This piece provides an overview of the current student loan servicing system. For a timeline of the events and actions leading up to the current servicing solicitation, click here.
Overview
The U.S. Department of Education (ED) has originated or guaranteed hundreds of millions of federal student loans, but it does not manage this debt on a day-to-day basis. Instead, it contracts with servicers, companies or organizations that are the primary points of contact for borrowers once they leave school, and their responsibilities include communicating with borrowers about the status of their loans, providing information on and assisting borrowers as they enroll in repayment plans, managing contact centers, and processing payments, among others. Yesterday, ED’s Office of Federal Student Aid (FSA) announced that it is seeking bids for a new student loan servicing system—the fifth such solicitation since 2016—which will be called the Unified Servicing and Data Solution (USDS). (For a timeline of the events and actions leading up to the current servicing solicitation, click here.)
ED and FSA have been working to restructure the often troubled servicing environment since 2014. The large-scale, ambitious overhaul—which is now called “Next Gen”—includes not only loan repayment via USDS but also tools and services related to how students learn about, apply for, and receive their aid in the first place. Although much has been accomplished since 2014 to identify and address problems faced by students and streamline borrower-facing components of the system, the Next Gen initiative has yet to be completed due to evolving priorities at ED and FSA, resource limitations, new Congressionally mandated requirements, and protests related to the procurement process.
The current procurement will, if all goes well, result in new contracts with a number of servicers to manage new and existing federal student loan accounts, likely starting in 2023. FSA envisions a system in which borrowers will be able to more easily and seamlessly access tools and services; FSA will be able to iterate, innovate, and hold contractors accountable for their performance; and servicers will be incentivized to help the most distressed borrowers. And to be sure, there were many things to like in the preliminary document released by ED earlier this year.
But in order to understand what works and what doesn’t, we must first take into account where the servicing system has been over the last almost-decade since this protracted and expensive process began, existing problems caused by the current structure and actors within it, and other, related reforms on the table. For example, actions around debt cancellation, permanent changes to existing regulations governing student debt, and shorter-term reforms to existing programs to make up for past failures and ensure the system operates more smoothly will change the composition of the portfolio and servicers’ and FSA’s role within it. Over the coming weeks, the New America higher education team will examine FSA’s new solicitation and the implications for the future of loan servicing; but first, we provide a deep dive into the servicing system today.
Who are student loan servicers?
From the beginning of ED’s program directly lending to borrowers in the early 1990s until 2009, FSA contracted with one company to service its Direct Loans. (Loans made by private lenders and guaranteed by ED were serviced by a variety of other entities.) As ED acquired loans from private lenders during the financial crisis, and as it began originating a larger volume of loans itself, it needed additional servicing capacity. In 2009, it signed contracts with what are called “Title IV Additional Servicers,” or TIVAS, and in 2011, as required by law, it brought a host of smaller not-for-profit servicers (NFPs) on board.
Today, FSA contracts with six student loan servicers that still fall into these two categories:
- The TIVAS are a mix of larger for-profit and state-based entities that collectively service the vast majority of the federal loan portfolio. They include Great Lakes Educational Loan Services and Nelnet Servicing (which are part of the same company) and AidVantage (the servicing arm of Maximus, which currently manages FSA’s default portfolio). As of December 2021, Great Lakes serviced the loans of more than eight million borrowers with ED-held loans and Nelnet and AidVantage each serviced the loans of close to seven million.
- The NFPs are generally smaller companies and state-affiliated agencies and include Edfinancial (Higher Education Servicing Corporation, or HESC), Missouri Higher Education Loan Authority (MOHELA), and Oklahoma Student Loan Authority (OSLA). As of December 2021, the NFPs collectively service the loans of approximately nine million borrowers.
Recently, a number of servicers have exited the system for a host of reasons, including increased oversight and enforcement actions by ED, states, and other federal agencies; the cost and complexity of providing services; and (relatedly) a desire to focus on other lines of business.
- CornerStone (Utah Higher Education Assistance Authority, or UHEAA) left the system in 2020 and transferred its 1.1 million federal student loan borrowers to the Pennsylvania Higher Education Assistance Agency (PHEAA), which operates under the brand FedLoan Servicing.
- In 2021, PHEAA also announced it was exiting federal student loan servicing. It has a legacy contract with FSA and is in the process of transferring its accounts to other servicers.
