ED Proposes Single Source Model for Massive Student Loan Servicing Contract

On Friday the U.S. Department of Education Secretary Betsy DeVos used a Wall Street Journal OpEd to announce her new plan for the massive student loan servicing contract – including her intention to move to a single-servicer model. The Department currently has four primary servicers: Navient, NelNet, Great Lakes Educational Loan Services, and FedLoan Servicing.

She blamed the Obama Administration for the current process, which is “complicated and rife with confusion,” and says that students are not treated like valued customers.

She wrote that the current amendment to the contract “maintains a focus on superior customer service and key borrower protections while ensuring the project stays on budget, saving taxpayers more than $130 million during the first five years alone… The primary servicer will be required to establish a standardized process for handling customer calls, ensuring timely responses to questions.”

insideARM Perspective

It’s unclear exactly how giving one firm a monopoly over such a massive contract will provide customer protection, although on its face it may seem easier for ED to oversee a process at only one company. It is interesting that businessperson Donald Trump and the administration created by President Donald Trump do not seem consistent.  Few true business people would propose a single vendor for a significant contract. The true businessperson would deem concentration risk too high.  Additionally, leverage for price negotiation and creation of a competitive performance dynamic would disappear. It is shocking that ED would ignore those elements and suggest a single servicer.

In related news,

insideARM also wrote today about a proposed solution to the ED private debt collection agency contract situation (this is the group that kicks in after a borrower fails to pay the servicer) – basically starting all over again.

In other related news,

Last week the Student Loan Ombudsman at the Consumer Financial Protection Bureau (CFPB) released a report that showed 9 in 10 high risk borrowers were not enrolled in federal affordable (or income-driven) repayment plans. The findings were used to reiterate the recommendations that were made in the Ombudsman’s 2016 Annual Report, including streamlining the rehabilitation process.

Meanwhile, former CFPB Student Loan Ombudsman, Rohit Chopra, has been recommended by U.S. Senate Minority Leader Charles Schumer (D-NY) to be nominated as a Commissioner for the Federal Trade Commission (FTC). There are currently three open seats on the five-member commission.

During his tenure at the CFPB Chopra was critical of schools, banks, and servicers in their handling of loans and lack of transparency with borrowers. After leaving the CFPB in the summer of 2015, Chopra joined the progressive think tank, Center for American Progress. He was there for a brief stint, and then in January 2016 moved to ED as a Special Advisor to the Secretary of Education.

At the time it was unclear exactly what Chopra’s role would be at the Department, except that then Under Secretary of Education Ted Mitchell announced he would be working on a range of issues related to “enhanced protections for students, improved borrowers’ service and strong accountability for institutions.” He may not have had enough time at the Department to make his desired impact. He is currently a senior fellow at the Consumer Federation of America.