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Here’s the strongest proof yet that the federal student loan repayment system, as currently constructed, needs a reboot: Bloomberg is reporting that student loan servicer Navient, in response to a recent lawsuit filed against the company by the U.S. Consumer Financial Protection Bureau, allegedly stated in court filings, “There is no expectation that the servicer will act in the interest of the consumer. Servicers provide information about repayment plans and routinely provide information and support to borrowers, but have no ‘fiduciary’ responsibility to serve as a financial adviser to borrowers.”
Give them points for honesty, at least.
Navient’s words underscore an inherent problem in the current design of the federal student loan program: The traditional loan servicing system, whereby private servicers represent the interests of their paying lender customers, has not easily translated to the Direct Loan structure in place since 2010, because the paying customer – the federal government – is actually both lender and protector of student borrowers. Student loan servicers aren’t neutral; their allegiance is to the federal government in its role as lender – not in its role as guardian of student borrowers. As a result, the U.S. student loan repayment and collection system today works in the best interest of the student loan provider, not the consumer.
Three years ago, the U.S. Department of Education took steps to change the nature of servicer interactions with borrowers. In announcing the renegotiation of ED contracts with the servicers, President Obama said, “We’re going to make it clear that these companies are in the business of helping students, not just collecting payments, and they owe young people the customer service, and support, and financial flexibility that they deserve.”
Seems that’s easier said than done, though. Apparently, Navient is now making the case that it simply doesn’t get paid enough to offer the kind of services the federal government says borrowers deserve. And in Navient’s defense, they have a point. The extreme handholding and counseling that should be extended to student loan borrowers today is a lot to ask of a low-bid contractor.
Online tools and repayment estimators have come a long way in helping borrowers navigate the intricate maze of student loan repayment options that can befuddle even the smartest Ph.D. But there comes a time when many borrowers, especially the most vulnerable and struggling, need to connect with a human on the other end of the phone – or the keyboard – to talk through their issues and find solution.
Based on the experiences of our own organization, these interactions are long – 15 to 30 minutes, or longer, can often be the norm. They’re complex. And they frequently require more than one call-back before final resolution. Counselors must employ a decision tree set of questions to determine whether a borrower is eligible for income driven repayment, public service loan forgiveness, consolidation of an old Federal Family Education Loan into a Direct Loan, or more.
That’s miles apart from what the loan servicing industry has been built for: low-cost efficiency that specializes in handling the administrative task of recordkeeping. Student loan servicers have developed extensive systems and expertise to excel at a transaction-based process involving the most effective use of technology and personnel. The servicer’s goal has always been to collect payment for its lender employer as proficiently and seamlessly as possible so as to minimize costs, achieved through minimum borrower contact. The counselor’s goal, by contrast, is to maximize borrower contact through any means necessary. Simply put, servicing does not equal counseling and never the twain shall meet. So what’s the solution? The answer is not that the federal government should get out of the student loan business. Higher education is a public good and requires federal investment. The federal student loan program is an integral part of the student aid patchwork that promotes college access, choice and affordability, and it typically offers borrowers better terms and more flexibility than private lenders.
In the long-term, we should look to streamline payment options and collection tools, perhaps through automatic paycheck deductions, akin to tax withholdings. But until that point, the act of collecting student loan payment should be made separate and distinct from counseling borrowers. Ideally, these two activities should be conducted by separate entities, to ensure neutrality for the consumer. (One could go even further and suggest that these functions be separated at the federal level, with Treasury overlooking collection and servicer contracts, and ED charged with overseeing the counseling aspect.)
Ultimately, there’s no denying that struggling borrowers seeking relief are desperate for high-quality, objective, intensive handholding to keep their loans on the right path. Navient’s words and actions show these needs aren’t being met. We owe it to our students to fill that void until a better system is designed.