- The New Hampshire Higher Education Loan Corporation, which operated its loan servicing business under the name Granite State Management & Resources (GSMR) left in 2021, transferring its loans to Edfinancial.
- Maximus/AidVantage took over Navient’s portfolio when Navient exited the system in 2021. (Navient was formerly a part of Sallie Mae.)
Currently, borrowers enrolled in or intending to apply for certain forgiveness or discharge programs are assigned to specific servicers. For example, PHEAA previously serviced the Public Service Loan Forgiveness (PSLF) and the Teacher Education Assistance for College and Higher Education (TEACH) Grant programs. Accounts for both are in the process of being transferred to MOHELA. Nelnet services the total and permanent disability (TPD) discharge program.
Each servicer has its own website, trains its own customer service representatives, and typically has a fair amount of discretion in terms of protocols and outreach strategies for engaging with borrowers. Some servicers operate on the same back-end processing systems, but there is not one standardized platform, and FSA doesn’t have complete access to these systems. As a result, borrowers’ experiences repaying their loans often depend on their servicers, for better or worse, and FSA has traditionally lacked some of the tools necessary to track noncompliance (although government reports indicate that it has also been lax about doing so).
FSA most recently entered into five-year contracts with the TIVAS and NFP loan servicers in 2014. These contracts were extended through December 2021 for the TIVAS and through March 2022 for the NFPs using contractual authority to help manage the (stalled) transition to Next Gen. In late 2020, Congress, via the Consolidated Appropriations Act of 2021, allowed FSA to extend the period of performance of these contracts for another two years.
How is servicer performance measured?
FSA awards contracts to servicers, issues instructions and guidance, and oversees performance through compliance reviews, phone call monitoring, independent financial audits, unannounced site visits, and routine discussions with servicers, among other mechanisms.
Until recently, FSA used five performance measures to assess loan servicers on a quarterly basis: customer service satisfaction, based on a survey of borrowers; the percentage of borrowers in current repayment status; the percentage of borrowers 90-270 days delinquent; the percentage of borrowers 271-360 days delinquent; and a survey of FSA employees. Loan servicers compete for new loan volume based on their relative quarterly performance on these metrics.
Starting in 2022, FSA instituted new contract terms for servicers (via the extensions authorized by Congress, as noted above), including stronger performance standards designed to give FSA “greater ability to monitor and address servicing issues as they arise; require compliance with federal, state, and local laws relating to loan servicing; and hold servicers accountable for their performance.”
Previously, contracts included incentives for certain behavior but did not directly penalize servicers for poor performance other than reducing revenue by allocating a smaller number of loans. The new contract terms mean that servicers are now assessed quarterly based on service level agreement metrics, which have built-in performance thresholds. Servicers can incur penalties, including not receiving any new loan allocations, for not meeting them. These metrics include:
- The percentage of borrowers who end a call before reaching a customer service representative by phone, not to exceed 4 percent;
- How well customer service representatives answer borrower questions and help them navigate repayment options, not to dip below 95 percent;
- Whether servicers process borrower requests accurately the first time, not to dip below 95 percent; and
- Customer satisfaction (i.e., the overall level of customer service provided to borrowers), which must remain above 70 percent.
Servicers are also still assessed via (updated) portfolio performance measures—including the percent of borrowers less than 31 days delinquent, the percent of borrowers 31-90 days delinquent, and the percent of borrowers more than 90 days delinquent—meant to ensure servicers are helping borrowers not fall behind on their payments. Servicers are further evaluated based on their ability to assist high-risk borrowers, including those who previously defaulted, those who did not complete a degree or credential, those who recently entered repayment, and those who recently experienced a hardship.
The new contract terms also require servicers to have set call center hours; include increased reporting requirements and transparency; require servicers to “comply with federal, state, and local laws governing loan servicing and to respond to complaints filed with those authorities in a timely manner;” and prohibit servicers from avoiding lawsuits related to poor performance. (While these changes are an important step in the right direction, there is more to be done to align contracting terms and compensation with desired borrower outcomes, as described below.)
How are servicers compensated?
Once servicers receive an allocation of loans, FSA pays them a fee each month for each borrower based on the status of that borrower’s loans. Servicers are paid the most for borrowers who are current on their payments and less as they become delinquent or enter periods of paused payment.
