This week Education Secretary, Betsy DeVos, rescinded Obama’s reform of student loan collections. Consumer advocates state the move will push many borrowers in to default and make repayments tougher.
Obama’s reforms were to apply to student loan companies that win federal contracts after 2019 and to give a financial break to borrowers.
“This move is a big win for companies that have run roughshod over borrowers,” says Rohit Chopra, senior fellow at the Consumer Federation of America, the former student loan ombudsman at the Consumer Financial Protection Bureau (CFPB) and a Department of Education official last year.
A few companies are in the running for student loan contracts. One company is Navient. Navient is the largest student loan servicer and was sued by the CFPB over abuses and even stated that borrowers were cheated. Withdrawing the Obama memos makes it more likely that Navient will be selected as the contract holder.
All protections for borrowers come in to question as DeVos says she is withdrawing the memos. This also puts into question the process of awarding new contracts. As per DeVos, the Obama initiative “has been subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.”
“We must create a student loan servicing environment that provides the highest quality customer service and increases accountability and transparency for all borrowers, while also limiting the cost to taxpayers,” she added. In a statement provided to USA TODAY, Education Department officials said they couldn’t legally provide more details because the information relates to an ongoing procurement process.
Loosening of for-profit school rules worries student advocates
The memo came a week after the servicers’ trade group, the National Council of Higher Education Resources, sent letters to Congress urging lawmakers to examine servicing contracts “to reduce unnecessary and burdensome requirements.”
“It’s very clear (Education is) responding to the demands from the industry,” Bergeron says.
It has been found that the service companies do not inform borrowers about affordable repayment options, lose paperwork and misapply payments. These movements put borrowers at risk of going in to default. For example, certain plans allow for lower payments based on income and set timelines to forgive remaining balances. The firms also mislead borrowers about options to avoid default, process payments in ways that maximize interest and fees, and encourage forbearance, which allows borrowers to put off payments but at a high cost, rather than restructure loans.
More than 1 million student borrowers were in default last year.
As per Chopra and Bergeron, service companies cut corners because directing borrowers to more affordable payment plans requires representatives to spend more time on the phone, increasing costs.
“If they can provide the service cheaply, they make more money,” Bergeron says. “It’s a pattern of behavior (by the Trump administration) that’s putting corporate interests ahead of the consumer.”