If you have never had to deal with a federal student loan servicer like FedLoan Servicing, Navient, or Great Lakes consider yourself lucky. For the forty-five million people buried under a collective $1.7 trillion in debt, the mere mention of their servicer likely inspires fear and loathing. When servicers aren’t collecting the last dollar you have at the end of the month, they are often screwing up your account in ways that are extremely difficult to correct.
Technically speaking, a student loan servicer is a kind of middleman between the debtor and the creditor to manage the account, collect payments, and penalize noncompliance. Or, as the Department of Education puts it, “A loan servicer is a company that we assign to handle the billing and other services on your federal student loan on our behalf, at no cost to you.” The last bit could not be further from the truth.
Servicers often give false or misleading information that can result in life-altering consequences. Sometimes this means getting hit with late fees or defaulting, negative marks on your credit which can prevent you from getting a job or renting an apartment. Sometimes it means finding out too late that you didn’t file the correct paperwork to qualify for loan forgiveness and the light at the end of the tunnel was a mirage. Trying to do anything with the “customer service” at companies like FedLoan and Navient is always a frustrating and often degrading experience.
For most people struggling with student debt, servicers like FedLoan are the “face” of their student loans, even if ultimately the money in most cases is owed to the Department of Education. So it is understandable that so many debtors celebrated when last month, FedLoan announced it was exiting the student loan servicer business. Less than two weeks later, one of the smallest student loan servicers, Granite State Management & Resources, also announced that it was quitting.
Learning that this ever-present source of strife might soon be gone is reason to celebrate, but for many it’s not entirely obvious what the news means. Why would companies voluntarily step away from the extremely lucrative student loan racket?
FedLoan (also known as Pennsylvania Higher Education Assistance Agency, or PHEAA), is one of the largest student loan servicers, with roughly 8.5 million accounts. They likely quit the student loan servicer business because the company was going to have its contract terminated soon anyway as a result of repeatedly violating Federal Student Aid policy, especially for failing to properly administer the Public Service Loan Forgiveness (PSLF) program.
FedLoan is the worst servicer in a crowded field. During a recent testimony to Congress, FedLoan CEO James Steeley was caught blatantly lying, and Elizabeth Warren has long been gunning for their destruction. When the former head of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, was recently appointed as head of Federal Student Aid (FSA), FedLoan saw the writing on the wall. In early June, after temporarily renewing all servicer contracts for six months, Cordray pledged it would be “the last action FSA will take under my leadership that qualifies as business as usual,” signaling that several servicer contracts would not be renewed.
FedLoan’s decision was a “you can’t fire me, I quit”–type of move, a way of saving face and putting their own PR spin on things. Granite State’s decision to quit, in contrast, implies an unwillingness to continue under conditions where regulations designed to protect borrowers are more stringently enforced.
In the months ahead, other servicers may well follow suit. If other rule-violating companies don’t quit of their own accord, Cordray should start ending contracts. Great Lakes, Navient, and Nelnet should all be cut off as punishment for their records of incompetence and abuse.
Navient, for example, strategically placed student’s accounts into forbearance for the purpose of increasing their interest and extending the repayment period to boost profits. In 2017, the CFPB sued Navient for a laundry list of abuses including tricking students into paying more than they were required to, deliberately obscuring how to lower payments, and targeting veterans. All servicers engage in these kinds of shenanigans — the big ones like Navient just do it more frequently and on a grander scale.
But while Warren has also been actively calling for Navient’s contract to be cancelled, not everyone in Washington wants to see these predators shut down. With so much turmoil in student loan servicing, there might be pressure from the White House and Congress on Cordray not to end any additional contracts.
The fact is, Cordray should do more than terminate contracts. Consumer advocates argue that the FSA and other agencies, including the CFPB and state Attorneys General, have significant power to go after the criminals who run these companies. And just because FedLoan and Granite State willingly quit doesn’t mean we should allow their executives off the hook.
FedLoan might look like it is leaving the student loan business, but it could all be an illusion. Right now, there are nine or ten servicers (depending on how you count — it’s complicated). But behind the scenes, there are only four servicer platforms, and FedLoan owns one of them.
