On August 1, under pressure from a bipartisan group of senators, Education Secretary Betsy DeVos cancelled her contract to hand over the $1.3 trillion in federal student loans to a single service provider. DeVos, who wants to overhaul the U.S. student loan system, reaffirmed at the time that she plans to implement a new system by 2019, when existing service contracts expire. She’s been mum ever since about what that might entail.
With Fall 2017 tuition bills due during the next few weeks for millions of college students, it’s a good time to consider what could be in store for them and their families—especially since consumer and student right groups say DeVos's plans may make it harder to afford college and graduate school.
Mark Kantrowitz, a financial aid expert and the publisher and vice president of strategy for the college search website Cappex, is glad DeVos has backed off from handing a single service provider responsibility for all student loan servicing. But he isn’t convinced she won’t refloat this proposal.
DeVos is “likely to double down on the same bad ideas,” he says, “since she has repeated the same rhetoric she used to criticize the Obama proposal.”
Obama’s proposal called for a unified student loan servicing system that would provide a single web page and a single toll-free number for borrowers to reach their servicer. However, multiple servicers would still compete with each other to service loans “behind the scenes,” says Kantrowitz, and their performance would be evaluated based on customer service surveys and default rate data.
“A single front-end interface while retaining interchangeable back-end servicers, he says, would drive down the cost of servicing, save taxpayers money and, depending on how the front end is implemented, could improve oversight by allowing the U.S. Department of Education full visibility into the status of each borrower's loans.
On the contrary, a single service provider would have no incentive to improve performance and, says Kantrowitz, “it could lead to a ‘too big to fail’ scenario.” A single servicer would provide uniform servicing but, he adds, “the servicing is likely to be uniformly bad.” It would eliminate all competition among servicers and the cost to borrowers would likely increase, he explains.
He points out that many years ago the federal direct loan program had a single service provider, ACS Education Solutions. ACS, he says, “is alleged to provide the lowest quality loan servicing of all the student loan servicers currently under contract to the federal government.”
DeVos’s efforts to unravel student loan protections developed under the Obama administration also have people on edge. In July, attorneys general from 18 states and the District of Columbia sued her and the Department of Education for freezing new rules that would’ve erased federal loan debt for students cheated by for-profit colleges that acted fraudulently.
“Her track record involves removal of student loan protections and to delay enforcement of student loan protections,” adds Kantrowitz, “so there's nothing to suggest that she's going to act any differently in the future.”