DeVos Announces Huge Overhaul of Federal Student Loan System

federal student loan servicing

The federal student loan servicing industry has seen numerous complaints from borrowers in recent years. Loan servicers such as Navient are even facing lawsuits from those who say their loans were mishandled, and that borrowers were deceived about their repayment options.

On Friday, Secretary of Education Betsy DeVos announced that the Trump administration is looking to change the federal student loan servicing system dramatically. Find out what these changes mean and how it could affect you and your student loans.

Issues with the current federal student loan servicing system

Right now, there is $1.4 trillion in student loan debt spread across 44 million borrowers in the United States. Of that amount, the vast majority of student debt is comprised of federal student loans.

When former President Barack Obama was in office, he worked to transfer student loans away from private banks and consolidate them within the government.

However, there are still nine different servicers that manage federal loans:

  • Cornerstone
  • Granite State
  • HESC/EdFinancial
  • Navient
  • Nelnet, Inc.
  • Great Lakes Educational Loan Services, Inc.
  • FedLoan Servicing
  • OSLA Servicing.

All nine are private institutions.

The Consumer Financial Protection Bureau (CFPB) also says they have received millions of complaints from borrowers about these federal loan servicers. They allege that these companies misled borrowers about their repayment options, made errors when recording payments, and wrongfully entered many people into default.

Trump administration to offer exclusive student loan servicing contract

In an op-ed for the Wall Street Journal, DeVos cited these issues with loan servicers as the rationale behind the major overhaul she and the rest of the Trump administration have planned.

“The existing student-loan servicing requirements, put in place by the Obama administration, created a chaotic system that has resulted in numerous consumer complaints,” said DeVos.

DeVos blamed consumer issues on an overly complex system.

“The federal student loan servicing solicitation we inherited was cumbersome and confusing—with shifting deadlines, changing requirements and de-facto regulations that at times contradicted themselves,” said DeVos in a press release.

“Internal and external stakeholders both agreed it was destined for a massive and unsustainable budget overrun,” she added.

To address this problem, DeVos said that the Department of Education would offer an exclusive contract to one company. The contract will give them the rights to servicing billions in federal loans, eliminating the other companies’ involvement.

Also, according to DeVos, the change could potentially save taxpayers $130 million over the next five years.

What the shift would mean for borrowers

DeVos stressed that having just one loan servicer would ensure a standardized approach to customer service and a more efficient user platform.

With just one servicer, the Department of Education could monitor the company more effectively. Plus, it may simplify managing federal student loans for borrowers.

Currently, you may have several loan servicers if you have federal loans. That means you have to sign into multiple sites to monitor your account and make payments. It can be complex and difficult to keep up.

Under the new plan you’d have just one account to track, as well as consistent customer support for any questions or issues, according to DeVos.

“Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes,” said DeVos.

For borrowers who have been frustrated by poor or misleading service in the past, the change could be a big improvement.

Potential drawbacks of one student loan servicer

While the new approach could be helpful to borrowers, some consumer advocates are expressing concern.

Rohit Chopra, senior fellow at the Consumer Federation of America, cautioned that the system overhaul could make the Department of Education overly reliant on one servicer.

“The changes may increase profits for the industry, but may do little to tame the high levels of default in the program,” said Chopra in an interview with the New York Times.

Four student loan servicers have submitted proposals for the open bidding process, according to the New York Times:

  • Navient
  • Pennsylvania Higher Education Assistance Agency, which is listed as American Education Services and FedLoan Servicing when servicing loans
  • Nelnet and Great Lakes Educational Loan Services (they submitted a joint proposal)

What you can do now to address student loan servicer issues

The Department of Education and Secretary DeVos have not announced a timeline for when they will award the contract.

Therefore, it’s unclear just when this change will take effect. So for now, your loans will remain with your current servicer.

However, if you’re currently having problems with your federal student loan servicer, you can take action before the changes go into effect. Here are a few options to keep in mind.

Know your student loan repayment options

Since loan servicers may not inform you of alternative repayment plans or deferment options, it’s important to ensure you’re informed.

If you’re not sure where to begin, you can sign up for the Student Loan Hero app and get customized guidance.

Consider student loan refinancing

If you’re really unhappy with your servicer, one way to get rid of them is to refinance your student loan with a private lender.

Refinancing can help you save money by providing a lower interest rate if you qualify. It can also potentially reduce your monthly payment.

However, keep in mind that you will lose out on federal benefits. But for some borrowers, it can be a smart way to take control of their debt.

Lodge a complaint

Let’s say you are having a problem with your current servicer and cannot reach a resolution.

You can escalate the issue by contacting a student loan ombudsman or the CFPB. Then, with either option, a neutral third-party can investigate the problem and come to a solution.

Where do borrowers go from here?

While the proposed changes to the federal loan system are a huge shift, they could be beneficial to borrowers. In the meantime, you can take steps now to protect yourself and manage your loans more effectively.

For more information about your student loan options, check out this article on what to consider before refinancing your loans.

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Published in News & Policy, Student Loan Repayment

  • Glendon Hodges

    Because the best way to improve user experience, reduce email and call response times, and an improved customer service is to eliminate all of the competition. Just look at Comcast.

  • Guest

    Will there be a forgiveness program for us who are struggling financially? And no I dont work in Public Service or a Teacher.

  • Sam Schmitz

    I ended up using Earnest which you don’t have posted above. They provided the best rate.

    I think i originally got there information from your site so make sure you don’t take them out of your advertisements.

  • rocketjnyc

    Nelnet and Navient are not private. They are public, for profit. Navient is the one that is in trouble with CFPB. Some sloppy research in this article.

  • Alicew234

    Refinancing with a private lender means walking away from any forgiveness plans or income adjusted plans. In addition, keep your eye on the maximum interest rate you are agreeing to pay. Some of the agreements state that the variable loans can go as high as 25% in the future!

  • Hi,

    Thanks for your comment. I looked into this, and I can’t seem to find the issue. Both Nelnet and Navient service federal student loans and are for-profit company. I can’t see where it says otherwise in this article. Can you explain the problem in more detail?