Education Department Admits It Will Pay Much Reviled Student Loan Firms More Money

The U.S. Department of Education will pay its oft-criticized student loan servicers more money under new contracts that the White House demanded in response to the companies' lack of adequate customer service.

An Education Department official acknowledged the bump in pay on Wednesday during a testy exchange with Sen. Elizabeth Warren (D-Mass.).

"Let me get this straight: You break the law. You don't follow the rules. You treat the borrowers badly," Warren said of the loan servicers. "And you all just renegotiated the contracts to make sure that across the portfolio [loan servicers] are going to make a little more money if nothing changes?"

The disclosure, made at a hearing before the Senate Special Committee on Aging, threatens to further inflame Democratic lawmakers and student advocates, who have been complaining for months about the shoddy treatment that borrowers receive from the companies paid to process their monthly payments and counsel them on repayment plans. Democratic lawmakers, consumer advocates, state colleges, student groups and organized labor have all complained over the poor customer service they argued was leading to increased loan defaults and needlessly stressing borrowers.

This past May, Navient Corp., the former student loan arm of Sallie Mae, agreed to settle Justice Department allegations that it and Sallie Mae had intentionally cheated troops out of tens of millions of dollars on their student loans. The two companies neither admitted nor denied wrongdoing.

In response to the settlement, the AFL-CIO, United States Student Association and American Federation of Teachers demanded that the Education Department terminate its loan servicing contract with Navient. Instead, the department renewed the contract.

The resulting outcry led to President Barack Obama directing the department in June to renegotiate the deals with all its loan servicers. The new contracts took effect this month. In general, the companies will receive more money if their borrowers are current on payments and less if they're late or not paying.

Last month, when it announced the changes, the Education Department touted the new contracts as being more responsive to the needs of borrowers. It said it had renegotiated with companies such as Navient "to strengthen incentives for them to provide excellent customer service and help borrowers stay up-to-date on their payments."

But it didn't say whether it would end up paying the companies more money as a result.

On Wednesday, William Leith, chief business officer for the Office of Federal Student Aid -- the Education Department unit that handles student loans -- told Warren that department projections showed the loan companies will get "a little bit more" money as a result of the new contracts.

Navient could receive an additional 15 percent in annual revenue, Michael Tarkan, an analyst at Washington-based Compass Point Research & Trading, estimated in a report to clients earlier this month. Tarkan projected that the Education Department would pay the company an extra $20 million a year under the new arrangement.

Leith said that the department wrote the contracts to spur its loan servicers to keep more borrowers current on their loans.

About 22 percent of borrowers repaying under the Direct Loan Program are delinquent, according to Education Department data. The new contracts specify that loan companies that maintain delinquency rates of less than 23 percent can receive $800,000 a year in bonuses.

"The idea of the renegotiation was to help the borrowers, not to make the servicers richer," Warren said in response to Leith's admission.

Leith said that if the department didn't see significant improvement in borrowers' delinquency rates over the next six to nine months, the Education Department would once again change how it pays the loan servicers.

"To do what? To pay them even more money to not make any changes?" Warren retorted, visibly annoyed. "I do not understand a basic renegotiation that says you can continue breaking the law but we're going to pay you more money for doing it."

Dorie Nolt, an Education Department spokeswoman, did not have an immediate comment. Undersecretary of Education Ted Mitchell, who last month told The Wall Street Journal that the new contracts would "put servicers on notice that they have to be borrower-focused and consumer-focused," did not respond to an email message seeking comment.

Maxwell John Love, president of the United States Student Association, said the bump in servicer pay was "emblematic" of the way the Education Department responds to criticisms.

"To this day I don't think the concerns about Navient overcharging service members have been addressed," Love said. "It's very frustrating. It just doesn't sit right."

Winfield Crigler, executive director of the Student Loan Servicing Alliance, which represents the loan servicers, didn't respond to email messages seeking comment.

Sen. Bill Nelson (D-Fla.) said Wednesday that his committee would try to meet with Education Secretary Arne Duncan to address Warren's concerns.

In December, the Education Department told Warren that it had declined to levy any fines against Navient's former parent company, Sallie Mae, even though it had secretly determined that over the previous decade the company had harmed borrowers, incorrectly billed the department and produced other servicing failures. The department dismissed the various findings as “compliance issues."

"We need a Department of Education that'll be on the side of students, not on the side of the servicing industry," Warren said on Wednesday.