Reprint: marketwatch.com
A directive just issued by Betsy DeVos is raising alarm among student loan borrower advocates.
In a memo sent Tuesday to James Runcie, the chief operating officer of Federal Student Aid (FSA), DeVos rescinded Obama-era directives aimed at holding student loan servicers — the companies hired by the government to manage the repayment process — accountable for working in borrowers’ best interests.
In the memo, DeVos withdrew guidance sent by former Secretary of Education John King to Runcie, instructing him to consider a servicer’s past performance when deciding whether to award the company a new contract. DeVos’s memo also withdraws a directive sent by former undersecretary of education Ted Mitchell instructing Runcie to hold servicers accountable for meeting basic customer service standards, like responding quickly to borrowers, and reward those companies that do the best at ensuring borrowers are on track toward repaying their loans.
“Undoing these memos is a very concerning indication of how much (Department of Education officials) value protecting borrowers versus how much they want to insulate servicers,” said Alexis Goldstein, a senior policy analyst at Americans for Financial Reform. “Is this meant to be a message that says we are less concerned with borrowers and more concerned with protecting servicers even if they made mistakes in the past?”
The memo comes as higher education leaders and borrower advocates are watching closely to see how the Trump administration treats student loan borrowers. Last month they expressed concern after the Department of Education reversed an Obama-era directive preventing student loan debt collectors from charging high fees to defaulted borrowers who make an effort quickly to become current on their debts.
The exact implications of DeVos’s new guidelines remain unclear. The Department didn’t immediately respond to a request for comment. The agency is currently in the midst of awarding a new lucrative servicing contract to a single entity. Two public companies, Navient and Nelnet, are finalists for the new award. But it’s hard to say whether that contract process will continue, given DeVos’s new memo, or whether the Department will begin again with an entirely new contract process. No matter how the process evolves from here, borrower advocates and investors will be watching closely to see which companies are rewarded with contracts.
“The market will be looking carefully at whether they will start the process from scratch,” said Rohit Chopra, a senior fellow at the Consumer Federation of America and the former student loan ombudsman at the Consumer Financial Protection Bureau. “Right now there are big companies with a lot of revenue on the line and they’ll be pushing hard to keep taxpayers funds flowing into them.”
The Obama-era directives rescinded by DeVos came after years of borrower advocates expressing concern that student loan servicers weren’t working in borrowers’ best interest, making it more difficult for them to repay their loans. The government offers a slew of repayment programs federal student loan borrowers can use to pay off their debt according to their income and avoid default.
But reports from the Government Accountability Office, the Consumer Financial Protection Bureau as well as probes and lawsuits from the CFPB and state law-enforcement officials indicate that some servicers don’t do a good enough job of helping borrowers enroll in these programs and instead steer them toward repayment plans that may make it harder for them to pay off their debts.
More than 1 million borrowers defaulted on the federal student loans last year and in many cases those defaults — a credit ruining event — could have been avoided if borrowers were enrolled in one of these repayment programs.
Borrower advocates worry that DeVos’s memo will make it easier for servicers who don’t work in borrowers’ best interests to continue to do so and still win lucrative government contracts.
“There’s a lot of problems out there and these basic common sense protections are incredibly necessary,” said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “It’s somewhat baffling to see them being rolled back at this point.”
