When You Weren't Paying Attention Congress Shook Up The Student Loan Market

A small change could mean a big improvement for Americans with federal student loans.

Some 42 million Americans could become less likely to fall behind on their student loans -- and get better customer service -- thanks to a new measure the Republican-led Congress forced on the U.S. Department of Education this month.

The government's four largest student loan contractors have the worst track record when it comes to preventing late payments. Despite this, the Education Department funnels the bulk of new loans to those four contractors.

But 50 words tucked into an 887-page spending bill President Barack Obama signed into law Friday will change that by directing the Education Department to treat its largest and smallest loan contractors equally.

The department currently favors its four largest contractors, which include publicly-traded companies such as Navient Corp. and Nelnet Inc., by sending them 74 percent of borrowers who have recently left school and have to begin repaying the government. The department's six smaller contractors fight over the remaining 26 percent of borrowers.

That occurs even though borrowers are about three times as likely to fall behind on their student loans if they're serviced by the four big loan contractors compared to the department's six smaller contractors, federal data show.

At the best-performing large contractor, Great Lakes Higher Education Corp. & Affiliates, about 25 percent of borrowers are late on their required payments, according to the most recent figures from the Education Department.

The delinquency rate at Mohela is about one-third of that, or less than 9 percent. The firm, also known as the Missouri Higher Education Loan Authority, is the best-performing small contractor.

Roughly 36 percent of Nelnet's borrowers are delinquent -- giving it the highest delinquency rate of any department contractor.

At the worst-performing small contractor, Oklahoma Student Loan Authority, 15 percent of borrowers are behind on their obligations.

By directing more accounts to smaller loan contractors, representatives of those firms say, both taxpayers and student borrowers stand to benefit because borrowers at risk of falling behind will get the attention and service they need to make good on their obligations and avoid defaulting on their debts.

The threat of losing future business could push the department's biggest loan servicers, such as Navient and Nelnet, to improve their own performance and reduce their borrowers' delinquency rates.

"This provision is a win for student loan borrowers, ensuring that they receive effective, personalized loan servicing that guides them through their repayment period successfully, and for taxpayers, who deserve a system that maximizes existing and proven resources," Debra Chromy, president of the Education Finance Council, a Washington trade association, said in a statement.

"This provision is a win for student loan borrowers." --Debra Chromy, president of the Education Finance Council

The Education Department has until March 1 to implement the change. Starting next month, the department is expected to solicit a new round of contracts from loan servicers hoping to either join or remain part of the federal student loan program. It can take a few years of negotiation until the new contracts are finalized.

In the meantime, by forcing the Education Department to allocate new loans based purely on measures such as delinquency rates and customer satisfaction surveys, smaller loan contractors could get close to 75 percent of all new loans, according to calculations by Ben Miller, who helps lead higher education policy for the Center for American Progress, a Washington advocacy group with close ties to the Obama administration.

The Education Department has previously defended its arrangement with its loan servicers by claiming that smaller contractors have been mostly dealing with allegedly more reliable borrowers to begin with, which arguably makes it easier for smaller contractors like Mohela to achieve low delinquency rates.

Companies such as Navient and Nelnet, which stand to gain fewer new accounts as a result of the change, could be among the biggest losers.

Shares in Navient have fallen about 5 percent since Congress unveiled its plan on Dec. 16, bringing its total year-to-date drop to about 45 percent. Nelnet's stock has been flat since Dec. 16, though it's down about 30 percent this year.

Total student debt, including private loans, has doubled since 2008 to about $1.3 trillion, according to the Federal Reserve. Americans collectively owe more on their student loans than they owe on their credit cards or auto loans, making student debt the second-largest source of household debt after home mortgages. 

The Consumer Financial Protection Bureau estimates that nearly 8 million Americans, or about 1 in 5 with a higher education loan, are in default on their student loans. Millions more are delinquent or otherwise delaying payments due to financial hardship, allowing their burdens to grow as the accumulating interest is added to the balance.


Nearly 8 million Americans -- 1 in 5 of those with a higher education loan -- are in default on their student loans.


The White House has repeatedly directed the Education Department to aid struggling borrowers -- even enlisting the expertise of officials at the consumer bureau and the Treasury Department -- in a bid to reduce loan delinquencies and prevent defaults.

But defaults have continued to increase in recent years, despite the fact that nearly every American with a federal student loan is eligible to make payments based on their monthly earnings. Federal student loans aren't in default until borrowers have gone 270 days, or nine months, without making payments.

Americans are more likely to be at least 90 days late on their student loans than any other type of loan, according to the Federal Reserve Bank of New York.

Borrower advocates and officials at the Treasury Department and federal consumer bureau suspect sloppy loan servicing practices are to blame for much of the rise in student loan distress. Servicers collect borrowers' monthly payments and counsel them on their repayment options.

In March, in response to concerns about servicers' allegedly rampant mistreatment of debtors, Obama announced that "every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans."

Months later, in September, the consumer bureau declared that the industry was riddled with "widespread failures" after a review found many borrowers were unable to obtain basic information about their accounts, were frequently misled, surprised with unexpected late fees and often pushed into default.

About 90 percent of all student loans are either owned or backed by the Education Department. That arguably makes Obama's and the CFPB's declarations an indictment of Education Secretary Arne Duncan's management of the federal student loan program.

Miller, a former Education Department official, predicted that the department is likely to miss Congress's March 1 deadline.

"Something that Congress always gets wrong is how long it takes to do things in the executive branch," he said.