- In Repayment: $2.85
- Delinquent, 6–30 days: $2.11
- In Grace Period: $1.68
- In Deferment: $1.68
- Delinquent, 31–90 days: $1.46
- Delinquent, 91–150 days: $1.35
- Delinquent, 151–270 days: $1.23
- In School: $1.05
- In Forbearance: $1.05
- Delinquent, 271–361+ days: $0.45
Due to the pandemic, student loan payments, interest, and collections activities for most federal loans are paused (i.e., in an administrative forbearance) through at least August 31, 2022. As of October 2020, servicers are being paid a negotiated rate of $2.19 for loans in forbearance during the pandemic.
Other actors in the system
FSA also awarded Business Process Operations (BPO) contracts to a group of vendors in 2020—Edfinancial, F.H. Cann & Associates, Maximus, MOHELA, and Trellis Company—as part of a previous procurement. In 2021, the BPO vendors started managing some call centers, such as the student loan Ombudsman hotline and borrower defense to repayment hotline, and back-end processing tasks. And, in 2022, they will begin managing pieces of the default portfolio. (Historically, FSA contracted with a set of private collection agencies to manage accounts in default, but in late 2021, it ended those contracts.) As part of its new servicing environment, FSA also envisions the BPOs taking over the management of specialty servicing programs, including PSLF, TEACH Grants, and TPD.
In response to failures in the existing system (as described below), other federal agencies—including the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission, among others—and some state enforcement entities have also stepped in. The current administration at ED has signaled a desire to work collaboratively with these other stakeholders to provide oversight of the servicing system and acknowledges the importance of states’ legislative, regulatory, and enforcement tools (and FSA’s own limitations). But this hasn’t always been the case, especially during the previous administration, sparking debate about the role of federal partnerships and litigation about states’ authority to license, regulate, and oversee federal student loan servicers.
Challenges of the current system
A host of stakeholders—including federal and state agencies, borrowers and consumer advocates, and servicers themselves—have expressed concerns about elements of the current student loan servicing system.
Servicers provide inconsistent, incorrect, and inadequate assistance to borrowers.
Analyses of student loan borrower complaints over time by ED and the CFPB, investigations by ED’s Office of Inspector General (OIG) and the CFPB, reports by the Government Accountability Office (GAO), enforcement actions, and reports from borrowers and those engaged on their behalf, among others, point to issues related to servicers’ customer service, outreach and communications, record keeping, and compliance with federal servicing guidelines. These data indicate that borrowers receive inconsistent, conflicting, incorrect, or inadequate information; struggle to access repayment plans and navigate the system; and face barriers to ensuring their loans are in the correct status. In addition, a host of federal and state actors have filed lawsuits related to servicing noncompliance and malpractice, including placing borrowers in more expensive repayment options, not providing access to existing forgiveness programs, and a host of other issues leading to borrowers paying more and over longer periods of time.
FSA provides inconsistent and inadequate communication to and oversight and enforcement of servicers.
Student loan servicers and other contractors note that ED and FSA often do not provide clear, consistent guidance on implementing aspects of or changes to the loan system; while there are standardized contract requirements for all servicers, there is no common manual for servicing protocols and procedures, resulting in borrowers having variable experiences repaying their loans. In addition, numerous government reports have highlighted shortcomings in FSA’s oversight of servicers, including failures to solve emerging problems and a lax monitoring of servicer communications. A recent ED OIG report noted that, “FSA did not track all identified instances of loan servicer noncompliance and rarely held loan servicers accountable for noncompliance with requirements.” And the GAO indicated that while ED previously “drafted requirements for servicers to address accuracy concerns with…payments, [it] ultimately decided not to implement the draft requirements.”
As part of Next Gen, FSA intends to make it easier to transfer accounts away from entities that do not meet its standards, a task that is needed but has proven complex in the past given the size and make up of servicers’ portfolios. It also plans to rely more on BPOs, which are less autonomous than the current servicers in that they rely on FSA for strategies to engage with borrowers. In such an environment, it will be equally important for FSA to be held accountable for borrower outcomes and its own capacity and guidance.
The repayment system is confusing to borrowers and complex to administer.
