state law enforcement officials, who act independently of the Education Department, have prosecuted them for a range of abuses that fall far outside the terms of these contracts.”

For senators, the concern is that the accountability continues. 

Education “must move forward with caution to ensure that servicers are still held accountable for servicing failures that are commonly reported to the CFPB,” they write.

An Education Department spokesperson confirmed that the department had received the letter and told Nextgov/FCW it“will respond directly to the signers” when asked for comment.