The change comes just months after Betsy DeVos announced an overhaul of an Obama-era proposal
The Trump administration is re-thinking its plan to overhaul the way borrowers repay their student loans, officials announced Tuesday.
The Department cancelled its solicitation for proposals from companies interested in servicing the government’s entire federal student loan portfolio after complaints after criticism from advocates and a bipartisan group of senators, who said awarding the business to just one company could put the government at risk of working with a firm that became too big to fail.
In its place, the Department plans to create a servicing system where the backend and front end of the student loan servicing system will likely be handled by different companies with expertise in each field. More than one company may handle the consumer-facing part of the business in the new servicing system, according to the announcement.
Servicers are the first point of contact for borrowers repaying student debt. The government traditionally has outsourced this business to four major companies and several smaller ones through a lucrative contract that theoretically incentivizes the firms to perform the way the Department wants them to. That’s why a seemingly wonky government contract process can be important to borrowers — the way the contract is structured and the companies chosen by the government often dictates how successfully a borrower, particularly one in distress, manages their student loans.
“There is certainly a potential benefit if you can open the competition to a wider swath of companies than the limited number that do it right now,” said Ben Miller, the senior director of post-secondary education at the Center for American Progress, a left-leaning think tank. Still, without more details, Miller said he remains skeptical that the new process will ensure that student loan companies act in borrowers’ best interest.
“It’s very easy to write a press release that says we’re going to be put in borrower protections, but it would be good to hear what those protections might be,” he said.
Borrower advocates have complained for years that servicers are not incentivized to act in borrowers’ best interest. They’ve said the companies often provide borrowers with little or incorrect information about the benefits they’re entitled to in order to successfully manage their student loans.
The Obama administration tried to address some of these concerns with a contract solicitation that considered a company’s poor performance in deciding whether it was deserving of business and required servicers to do things like spend extra time counseling distressed borrowers. Earlier this year, Betsy DeVos got rid of the requirement that contract officers consider a company’s past poor behavior when determining whether to award them business.
Her Department of Education also scrapped the Obama-era contract process and replaced it with one that would have put one company in charge of servicing the government’s student loan portfolio. Now, just a few months later, the Department is changing course.
Miller said he’d be watching closely to see whether it will create a student loan system that truly leaves borrowers better off. “The devil will really be in the details,” he said. “Hopefully whatever they do will be about putting borrowers first.”