Federal student loan servicers are more than just a headache for borrowers. The government entrusts these companies to manage over a trillion dollars in federal assets.
They continue to fail at their job.
Borrowers struggle to get accurate information from their servicers. Confusion about federal student loans creates opportunities for scammers to take advantage of borrowers. Borrowers fall into default, unaware that programs exist to keep their monthly payments manageable.
Plenty of Blame to Go Around
It is easy to look at the enormous contracts servicers receive and blame them for the issues with servicing.
Unfortuantely, the root cause issues run much deeper. The Department of Education contracts with a long list of federal loan servicers. While some servicers are better than others, all servicers struggle to provide borrowers with accurate information and helpful advice.
Efforts to police servicers, like the recent Navient settlement, don’t fix the fundamental problem. Federal student loan servicing is broken.
The Big Fix: Simplify Student Loan Repayment
I’ve spent nearly a decade educating borrowers about student loans. In that time, changes to student loan rules made things more complicated.
It seems that each year, the government puts new rules in place to help borrowers. These rules may help more people qualify for forgiveness or make repayment more affordable. While some of these changes are undeniably helpful, they also add complexity to student loan repayment.
Every day I receive emails from readers asking challenging repayment questions: I’m about to get married, does it still make sense to chase forgiveness? Will my student loan payment go up if I get a bonus at work? I have a consolidation loan with my ex, what are our options?
As taxpayers and borrowers, we ask a lot if we expect poorly paid call center representatives to answer these complicated questions.
If we want to make the questions easier to answer, we must make the system easier to understand. Until that time, confusion will be an issue.
How do we simplify the federal student loan system? There are numerous opportunities to reduce borrower confusion, but it requires more foresight from policymakers.
Quick Fix: Let Borrowers Pick their Federal Student Loan Servicer
Most borrowers don’t get a say in who services their federal loans. Outside of a couple of opportunities to switch servicers, borrowers are stuck with whomever the Department of Education assigns to service the loans.
This is a missed opportunity for the Department of Education.
Servicers are already compensated based on the number of borrowers they service. They have a financial incentive to want additional borrowers.
If borrowers could change servicers, it would force them to compete to provide the best help to borrowers. The servicers with the shortest hold times and the most helpful representatives would get the most borrowers and make the most money.
This change wouldn’t cost any money, and it could provide a huge step forward for borrowers.
The Unpopular Fix: Pay Servicers More
As taxpayers, we should expect the government to spend as little as possible servicing federal student loans. Unfortunately, you get what you pay for.
If the government paid servicers more, they could expect more from servicers. The contracts with servicers could specify a minimum salary and training requirement for all customer service representatives.
Our current system of the blind leading the blind consistently leads to bad outcomes for borrowers. Poorly trained, underpaid call center representatives can’t possibly offer the nuanced help that many borrowers need.
If we can’t create a system that is easy to navigate, we should at least provide borrowers with competent guides.