Department of Education to Revise Student Loan Servicer Evaluations

NEW YORK (MainStreet) — The Department of Education (ED) is planning to revise the way it evaluates student loan servicers that manage payment of direct student loans.

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In a letter to Rep. John Kline, (R-Minn.) chair of the House Education and Workforce Committee, Thomas Skelly, ED's acting chief financial officer, outlined a plan to standardize performance benchmarks for the four main servicers and some smaller ones. The department is also re-examining how it pays its servicers. Compensation is reviewed when servicer contracts come up for renewal.

A joint House and Senate Conference Committee directed ED to ensure consistent application of new performance metrics and a timeline for their implementation. The Conference Committee wants to minimize the problem of moving multiple servicers to one set of metrics and reduce the impact of these changes on borrowers.

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ED is continuing to work with the Consumer Financial Protection on scrutinizing and regulating servicers. A CFPB source said the federal consumer watchdog would not comment on Department of Education's plans because of ED's contractual relationship with the servicers.

Revising servicer evaluation is one thing; giving borrowers a fair shake is something else. Servicer critics say that the Department isn't doing enough to oversee servicers who aren't cutting busted borrowers enough slack. James Runcie, chief operating officer of the federal student loan office, defended ED and the status quo in testimony before the Senate Health, Education, Labor and Pensions Committee last month.

Many borrowers would like to vote with their feet—and have the option of dumping their servicer. Some say that letting borrowers switch servicers might solve one set of problems while creating others.

"If borrowers were able to switch, you might introduce other influences beyond the quality of servicing and default aversion activities," said Mark Kantrowitz, publisher of FinAid.org, a Web-based provider of student loan intel.

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"You might have some servicers trying to dump problematic borrowers on other servicers. For example, if there's an indication that a borrower is likely to default, you'd have your call center contact them to let them know about their ability to switch to a different servicer. Or you might have some servicers offering incentives to get borrowers to switch so the servicer can grow its servicing volume."

Under the current performance metrics, the four main loan servicers -- Sallie Mae, the Pennsylvania Higher Education Assistance Agency (PHEAA), Nelnet and Great Lakes Higher Education Corp. -- receive new borrower accounts to service based on how they score, relative to each other, on two default metrics and three customer satisfaction surveys.

ED still seems to view servicer competition as a kind of de facto regulation--one that would require no implementation since it's ongoing. In his letter to Congress, ED's Skelly wrote "We strongly believe that competition among a small group of experienced, high-qualified servicers—whether for-profit or not-for-profit—is the best way to drive improved performance and value for taxpayers."

The new performance metrics will be finalized later this year, the department said.

--Written by John Sandman for MainStreet

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