Donald Trump speaking at a CPAC event in Washington, D.C.
The Trump administration announced that it will be offering one company an exclusive contract to service outstanding federal student loans. In mid-May, Secretary of Education Betsy DeVos released an amendment to the servicing solicitation where she expanded on the decision, claiming the old system “was cumbersome and confusing.”
Currently, student loans are serviced by four separate for-profit companies with Navient being the largest of the bunch. The others include Nelnet Inc., Great Lakes Educational Loan Services, Inc. and FedLoan Servicing (aka PHEAA).
Under the Obama administration, much of the $1.4 trillion in student loans were transferred from banks and other servicers to the federal government which left the door open for servicers to obtain contracts with the government. Secretary of Education Betsy DeVos wrote in an op-ed piece on the Wall Street Journal site that this was a “chaotic system” that resulted in consumer complaints.
While DeVos claims that the move to one company will save money and boost efficiency (about $130 million in taxpayer money over 5 years), many critics are concerned that it will have a negative impact on borrowers. The move could create a monopoly company with no incentive to provide quality customer service. However, one would assume that the government will provide the incentives as well as oversight.
Critics say these changes have one thing in common: They’ll boost profits for the servicers (or just one servicer eventually), but they’ll do nothing to help borrowers. Only time will tell if these changes are going to help borrowers repay their debt, resulting in a decline in the default rate.
So far, there hasn't been a decision on which company will be given the exclusive contract. However, there is still plenty of room for debate, and many servicers could potentially be ruled out for various reasons.
For starters, Navient is being sued by the Consumer Financial Protection Bureau (CFPB) which is alleging the country’s largest student loan company has "systematically and illegally" failed borrowers. In response, Navient made a bold claim that it wasn't required by law to act in its borrowers' favor according to The Student Loan Report.
One would think that Navient is out of the running, but a survey from The Student Loan Report suggests otherwise. The survey found that customers haven’t been that unhappy with the company. In fact, 66.78 percent do not believe they were ever deceived by Navient, and the respondents gave it 5.92 out of 10 in overall customer service.
While Navient's chances are still up in the air, the same cannot be said about other companies. In one case, a Massachusetts servicer, ACS Education Services, was fined a hefty $2.4 million for malpractice. In addition to this servicer, many other companies are under the gun after a report revealed plenty of issues with the way student loan servicers do business.
Interestingly enough, developments such as these are what initially inspired the single servicer agenda. Despite the reasoning behind the idea, it received quite a bit of criticism at the start. At any rate, one could surmise that this is simply another issue to be subjected to the typical gridlock environment that characterizes American politics. Opposition is almost guaranteed for such a move as this, especially when it involves over a trillion in outstanding debt, also known as tax payer dollars.
Image Copyright © Gage Skidmore