Lawmakers are requiring the Department of Education to drop a formula that gives preference to four major federal student loan servicers - Navient, Nelnet, Great Lakes and American Education Services - and instead divvy up the accounts "on the basis of their performance compared to all loan servicers utilizing established common metrics, and on the basis of the capacity of each servicer to process new and existing accounts.”

The performance-based scrutiny is aimed at offering borrowers with a higher quality of service under an omnibus spending bill and could be a big win for nonprofit companies that manage education debt payments for the government.

Four companies currently manage nearly 70% of the $1.2 trillion in outstanding federal student loans, even though there are 10 servicers contracted to manage the loans. The loans are divvied up based on how they score on two customer satisfaction surveys and three default prevention metrics.

Student loans make up the nation’s second largest consumer debt market, which has grown rapidly in the last decade. The total volume of outstanding student loans has more than doubled, up from less than $600 billion in 2006 to more than $1.2 trillion. One in four student loan borrowers are currently in default or struggling to stay current on their loans, despite the availability of income-driven repayment options for the vast majority of borrowers.

The Consumer Financial Protection Bureau in September found "widespread servicing failures" across the board by both private and federal student loan servicers and urged new rules to protect borrowers. A report by the CFPB found a "range of sloppy, patchwork practices that can create obstacles to repayment, raise costs, cause distress and contribute to driving struggling borrowers to default."

The CFPB has made it a priority to take action against companies that are engaging in illegal servicing practices and some of that work is addressed in a new report, which can be found at: 

Debra Chromy, president of Education Finance Council, a national trade group representing nonprofit and state-agency student loan servicers, called the provision to drop the student loan servicing formula a win for student loan borrowers that ensures "they receive effective, personalized loan servicing that guides them through their repayment period successfully, and for taxpayers, who deserve a system that maximizes existing and proven resources."The move could shift business to nonprofit servicers that include Missouri Higher Education Loan Authority and Oklahoma Student Loan Authority.

There are nearly 8 million federal and private student loan borrowers in default, representing more than $110 billion in balances, according to the CFPB. Millions more are falling behind and may need additional support from servicers to understand and access repayment options. The CFPB believes many companies may not be investing in the resources necessary to service large numbers of delinquent loans.

"With one out of four student loan borrowers struggling to repay their loans or already in default, cleaning up the servicing market is critical," said CFPB Director Richard Cordray. “[The] report underscores the need for market-wide student loan servicing reforms to halt harmful practices and boost assistance for distressed borrowers."

The CFPB said it intends to explore other potential industry-wide rules to increase borrower protections.  

In May, the CFPB launched a public inquiry into student loan servicing practices. The CFPB also sought input on potential solutions to improve service for student loan borrowers in repayment. In response to the public inquiry, the CFPB received more than 30,000 public comments, which informed recommendations in the new report. 

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