Last week, the New York Attorney General’s office reached a $9 million settlement with ACS – one of the country’s major student loan servicers – for systematically harming student loan borrowers by misinforming them, misleading them, misapplying payments, and more.
As far as I can tell, no one who works with student loan borrowers is surprised. The types of problems that the New York Attorney General’s office found are widespread, and by no means limited to ACS. The Consumer Financial Protection Bureau (CFPB) has reported extensively on rampant student loan servicing problems throughout the industry. Major lawsuits brought by other state attorney general’s offices are still ongoing against giants such as Navient and the Pennsylvania Higher Education Assistance Authority (PHEAA), which also runs FedLoan Servicing. Even smaller servicers such as ECSI have been under investigation.
Why is Student Loan Servicing a Mess?
It doesn’t take a rocket scientist (or a student loan expert) to understand what’s going on here: the federal government outsources the servicing and day-to-day operations of its entire student loan portfolio to a handful of private companies. And it pays them handsomely; one servicer, Nelnet, made more than $200 million in profits in 2016 alone. But there is virtually no oversight of these companies, and no accountability. It’s often up to individual states (usually via proactive attorney general offices) to try to protect borrowers, leading to a patchwork of enforcement actions that can sometimes get results (like we just saw in New York) but doesn’t always lead to systemwide change.
What a Student Loan Enforcement Unit Could Do
If the government is going to pay these companies hundreds of millions of taxpayer dollars annually to manage student loans and interface with borrowers, it needs to hold them accountable. And a student loan servicing enforcement unit might be a good way to do that.
Such a unit was created previously as part of the Consumer Financial Protection Bureau (CFPB), but was effectively shut down by Mick Mulvaney last year, prompting its director to resign.
The way I see it, a new student loan enforcement unit would be even more powerful, with four primary objectives:
- Data collection on complaints. Right now, there is no central place where student loan borrower complaints about servicers are housed. Borrowers can submit complaints directly to their servicers; they can submit a complaint to the CFPB; and they can submit a complaint to the U.S. Dept. of Education via its new complaint resolution system or its Ombudsman’s Group. A student loan enforcement unit can collect and house all of these complaints so that there can be comprehensive analysis about which servicers are performing badly, and in what ways.
- Power to investigate. The enforcement unit should have the power to investigate and verify complaints (particularly when there are many complaints against a particular servicer for similar, systematic problems).
- Power to issue corrective or punitive orders without litigation. The enforcement unit should also have the power to order servicers to make changes and improvements to harmful practices and, if servicers do not sufficiently comply, to penalize them. Penalties could take the form of fines (which would have to be substantial enough to matter to the servicer), contract non-renewal, or contract termination.
- Power to reverse harms done to student loan borrowers. Finally, the enforcement unit should have the ability to remedy the harms cause by a servicer’s mistakes or omissions. For example, the unit could have the power to reverse a default or delinquency erroneously caused by a servicer, or to correct credit reporting errors. The unit could also refund borrowers for improper fees or interest charges, potentially using the fines levied on the servicers.
How and when can this enforcement unit be created?
A student loan enforcement unit could be created as a division within the U.S. Dept. of Education or re-established at the Consumer Financial Protection Bureau (CFPB). It could even be established as a separate independent agency altogether. Depending on what part of the federal government houses it and the scope of its authority, such a unit would need enabling regulations – and potentially Congressional authorization – in order to be created. Right now, given the current state of the Dept. of Education and CFPB, as well as a divided Congress, that’s unlikely to happen. But with the re-authorization of the Higher Education Act on the horizon within the next few years, a student loan enforcement unit is not just a pipe dream.
