Department of Education Releases Student Loan Servicing Requirements


11/7/2016 3:00 PM

The requirements, part of the Ed’s process to build a single servicing platform for borrower accounts, were among the student loan topics discussed at the latest CFPB Consumer Advisory Board meeting.

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The U.S. Department of Education recently released requirements for a new federal student loan servicing system that will consist of a single servicing platform for all borrower accounts held by the department.

The requirements build on policy guidance released by Ed in July focusing on communication with borrowers, especially those at risk to default on their loans. They also set the stage for Ed’s student loan servicer contract selection process, which is expected to be complete by February 2017, according to a news release.

“The new system will also more accurately measure and disclose how the system is performing,” it states.

Ed, the U.S. Department of the Treasury and the Consumer Financial Protection Bureau developed the policies together which were sent in a memorandum from U.S. Under Secretary of Education Ted Mitchell to Federal Student Aid. They expand on a joint statement of principles on student loan servicing that the agencies released in conjunction with a fall 2015 report to guide improvement in student loan servicing practices, ACA International previously reported.

In October this year, the CFPB’s Consumer Advisory Board provided input on student loan servicing issues in a discussion with Student Loan Ombudsman Seth Frotman and Director Richard Cordray.

Cordray said Ed’s progress on the federal student loan servicing standards is encouraging.

“If you take out a federal student loan to pay for college and later have trouble paying it back, you have a right under the law to arrange a payment based on your income. Cash-strapped borrowers should not be driven to default on a federal student loan,” Cordray said in his introductory remarks at the Consumer Advisory Board’s meeting.

Requirements to select student loan servicers reflect the Ed’s plan to enact those protections and standards and will provide for improved monitoring of vendors, added cost efficiencies and loan distribution metrics that act as rewards when borrowers experience positive outcomes such as repayment and staying out of default, improved verbal and written communications and more, according to the department.

“The idea will be to have a single platform for servicing loans [which] then branches out from that to help borrowers with other needs,” Frotman said during the meeting.

The CFPB is monitoring reported breakdowns in the student loan servicing process, how borrowers can enroll and stay enrolled in income-driven repayment plans and avoid defaults on their loans, according to Frotman.

“The bureau has made it a priority to take action against companies engaging in illegal servicing practices,” Frotman said. “We have also announced we are considering industry-wide rules on student loan servicing.”

To shape the discussion during the board’s meeting Chairperson Maeve Brown, executive director of the Housing and Economic Rights Advocates organization, asked members for their input on common barriers and problems borrowers may face with student loan servicing, their views on how to improve practices in the student loan servicing industry and their ideas on how protections for other consumer financial products such as mortgages and credit cards may be applied to student loans.

Judith Fox, a clinical professor of law at the Notre Dame Law School, shared her perspective based on encounters with students as well as a consumer who is paying back student loans.

“When we think of student loans, we think of young people. But there are older people with loans. I still have student loans and I am a cosigner on my children’s graduate loans,” Fox said.

She said it should be easier for borrowers to get documentation on the amount of their loan and details on the creditor.

“One of the most frustrating things when I am trying to assist someone with a student loan debt is finding out who they owe and how much they owe,” Fox said. “It seems to be it should be very easy to get a number, and a number that sticks.”

The board also discussed communication with borrowers and how access to data and their payment histories can help the student loan servicing process.

“It’s not just that borrowers need to know who they owe and how much—they lack the ability to get a payment history so they know the number they’re being given is the right number,” said board member Chi Chi Wu, staff attorney at the National Consumer Law Center.

Frotman added that the CFPB is focusing on any student loan servicing breakdowns to help borrowers avoid making unnecessary payments while their income-driven payment plan enrollment is processed, for example.

“There are real costs to borrowers in breakdowns we are seeing and that’s something we are really trying to emphasize,” he said.

The CFPB has also been evaluating communication with student loan borrowers in a series of Requests for Information on the student loan servicing market, ACA International previously reported.

In July, ACA International also filed comments  focused on the challenges debt collectors face when using email to share important debt-related information with student loan borrowers in response to the CFPB’s interest in written communication.

ACA emphasized that while access to written repayment information is important, understanding that information, being able to ask questions about that information, and having an opportunity to share details that could alter the accuracy of that information are all critical components to prevent borrowers from avoidable delinquency and default.

In previous comments to the CFPB related to the student loan market, ACA also described why it is essential for legitimate debt collectors to have the ability to communicate with borrowers on their wireless devices or other preferred means using modern telephone technology.  Specifically, ACA emphasized that if contact with delinquent borrowers is unnecessarily impeded, servicers and debt collectors lose the ability to share critical information with borrowers that can help them avoid delinquency and default which in turn exacerbates so called “student debt stress.”

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