ED Announces Ambitious Plan to Create Loan and Debt Management Software

Today on HomeRoom, the official blog of the U.S. Department of Education (ED), the Department announced plans to launch “one of its biggest initiatives to date” – the creation of a software system to manage all Direct Student Loans, including both servicing and debt collection.

The argument made in the blog is that the servicers that ED contracts with have varying skills; some are good at data management, some are good at reaching out to borrowers. They want to take the system part off everyone’s plate and let them focus on the service.

These are the benefits ED says this new system will provide:

• Department of Education-branded communication that is standard–eliminating differences that now exist among multiple servicers that co-brand borrower communications–and that will help borrowers stay on top of their debt and avoid confusion about who is servicing their loan.
• A streamlined borrower experience via a single web portal through which all borrowers can find the latest information about their loans, make payments and apply for benefits–eliminating the need to know the name of their servicer.
• Better customer service practices that will be common for all borrowers and that meet high standards to ensure borrowers’ needs are met consistently, regardless of what contractor is providing that customer service.
• Reduced, and, to the extent practical, eliminated loan transfers and other borrower disruptions that can make it hard for borrowers to keep current with their loan payments and seek help when they need it.
• Enhanced oversight and accountability that will ensure that borrowers are treated fairly and given clear, actionable information at every step of the repayment process, including enhanced customer service practices and a new complaint system to empower borrowers when something is not right.
• A single platform for all Federal student loans allowing for a more seamless connection for future customer service centers.

On April 4, 2016 ED issued a Solicitation and Statement of Objectives for Phase I of the Federal Aid Servicing Solution. Offers must be received no later than 3:00 PM Eastern on May 9, 2016.

As of the time of this article, there were (9) comments posted to the blog. All of them more articulate and insightful than is typical of blog comments, which tend to include a lot of typos, grammatical errors, and profanities. Three of them are optimistic about the idea. In all cases, there is skepticism that ED – and the servicers – are up to the task. One of them offers an interesting analogy that sums up the current state of the education finance system:

“So basically, all you guys are doing is creating a new consolidated website/portal for student loans.

Thats it?

Do you guys think that we (read: millennials) are stupid? How does this do anything to help the current student loan bubble?

Here’s a rather sober analogy. Lets say you’re a prisoner at a labor camp, and have to complete a certain amount of labor to be freed (loan debt). If you don’t complete a certain amount of labor per day, it’s added on to your jail sentence (interest).

Once day, the guards come over to you and say “hey, you can work less each day, but we’re going to stretch your jail sentence to 20+ years” (PAYE). But if you have extra work left you didn’t finish at the end of the 20 years, you’re going to have to do it all at once, without sleep (tax bomb at the end of PAYE – oftentimes more than the original amount.

Fast toward to today – the jail guard (you guys + this website) have announced “we’re going to keep you at just one labor camp, and not move you around (multiple loans, different websites) to make it easier for you to preform your labor!

Do you expect us to be GLAD? We still have to pay off the loans regardless. Most millennials are technologically savvy – making a new consolidated website/portal does absolutely NOTHING to help us long term.

I’m calling you guys out – seeing articles like this is absolutely infuriating.”

insideARM Perspective

This proposed initiative is enormous. The stated objectives for the new system are solid. They are both practical and responsive to consumer needs. In particular, the potential for a “streamlined experience via a single web portal through which all borrowers can find the latest information about their loans, make payments and apply for benefits–eliminating the need to know the name of their servicer” should be welcome news to any student with loans being serviced by multiple entities.

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HOWEVER, let’s also be realistic. Ed does not have the greatest track record when it comes to developing and implementing new systems. As noted above, this project is going to impact both servicing and collection of defaulted student loans.

In 2010 Federal Student Aid (FSA), an office of ED, began work on development of a new Debt Management Collection System (known as DCMS2). That system was only for the management of the collection of defaulted student loans – or ½ of the scope of this initiative.

The project was fraught with delays and challenges, as reported by an October 24, 2015 Office of Inspector General (OIG) report “Review of Debt Management Collection System 2 (DMCS2) Implementation.” It is best to read this report with an empty stomach.

That report found that “FSA could not ensure that its outside contractor delivered a fully functional DMCS2 because FSA did not develop an adequate plan, ensure the supplier met milestones, or use appropriate systems development tools.”

The report also references earlier OIG reports that highlighted glaring weaknesses throughout the delayed implementation process. Some of the problems directly impacted consumers. They included:

1. inability to process rehabilitated loans and receive collections through administrative wage garnishments,
2. DMCS2 inability to accept some debt accounts transferred from Title IV Additional Servicers, and
3. DMCS2 inability to protect certain accounts from private collection agency placement (for example, accounts that were in bankruptcy or assigned to the Department of Justice)

In May 2013 insideARM published a story about the changes to ED’s tracking system that may have resulted in either overpayments or underpayments to its 23 PCAs. That story referenced a May 15, 2013 OIG report. Even then, the identified problems were shocking.

In short, while the ED announcement is positive news for student borrowers, it must be viewed with an eye towards history.  To create the desired system will be an incredibly heavy lift for the department.