A new memorandum has been released by Department of Education Under Secretary Ted Mitchell concerning the future of student loan servicing in an effort to make plans more accountable for borrowers.
Typically, loan servicers manage and collect payments, inform borrowers of their obligations to pay and how the payments should be made, and to advise borrowers having difficulty with income repayment plans that could allow them to lower their monthly payments. New financial incentives will be offered to high performing servicers, as well as directives to help “at risk” borrowers in addition to mandates for the delivery of timely loan communications.
According to the July 20 memo, a “new ecosystem” will be introduced along with a single ED-branded servicing platform. Loan servicers will no longer be competing entities, but rather will be identified by a Department of Education logo.
The new regulations would limit the way debt collectors are allowed to contact borrowers in an effort to put a stop to harassment and abuse. Debt collectors will be only be allowed to call borrowers a certain number of times each week and will be required to provide documentation that the debt in question is legitimate before trying to reach borrowers.
“If there’s one message that rings loud and clear from these conversations, it’s that students lack a fundamental understanding of the terms of their loans or how monthly payments will be determined,” said Sarah Bloom Raskin, Deputy Secretary of the Treasury Department. “Many students are not aware of repayment plans and don’t know whom to contact if they have questions or problems.”
However, two House Republicans recently wrote a letter to Education Secretary John King, Jr. to express concern over the ability of the Department of Education to create the new federal student loan servicing center previously announced.
“We have no confidence in the department’s ability to complete this project without delay, service interruptions and harm to borrowers,” Rep. John Kline of Minnesota, chairman of the House education committee, and Rep. Virginia Foxx or North Carolina, wrote.
A press release from Kline referred to the plan as a “half-baked idea” that would lead to additional problems rather than help to fix the issues currently facing loan servicers.
For example, millions of borrowers have experienced their debt being transferred between servicers with little notice. In addition, many borrowers have defaulted on their loans despite numerous federal programs available that cap payments based on income, writes Joseph Lawler for The Washington Examiner.
The Department of Education said close to four million people are in default on their loans. The department went on to say that half of federal student loan borrowers who dropped out of school in the past three years are late on their payments, with more than half of those being at least 91 days late. In comparison, just 7.2% of recent college graduates are more than three months behind.
Meanwhile, James Runcie, chief operating officer of the Federal Student Aid office, said that the focus has always been on making sure that students have access to the funds necessary to attend college.