The Obama Administration Wants To Bypass Student Loan Servicers

Borrowers will be able to sidestep reviled loan contractors such as Navient Corporation.
President Barack Obama speaks at Georgia Tech in March about his plan to clamp down on the private companies that servic
President Barack Obama speaks at Georgia Tech in March about his plan to clamp down on the private companies that service federal student debt.

The Department of Education soon will allow Americans with federal student loans to bypass the department's contractors and make payments directly to the government, avoiding loan servicers accused of routinely mistreating and misleading borrowers.

Officials "will implement a single Department of Education student loan portal for all borrowers ... hoping to make things clearer, simpler and less confusing for every borrower," according to Undersecretary of Education Ted Mitchell, who addressed college financial aid administrators in Las Vegas on Tuesday. The audience can be heard applauding his announcement in a video recording.

Colleges, their financial aid employees, and state and federal regulators routinely complain about the level of customer service student borrowers receive from the Education Department's loan contractors. 

In March, President Barack Obama directed the department to create a website after consumer advocates accused his administration of failing to help borrowers who were being abused.

The Consumer Financial Protection Bureau said in September that student loan servicing, or the business of collecting borrowers' monthly payments and counseling them on their repayment options, was riddled with "widespread failures." Borrowers often can't get basic information from their servicers, the bureau said, and they're regularly pushed into default.

Mitchell told financial aid counselors that the centralized portal was coming "in response to your feedback." He didn't say when the new website would be available.

The website potentially threatens Education Department loan contractors such as Navient Corporation and Nelnet Inc., who are currently waiting to negotiate their contracts with the Education Department. The department was supposed to begin renegotiating its loan servicing contracts this year, but has pushed negotiations into 2016. 

Under the present system, borrowers have to go through companies like Navient to repay their loans. While borrowers can check the Education Department's National Student Loan Data System to learn how much money in student loans they've taken out or begin the process of enrolling in plans that enable them to make smaller payments based on their monthly earnings, they can't see a history of their payments.

Navient warned investors in its latest annual report that changes to its Education Department contract "could have a material adverse effect on Navient’s revenues, cash flows, profitability and business outlook, and, as a result, could materially adversely affect its business, financial condition and results of operations."

The Education Department expects to pay its loan servicers $804 million this year, Dorie Nolt, a department spokeswoman, said in August. Patricia Christel, a Navient spokeswoman, didn't immediately respond to a request for comment.

Earlier this year, the Obama administration said a single consumer-facing website for federal student loan borrowers -- where they could access their account information, learn about various repayment options and make monthly payments -- could "improve the borrower experience."

Borrowers surveyed by the Education Department routinely rate the department's loan contractors as below average.

Requiring loan contractors to use a single system also could "reduce the burdens associated with coordinating consistent student loan servicing contractor behavior, reduce the challenges of transferring loans between contractors, and provide reporting and system integration benefits to the Department of Education," the administration said.

Some consumer advocates have been pushing the Education Department to bring its loan servicing operations in-house, arguing that the federal government is wasting money on loan contractors that provide minimal service. In response, the Treasury Department recently launched a pilot program in which federal employees are tasked with collecting payments from severely delinquent borrowers.

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