When the system is working well, borrowers have access to a host of benefits and protections to help them in repayment. These include income-driven repayment (IDR) plans, which tie monthly payments to income and family size and are more affordable for many. Borrowers report that IDR plans are difficult to enroll and remain enrolled in, in part because of confusing application and annual recertification processes and in part because of the wide array of available plans (borrowers have access to up to nine). The result is that many borrowers who would benefit from an income-driven plan are not enrolled in one.
Servicers are tasked with keeping borrowers current on their loans by providing information about their repayment options and processing forms, applications, and payments through their back-end systems. This is an increasingly complex task, especially in a system that continues to add new repayment plans and options. Broader enhancements across the repayment system—particularly around streamlining repayment processes—are needed to improve the provision of information and support to borrowers.
In addition, transitions between the repayment and default systems are complex and a barrier to borrower success. Every year about a million borrowers default on their federal student loans and move from the repayment system to a different set of actors who handle collections. Others resolve their defaults and move from the default system back into good standing. Neither of those transitions is particularly smooth. Each involves hand offs, status changes, and paperwork. In particular, borrowers moving back into repayment from default are at a high risk of defaulting again—an especially bad outcome because it may be hard, if not impossible, to exit default a second time.
Performance metrics, penalties, and incentives are not aligned with desired borrower outcomes.
Historically, FSA has viewed allocation of future loan volume as a tool for holding servicers accountable for poor performance. There are few cases in which it has sanctioned a servicer for the quality of its work or for dramatically underperforming its peers. And in the past, since a servicer’s performance was measured relative to that of its peers, every servicer was guaranteed at least some future volume, regardless of its performance.
While the most recent contract terms added in metrics that include thresholds for performance and penalties for not complying—and while FSA has also indicated that it intends to crack down on servicers steering borrowers into forbearances in violation of FSA rules—the compensation structure still does not align with ideal borrower outcomes. For example, the current structure does not provide additional resources for enrolling borrowers in IDR plans or to support pathways toward other longer-term, desired outcomes, which could include discharges, full payoffs, forgiveness, spending little time in delinquency or forbearance (or avoiding the recurrence of either), or enrollment in an alternative repayment plan, especially for those with special circumstances. In addition, both advocates and industry have pushed for additional funding for servicers and the student loan servicing system.
Uncertainty about the future direction of the student loan system is challenging on many levels.
Over the last six years, FSA has launched multiple procurement efforts, each with a different structure and components. As a result, it is unclear whether this procurement will move forward as planned, what the future servicing environment might look like if it does not, and given that servicing is paid for out of discretionary dollars, what resources might be available for future efforts. In the shorter-term, uncertainty around the status of debt cancellation, the current payment pause, and the future of the default system makes operating and existing with this system a challenge for servicers and borrowers and their advocates.
More data are needed about student loan servicing to help identify promising practices.
A lack of publicly-available data makes it hard to assess which servicing interventions are the most effective, understand how much it costs to service a loan, and share best practices. That makes it difficult to set specific and appropriate standards and performance metrics to hold servicers accountable and to incentivize desired behavior. Researchers, policymakers, advocates, and practitioners need access to disaggregated data on borrower demographics, repayment behavior, and outcomes; servicer performance; and ED’s, FSA’s, and others’ enforcement actions. FSA is engaged in a lengthy process of updating its own internal data systems and should do so with an eye to making its data more easily available and understandable to external parties.
Next Gen alone cannot solve all that ails the student loan system
ED and FSA have indicated that they plan to solve a host of issues in the existing student loan system through USDS and the Next Gen process. While addressing the problems outlined above is a critical task for the new servicing system, it can neither resolve issues that occurred in the past nor be the solution for issues on the front end of higher education. For example, FSA has taken some steps recently to remedy borrower harms in the IDR and PSLF systems through waivers that expand access and grant credit for time spent in repayment, and the administration is considering cancelling some student debt. But FSA generally does not have a system in place to investigate and mitigate previous harms (and has not traditionally supported borrowers’ private enforcement actions).
As long as some students must take out loans to access the higher education system, ensuring that system is accessible, affordable, and borrower-centered is critical. But it will also never be enough. We must increase aid and reduce or eliminate the need for loans, especially for students from traditionally under-resourced communities; ensure that students can complete the credentials they start; and strengthen the federal accountability regime to ensure institutions are held accountable for providing high-quality education and that students receive a return on their higher education investments.