The Education Department’s (ED) office of Federal Student Aid (FSA), which oversees the government’s massive student loan portfolio, is launching stronger standards for student loan servicers in an effort to tighten oversight.
“FSA is raising the bar for the level of service student loan borrowers will receive,” FSA Chief Operating Officer Richard Cordray said in a statement.
As payments are set to resume on January 31, 2022, the agency’s moves — which follow on the back of recent news of a new Office of Enforcement that it’s setting up — “come at a critical time,” added Cordray, and “enables us to ensure that loan servicers meet the tougher standards or face consequences.”
‘Revolution in servicing’
FSA, which handles more than a trillion dollars in federal student loans, has a lot on its plate as the payment pause looms in early 2022. More than 16 million borrowers need a new loan servicer, and the stakes to get the machinery working efficiently are high.
The standards introduced on Friday address some of the core concerns many advocates have had in the past: the performance of loan servicers, introduction of more transparency, as well as the increase in accountability measures for the six student loan servicing companies that are in the system.
The companies affected by the news include Great Lakes, HESC/Edfinancial, MOHELA, Navient, Nelnet, and OSLA Servicing. FSA has extended their contracts for two years.
FedLoan Servicing (PHEAA) and Granite State, who are no longer in the servicing game, will have their accounts transferred to the remaining six. Navient is in the process of transferring its contract to Maximus, another servicer.
The standards will kick into effect early next year.
“This is a revolution in servicing,” Cordray, who previously served as the Consumer Financial Protection Bureau Director under President Barack Obama, said in an exclusive interview with Yahoo Finance on Friday.
“Up to now, the servicers … had a general role, and they kind of carried it out as they pleased,” he said. “We have decided that we need to make sure that they understand our goals and that means putting borrowers first … and I believe that reflects a major change in the program. We will see how it works over time. And if we need to refine it, we will.”
Performance standards come with penalties and rewards
All of the servicers’ contracts were set to expire at the end of the year, and were extended by two years after FSA negotiated new terms — which involved two months of back and forth, Cordray said. He further acknowledged that the new terms may have factored into the exit decisions by PHEAA and Granite State.
The new terms give FSA increased ability to monitor and address issues in servicing as they arise, require compliance with federal, state and local laws related to loan servicing, and introduce carrots and sticks into the process for loan servicers.
That means if a servicer performs poorly, FSA can withhold new loans and associated revenue. If they perform well, they’ll get more loan volume.
“Student loan servicers will now have strong financial incentives to provide quality service to their customers,” ED’s press release stated.
The servicers will be measured every quarter by the following:
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Percentage of borrowers who end a call before reaching a customer service representative by phone;
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How well customer service representatives answer borrower questions and help them navigate repayment options;
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Whether servicers process borrower requests…
Read More: Education Department intensifies scrutiny of student loan servicers