Department of Education Announces Overhaul of Federal Student Loan System

On Friday, Secretary of Education Betsy DeVos announced a plan by the Department of Education to award its entire student loan servicing portfolio to a single company – down from its current roster of nine. The Department of Education estimates that this reduction will save approximately $130 million over the next five years.

“Savings are expected to increase significantly over the life of the contract,” DeVos said in a statement. “Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times, and an improved payment application method.”

It is estimated that there is $1.4 trillion in student loan debt spread across 44 million borrowers in the United States. The large majority of this total – more than $1 trillion – is issued by the Department of Education, who currently outsources the processing of payments, collections, payment deferrals, and general customer service to nine private companies.

The process of streamlining federal student loan servicing began under the Obama administration, which sought to reduce the number of student loan servicing companies to four.

Opponents of the current administration’s move argue that it creates a “too-big-to-fail” scenario and will lead to an overall reduction in the quality of customer service provided to borrowers and will do little to alleviate the high levels of default currently seen with student loan debt.

DeVos, however, disagreed, stating that having a single company servicing all federally issued student loan debt would streamline the process, standardize the approach to customer service, and create a more efficient user platform. Other consumer advocacy groups agree that, done well, consolidating the servicing of the Department of Education’s student loan portfolio into a single company has the potential to benefit borrowers and reduce what some see as an overly complex system.

Currently, borrowers with federal student loans may have several different loan servicers, which in turn requires them to monitor multiple accounts and make multiple payments each month. According to DeVos, the new plan proposed by the Department of Education would provide borrowers with a single account to track and consistent customer support for any questions or issues.

The change is expected to take effect in 2019. The Department of Education is soliciting detailed plans from interested companies until July 10, 2017. Once the contract is awarded, the winning company will have 18 months to implement its service. Whichever company ultimately receives the contract will be required to build a platform to collect and service an estimated 32 million federal direct student loans.

Other changes proposed by the Department of Education on Friday would eliminate the requirement that notices be provided in Spanish for borrowers who opted for that language option, and monthly billing statements would no longer be required to include the breakdown of repayment options developed by the Consumer Financial Protection Bureau aimed at assisting borrowers in identifying the most appropriate repayment plan for their respective situation.