At a time when borrowers are increasingly struggling to pay off their debts, a new monopoly is coming to federal student loans that could be challenging for the debt-holders and risky for the government.
The Trump administration has put its stamp on a plan to consolidate servicing of more than $1 trillion in federal student loans. Where there used to be nine companies doing it, now there will be just one.
The idea is to save the government money and simplify customer service — goals initially pursued by the Obama administration in what would be one of the largest non-military government contracts. But critics worry that consolidating so much market power in a single servicing company is risky, with echoes of the too-big-to-fail institutions that fueled the 2008 housing crisis.
“We’ve already seen a real lack of accountability among the servicers in helping people manage their repayments, which should be the real priority,” said Cody Hounainan, program director at Student Debt Crisis, a nonprofit advocate for borrowers. “Now that accountability issue is exploding because we’re taking away what little competition there was in this area.”
The government will still bear the financial risk of lending to students and their families for school costs, but once it picks a unified servicing contractor, that company will be the main entity borrowers interact with for payments and other account tasks.
That’s a crucial role in American higher education. Under the current system, servicers have come under criticism from consumer advocates and even faced lawsuits from regulators for not doing enough to help borrowers find manageable repayment plans, including federally mandated options.
In a March report, the Consumer Federation of America in part blamed servicers for a rise in student-loan defaults. As of year-end 2016, borrowers hadn’t made payments on $137 billion in federal student loans for at least nine months in 2016, a 14 percent increase in defaults from a year earlier, CFA reported.
Student loans are also an increasingly central part of many households’ overall debt picture. Aggregate U.S. household debt recently topped pre–financial crisis levels for the first time, according to Federal Reserve data. Mortgages are now less of the overall picture for most households than in the pre-2008 days, but the recent run-up in borrowing has partly been fueled instead by — you guessed it — student loans.
The New York Times DealBook blog noted:
Households today are borrowing differently than they did nine years ago. Student loan debt, driven by soaring tuition costs, now makes up 11 percent of total household debt, up from 5 percent in the third quarter of 2008.
Under a new proposal published May 19, the Department of Education will accept detailed plans through July from bidders looking to be the government’s exclusive student-loan servicing contractor. The department will look for a company to build a single web-based payment interface and meet other customer-service standards up-front.
This is expected to be the chief benefit to borrowers, who are sometimes subject to confusing changes when their loans are moved from one servicer to another under the current system. Even critics of servicing consolidation like Hounainan admit that is a frequent problem, though they’d like to see it addressed in a different way.
“In the late days of the Obama administration, there had been talk of perhaps breaking up the servicing contract and awarding parts of it based on a track record of providing good customer service over time,” Hounainan said. “But that seems to be out the window now. It’s hard to see where the service incentives would be in this new version once the contract is awarded.”
The new filing represents something of a policy reversal by Secretary of Education Betsy DeVos, who initially expressed doubts about her predecessors’ efforts to consolidate student-loan servicing under one company. In a statement last month that caused some analysts to wonder if consolidation might be scrapped altogether, DOE said, “The guidance from the last administration resulted in a process that involved moving deadlines, changing requirements, and a lack of consistent objectives.”
But now the department clearly believes it has worked out the bugs.
Once DOE picks a winner to be the single servicer, the more than 40 million borrowers with government loans won’t see their terms change. But if your loan doesn’t happen to already be serviced by the firm that wins the bid, expect it to change hands again. There may also likely be some one-time adjustment pain to whatever new policies, procedures, and account-management tools the winner implements.
Of the nine current student loan servicers, most are nonprofits or public-private partnerships at the state level. But two — Navient and Nelnet — are public companies. Navient is the country’s largest single student-loan servicer, and it’s facing a lawsuit from the Consumer Financial Protection Bureau related to its treatment of its past and current borrowers.
Even so, after a slump earlier this year, Navient shares have rallied about 5 percent since the DOE’s announcement in mid-May, suggesting some traders think Navient is the favorite to win the bid for loan servicer. The company is also finalizing acquisition of $6.9 billion in student loans from J.P. Morgan & Chase, which is completing an exit from the student-loan business.
Shares in Nelnet, which is submitting a joint bid for the federal servicing contract along with the nonprofit Great Lakes Educational Loan Services, haven’t fared as well of late. They’re down slightly even since the new DOE proposal and have fallen about 12 percent for the year.
Both companies are deeply underperforming the S&P’s broader financial sector, which is up more than 1 percent so far in 2017.