June, 2020
Washington – The nation's student loan servicing, administered by the U.S. Department of Education, has been shockingly inadequate for years. Borrowers can get into student loan servicing hell and never get out. This is no small matter, as lives are ruined and the nation's economy is damaged.
One of my all-time favorite headlines appeared above an article by Ron Lieber of the New York Times: "Your Student Loan Servicer Will Call You Back in a Year. Sorry." That sums up the situation well.
The Department of Education's standard response has been to say that this will all be fixed when new contracts are put into effect under its "Next Gen" program. Some of those contracts were announced yesterday and, indeed, none of the Big Four servicers that do the bulk of the nation's current servicing are on the list of winners going forward. There is another contract round for the architecture of a common servicing portal, but that should not diminish the importance of yesterday's announcement of a chosen five.
The glaring problem is that only two of the current Big Four servicers, Navient and FedLoan (PHEAA), are responsible for the worst of the servicing. The other two have decent records and through experience have learned lessons that in the end benefited borrowers, at least in comparison with the truly terrible two.
Even more confounding: some of the winners announced yesterday don't have much to commend them. In a recent ranking of nine servicers, EdFinancial is three places below Great Lakes, best of the Big Four. MOHELA is well down in the rankings, barely above PHEAA. Trellis's CEO came from MOHELA. MAXIMUS is a troubled contractor when it comes to student loan defaults; its opaque operations are the subject of lawsuits and an unflattering law journal article, forthcoming. The contractor has been involved in preposterously unfair hearings in garnishment cases, hardly a recommendation for becoming a student loan servicer that is supposed to watch out for the interests of borrowers.
What is confusing about this process is the idea that the five new winners will start out with "back-office" operations and then move on to actual servicing later. Will they then subcontract with any of the Big Four as they attempt to scale up? MOHELA and PHEAA have a relationship that goes back many years. MOHELA uses PHEAA's loan servicing software known as COMPASS, as do other servicers. COMPASS has a checkered history of being used to make false claims against taxpayers.
It's hard not to think that politics is playing a big role in these decisions. EdFinancial is in Knoxville, Tennessee, home state of Senator Lamar Alexander, chairman of the Senate committee with jurisdiction over student loans. MOHELA is always furiously defended by Senator Roy Blunt of Missouri, without whose blessing the Department does nothing on student loan servicing.
PHEAA is in a revolving-door relationship with the Department of Education that has existed for nearly two decades and was recently strengthened. It is hard to imagine that PHEAA will not emerge intact from the Next Gen process. Historically, PHEAA has had back-up plans to protect itself. In 2004 it had a confidential agreement with Iowa Student Loan to take over much of its business in case it was bought out by SLMA, as was advocated at the time by Governor Ed Rendell.
Maybe Next Gen will work out for the better, but you can't blame people for having their doubts. There is simply too long a history of incompetence and outright corruption at the Department of Education to believe that Next Gen is finally the remedy for it all. My own preference is to make the switch to student loans that operate through the tax system, as in Australia and several other countries.
