Photographer: Topp Yimgrimm/Getty Images/iStockphoto

What If the Student-Debt Collector Were a Real Live Human Being Who Helped You?

Robocalls at night. Not-so-veiled threats. Here’s what loan servicers would have to do if the Obama administration prevails.

It's 9 p.m. and your phone chimes. You're among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you've started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.

It's a human being. Offering a payment plan tailored to your monthly income and suggesting ways she can work with you over the next few years to help you manage your obligations.

It's possible. Under new guidelines the Obama administration proposed Wednesday, companies responsible for handling nearly $1 trillion in direct federal student loans would have to shift their focus from collections to helping borrowers manage or discharge their debt. The directives, contained in a memorandum from the Department of Education to the department’s Federal Student Aid office, include:

  • Requiring companies to inform delinquent borrowers of their eligibility for income-based repayment plans before demanding they make a payment
  • Requiring loan contractors to make vigorous efforts to contact borrowers at risk of default and walk them through their options
  • Creating teams of specially trained customer service representatives within each contractor that would immediately handle inquiries from struggling borrowers who call for help
  • Setting strict deadlines for loan companies to process borrowers’ applications for various repayment plans
  • Demanding that companies inform borrowers potentially eligible for loan cancellations about their debt discharge options before discussing repayment 

FSA still has to approve the guidelines and write them into contracts with its loan specialists, such as Navient Corp. and Nelnet Inc. Today’s borrowers probably would have to wait for years before they see any impact.

The memo represents the culmination of years of effort by the White House to reduce the surge in loan defaults that have occurred on President Barack Obama’s watch. In the wake of the recession and during the long, muted recovery, millions of Americans have sought higher-education credentials for leverage in the job market, leaving many with little more than a mountain of debt. In addition to forcing FSA's hand, the White House aims to bring basic borrower protections to an industry the federal Consumer Financial Protection Bureau last year said is marred by “widespread servicing failures."

Student loan servicers say they do right by borrowers, who too often dodge their calls. Some industry leaders, such as Jack Remondi, Navient’s chief executive, have decried the increasing complexity of the federal student loan program. There are numerous plans that allow borrowers to postpone payments or cap their monthly payments relative to their income. Navient, under investigation by numerous state and federal authorities for allegedly mistreating borrowers in violation of consumer protection laws, has steadfastly denied any wrongdoing. 1 Wednesday’s memo detailed a variety of mechanisms for the government to keep contractors accountable, such as public reporting of how often borrowers’ disputes with contractors are resolved in their favor, the share of borrowers whom servicers fail to contact, and the average time it takes a borrower who calls for help to get a specially trained expert on the phone. The moves, if adopted, would likely lead to higher costs for the government’s loan contractors, said Michael Tarkan, an analyst at Compass Point Research & Trading, but it’s unclear whether the government would stump up the cash to compensate servicers for their efforts.  

The administration's public announcement underscores the relative powerlessness of the administration, in its final months in office, to improve the treatment of student loan borrowers who took out loans directly from the Education Department. Likewise, it highlights the challenges the next administration could face in trying to reform the nation’s student loan system without new legislation from Congress. Presumptive Democratic presidential nominee Hillary Clinton said this month that if elected she would impose a three-month “moratorium” on student loan payments to “crack down” on “loan servicers who have too often taken advantage of borrowers.” Republican nominee Donald Trump has offered few details of his plan for student debt.

The little-known student aid office is the federal government’s first “performance-based organization,” giving it more freedom from political interference than the typical government agency. It’s in charge of administering the loan program and the related contracts the government enters into with loan companies to collect on outstanding debt.

FSA refers to its contractors as its “partners” and, unlike the federal consumer bureau, makes a point of not formally characterizing borrowers’ complaints as “complaints.” Oversight has been thin and accountability rare, according to numerous audits by federal watchdogs. The department historically has focused on K-12 issues while leaving higher education matters to FSA, allowing it to operate largely independently of the Education Department.

“The Education Department should be able to prescribe what it wants FSA to do, but it doesn’t work that way,” said Deanne Loonin, a Massachusetts-based consumer attorney who represents student debtors. “The department is almost begging FSA to do things in a certain way.”

FSA’s existing contracts, updated just two years ago in response to concerns that too many borrowers were falling behind on their obligations, are in effect until 2019. Even if FSA adopts the Education Department’s directives, it will be years before the more than 30 million Americans with loans made directly by the Education Department will experience the benefits. The American Federation of Teachers, many of whose members carry student loans, last week said the department should scrap the current contracting process and start over.

“It is imperative that we reform servicing and debt collection practices for all student loan borrowers now,” said Illinois Attorney General Lisa Madigan, who recently sent the Education Department the findings of her multi-year investigation into prominent department loan contractor Navient. “If we don’t address these problems today, our economy will face grave consequences in the near future.”

Madigan said her investigation revealed that servicers often steer borrowers into plans that postpone their payments, rather than taking the time to enroll them in income-based plans, to hurry them off the phone. She said the Education Department adopted many of her office’s recommendations to improve how borrowers are treated.

Deputy Treasury Secretary Sarah Bloom Raskin said a default can be “catastrophic” for borrowers. It hurts their credit scores, reduces their ability to secure housing, and in some states can cost them their occupational licenses. 2 “In aggregate,” she said, defaults “can have a serious impact on our economy.” White House economists said the opposite on Tuesday.  Over the last three quarters, 888,000 borrowers have defaulted on loans made by the Education Department, dwarfing by 46 percent the increase in borrowers making payments based on their income.

The Education Department said in its memo that taxpayers should expect loan servicing to be “cost effective.” Asked Wednesday whether the feds would increase the pay for their loan contractors, Education Secretary John B. King Jr. said only that the Obama administration would work with Congress.

But Congress over the past few years has given the department what it asked for when it came to paying for loan servicing activities, budget documents show. King’s department last year spent 12 percent less on servicing than Congress appropriated. Asked whether he was prepared to fire anyone if his department’s directives weren’t written into FSA’s new contracts, King said, “We expect FSA to implement the memo as written.”

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