Key Points
- Department of Education is increasing its direct monitoring of student loan servicers
- More accountability on companies via withholding of payments
- Student loan borrowers to be made whole when issues happen
The Biden Administration announced on Thursday a framework of oversight for student loan servicers and programs to ensure that student loan borrowers are protected as they enter repayment. This comes after student loan repayment re-start got off to a rocky start with a myriad of student loan issues impacting millions of borrowers.
“The Biden-Harris Administration has made clear that we will not allow borrowers to pay the price for unacceptable servicing failures,” said U.S. Secretary of Education Miguel Cardona.
More Direct Servicer Oversight
It's important to remember that student loan servicers like MOHELA and NelNet operate as contractors for the Department of Education. Federal loans are owned by the U.S. Government - these companies simply "service" the loan. This includes sending out monthly statements, collecting payments, customer service, and more.
However, student loan borrowers have felt that these companies have operated without much direct supervision for years. The Department of Education is making it clear that's changing, with three key oversight plans:
- Direct Monitoring: The Department of Education staff will monitor complaints, listen to customer service calls, and even do "secret shop" audits of their loan servicers.
- Partnering With State and Federal Regulators: Closer coordination with states and other entities like the CFPB to enforce existing borrower laws.
- Leveraging Borrower Complaints: Following up more closely to complaints filed with the Ombudsman, and even watching social media for trends.
Loan Servicer Accountability
Beyond the monitoring and oversight, the Department of Education also announced it will hold these companies more accountable to their results. We recently saw that when the Department of Education penalized MOHELA by withholding $7,209,735 in payments to the loan servicer for October 2023.
Going forward, the government plans to be more aggressive in the actions it takes when problems arise:
- Withholding Payment: When contractors don't meet expectations, the Department of Education can withhold payment. Last month was the first time this had happened, but they are making it clear it can happen moving forward.
- Reallocating Borrowers: Student loan servicers get paid per-borrower. The Department of Education can reallocate loans to other servicers, effectively cutting their income.
- Performance Reports: The Department will grade loan servicers and use this information when contracts come up for renewal.
- Corrective Action Plans: Loan servicers with issues will have to create remediation plans.
The government also plans to implement new software and tools, previously dubbed NextGen, now called Unified Servicing and Data Solution (USDS).
Student Loan Borrowers Will Not Be Harmed
While the new oversight and accountability is welcomed, the most important aspect is that the Department of Education has made it clear that borrowers will not be harmed when their loan servicer messes up. We saw this recently from the repayment restart, with millions of borrowers being placed into administrative forbearance because of the failure to process SAVE repayment plan applications.
According to the Department, "When certain types of errors are detected, the Department directs servicers to place affected borrowers into a short administrative forbearance while the errors are resolved. In certain circumstances where a borrower’s progress toward loan forgiveness may be harmed by potential servicer errors, the Department has directed servicers to count those periods in administrative forbearance toward Public Service Loan Forgiveness and income-driven repayment forgiveness and adjust accrued interest to zero."
Don't Miss These Other Stories:
Editor: Colin Graves Reviewed by: Mark Kantrowitz
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.