Do You Trust Your Federal Student Loan Service Provider?

The penalty to loan servicers when borrowers fall behind isn’t significant enough to incentivize them to work with struggling borrowers . . .

Student Loans & Debt

Do you find peace in knowing that your loans are being serviced by a company contracted by the federal government?

I mean the government is fairly responsible, right, so they must pick good companies to service the nation’s $1.3 trillion in student debt? Unfortunately, I’m not so sure that’s the case.

More Options, More Problems

The Obama Administration has supported major initiatives to give students more options for repaying loans. The hope was that with more options, less borrowers would default on their loans. In fact, borrowers are now offered three different income driven repayment plans.

However, with each new initiative, came more questions and confusion. The problem is that the major loan servicing companies like Navient, Great Lakes, and American Education Services are not properly bridging the education gap.

These loan servicing companies get paid to do more than handles payments. They are also paid to answer questions and help borrowers avoid default, ie. educate them about their options. And maybe they would actually do so if they were properly incentivized to do so.

Poor Incentives = Poor Service

The penalty to loan servicers when borrowers fall behind isn’t significant enough to incentivize them to work with struggling borrowers. The DOE pays loan servicers $2.85 each month for current accounts. 

Despite the fact that there are now slightly steeper cuts for deliquency, its not clear whether these cuts actually make it financially worth their while to get the borrower back to current. 

If a loan is 6-30 days delinquent, the loan provider will see a $0.74 reduction in what they are paid, compared to what they receive for loans that are current. If the loan is 31 days delinquent, the rate drops $1.39. And when the loan is seriously delinquent, they may lose as much as $2.40. 

However, getting a borrower out of default requires time, energy, staff, education and consistency. So really what’s the point in helping that borrower, when they aren’t really getting paid to properly manage or assist that borrower. I guess it was too lofty an idea for us to think that these companies really had our backs, regardless of what they get paid.

Additionally, although servicers' perforamnce is based on several factors, including percentage of borrowers current on their payments, as well as percentage of borrowers who have fallen behind, a low score does not mean that they won't be awarded any loans. It just means that they will receive less than they would have otherwise. 

Loan Servicers Falling Short

The loan servicing companies have also had their fair share of legal troubles, largely due to mismanagement.

In June, $60 million worth of settlement checks were mailed out to active service members who federal officials claimed Navient had cheated out of interest-rate benefits. This was part of a settlement they reached with the Department of Justice (DOJ) last year.

How does that even happen?! I guess you better check your account, and frequently, to ensure you’re getting all the perks you are entitled to.

I had my own experience with mismanagement when I was having my loans serviced by one of the major loan servicers. They failed to adjust my payment schedule after I made a large lump sum payment towards my loan balance. !!!!

Just when I thought they couldn’t shock me anymore, I called to complain and get the situation remedied, and to my surprise, the customer service agent didn’t even understand what I was talking about.

I mean shouldn’t the people answering the phones for a loan servicing company be able to understand the basics?…You significantly pay down a loan. You don’t pay the same monthly fees as you did before.

Navient has also been the center of a multistate probe led by attorneys general in Illinois and Washington. Another watchdog is also threatening to go after the company

Navient, recently, in a filing with the Securities and Exchange Commission, acknowledged that the Consumer Financial Protection Bureau (CFPB) is considering suing them following an investigation into how Navient administered late fees and “other matters.”

You think all of this would have been enough to make the government reconsider their contract with Navient.

Nope. The government renewed their contract.

Cut Them Loose

Despite the fact that in March, the White House released a “Student Loan Bill of Rights,” which includes a new student feedback system, the system fails to address borrowers’ main concern.

When a loan servicer messes up big time, like Navient did, they should get the boot! That’s great if borrowers now have a new sounding board for their grievances, but where are the assurances that the government is listening?

Tired of your loan service provider?

Other Related Articles:

- Need Extra Money to Pay Off Your Debt?

- 10 Ways to Pay Your Student Debt Off Quicker

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