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DeVos Announces Huge Overhaul of Federal Student Loan System


The federal student loan service industry has seen numerous complaints from borrowers in recent years. Loan servicers such as Navient are even facing lawsuits from those who say their loans were mishandled, and that borrowers were deceived about their repayment options.

Recently, the Secretary of Education, Betsy DeVos, announced that the Trump administration is looking to change the federal student loan servicing system dramatically.

Issues with the current federal student loan servicing system:

Right now, there is $1.4 trillion in student loan debt spread across 44 million borrowers in the United States. Of that amount, the vast majority of student debt is comprised of federal student loans.

When former President Barack Obama was in office, he worked to transfer student loans away from private banks and consolidate them within the government.

However, there are still nine different servicers that manage federal loans:

  1. Cornerstone
  2. Granite State
  3. HESC/EdFinancial
  5. Navient
  6. Nelnet, Inc.
  7. Great Lakes Educational Loan Services, Inc.
  8. FedLoan Servicing
  9. OSLA Servicing
    All nine are private institutions.

The Consumer Financial Protection Bureau (CFPB) also says they have received millions of complaints from borrowers about these federal loan servicers. They allege that these companies mislead borrowers about their repayment options, made errors when recording payments, and wrongfully entered many people into default.

Trump Administration to offer exclusive student loan servicing contract:

In an op-ed for the Wall Street Journal, Devos cited these issues with loan servicers as the rationale behind the major overhaul she and the rest of the Trump administration have planned.

“The existing student-loan servicing requirements, put in place by the Obama Administration, created a chaotic system that has resulted in numerous consumer complaints,” said DeVos.

DeVos blamed consumer issues on an overly complex system.

“The federal student loan servicing solicitation we inherited was cumbersome and confusing- with shifting deadlines, changing requirements and de-facto regulations that at times contradicted themselves,”sad DeVos in a press release.

“Internal and external stakeholders both agree it was destined for a massive and unsustainable budget overrun,” she added.

To address this problem, DeVos said that the Department of Education would offer an exclusive contract to one company. The contract will give them the rights to servicing billions in federal loans, eliminating the other companies’ involvement.

Also, according to DeVos, the change could potentially save taxpayers $130 million over the next five years.

What the shift would mean for borrowers:

DeVos stressed that having just one loan servicer would ensure a standardized approach to customer service and a more efficient user platform.

With just one servicer, the Department of Education could monitor the company more effectively. Plus, it may simplify managing federal student loans for borrowers.

Currently, you may have several loan servicers if you have federal loans. That means you have to sign into multiple sites to monitor your account and make payments. It can be complex and difficult to keep up.

Under the new plan you’d have just one account to track, as well as consistent customer support for any questions or issues, according to DeVos.

“Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes,” said DeVos.

For borrowers who have been frustrated by poor or misleading service in the past, the change could be a big improvement.

Potential drawbacks of one student loan servicer:

While the new approach could be helpful to borrowers, some consumer advocates are expressing concern.

Rohit Chopra, senior fellow at the Consumer Federation of America, cautioned that the system could make the Department of Education overly reliant on one servicer.

“The changes may increase profits for the industry, but may do little to tame the high levels of default in the program,” said Chopra in an interview with the New York Times.

Four student loan servicers have submitted proposals for the open bidding process, according to the New York Times:

  • Navient
  • Pennsylvania Higher Education Assistance Agency, which is listed as American Education Services and FedLoan Servicing when servicing loans
  • Nelnet and Great Lakes Educational Loan Services (they submitted a joint proposal)

What you can do now to address student loan servicer issues:

The Department of Education and Secretary DeVos have not announced a timeline for when they will award the contract.

Therefore, it’s unclear just when this change will take effect. So for now, your loans will remain with your current servicer.

However, if you’re currently having problems with your federal student loan servicer, you can take action before the changes go into effect. Here are a few options to keep in mind:

  • Know your student loan repayment options! Since loan servicers may not inform you of alternative repayment plans or deferment options, it’s important to ensure you’re informed. If you’re not sure where to begin, visit Western Benefits Group‘s website for more information!
  • Consider student loan refinancing. If you’re really unhappy with your servicer, one way to get rid of them is to refinance your student loans with a private lender. Refinancing can help you save money by providing a lower interest rate if you qualify. It can also potentially reduce your monthly payment. However, keep in mind that you will lose out on federal benefits. But for some borrowers, it can be a smart way to take control of their debt.
  • Lodge a complaint. Let’s say you are having a problem with your current servicer and cannot reach a solution. You can escalate the issue by contacting a student loan ombudsman or the CFPB. Then, with either option, a neutral third-party can investigate the problem and come up with a solution.

Where do borrowers go from here?

While the proposed changes to the federal loan system are a huge shift, they could be beneficial to borrowers. In the meantime, you can take the steps now to protect yourself and manage your loans more effectively.