Multiple companies use the same platform but keep their data and staff separate. One likely way this might play out is that FedLoan will transfer many of their current accounts to another servicer called MOHELA, who also uses the same platform, and continue to subcontract with MOHELA. In this way, FedLoan would still get paid for the student loan accounts but would be attempting to hide from consumer protection regulations in the process.
Should the government allow them to use this move to dodge enforcement, FedLoan would not really be disappearing after all, just hiding. A year ago, it looked as if Great Lakes’ and Nelnet’s contracts with the Department of Education would be terminated, but they survived. Great Lakes went on to violate the CARES Act by illegally reporting millions of student loans to the credit reporting agencies, damaging people’s credit scores at the height of the pandemic.
Student loan servicers take a range of forms. Some, like FedLoan, are “quasi-governmental entities.” Some others, like Great Lakes, are at least nominally nonprofits. And some, like Navient, are publicly traded, for-profit companies. Whatever their structure, they violate the law and screw students with impunity.
To date, FSA has either been unable or unwilling to regulate them and enforce the laws on the books. Fraud is a part of the business model and a key source of revenue for servicers. When a whistleblower revealed that Nelnet defrauded taxpayers of over a billion dollars, Nelnet was able to settle for a mere $55 million. Under the FSA, servicers have learned that crime pays.
It’s good news that there’s growing recognition that these loan servicers are bad actors that need to be reined in. We should cheer the demise of FedLoan and Granite State, and call for more terminations and hopefully steep penalties for the people who ran the companies in question.
We have a real chance to win College For All and full cancellation of all student debt. But there are other forces at work as well that envision a future where students indenture themselves to the 1 percent, or where a perfectly functioning government bureaucracy keeps the debt-for-education status quo going for the next generation.
There’s a decent chance that you, dear reader, are one of the borrowers who will be impacted by this news. If your loans are serviced by FedLoan or Granite State, you might be wondering: What happens next? Am I about to get screwed? Sadly, you may be. You should be prepared to defend yourself and fight back.
This is not the first time we have seen millions of accounts transferred from one servicer to another. But because the student debt crisis grows bigger each year, we have never seen anything happen on this scale before. Over nine million accounts — one out of every five student debtors — will be transferred to another servicer in a relatively short span of time. And it could grow even bigger if we see other servicers shut down or get terminated.
Servicer transfers happen all the time but are usually much smaller. In fact, just in 2020 another student loan servicer called CornerStone cancelled its contract, and a million accounts were transferred to FedLoan. During past account transfers of a much smaller size (2.5 million) one out of every five accounts got messed up in the process. Records have been lost, past payments made have not been recorded or counted, late fees and penalties have piled up, and borrowers have been forced into default, with all the suffering that entails.
Making matters worse this time around, FedLoan is the company contracted to manage the PSLF program. PSLF has always been a bit of a false promise, but nobody could have predicted just how badly the program has functioned in reality. Roughly 99 percent of people who were counting on PSLF to cancel their remaining balance were told, after ten years of payments, that they did not qualify. This was usually because FedLoan had given them false or misleading information, or failed to inform them that they had the wrong loan type, wrong payment plan, or were missing paperwork.
When Congress tried to patch the program, 99 percent of people were denied again when trying to make use of this “fix.” When it comes to PSLF, the stakes are high, and this servicer transfer introduces another opportunity for errors to be introduced that can ruin people’s lives. They may get kicked off the program, have qualifying payments go uncounted, have to resubmit onerous paperwork, and more.
If your loans are currently serviced by FedLoan or Granite State, you should be organized — in both senses of the word. You need to band with others to fight for structural change, and you need to gather all your documentation. (For those looking for more practical steps, Adam Minsky has provided helpful advice here).
But you should remember: none of this is necessary. Instead of forcing millions of people to jump through hoops to simply change loan servicers, Joe Biden could just cancel all federal student debt. The Debt Collective already wrote the executive order for him. With a simple signature, all of this trouble could be averted.
Two Dystopias Ahead
As bad as FedLoan was, and as much of a nightmare it will be to have millions of borrowers change servicers, things might be about to get even worse. Right now, there are two competing dystopian visions for the future of student debt: a right-wing dystopia and a liberal think tank dystopia.
The right-wing dystopian vision for the future of higher education finance is to bring back indentured servitude and rebrand it as “Income Share Agreements” (ISA). This idea is being pushed by Republican senators Marco Rubio and Todd Young, as well as Democrats like Mark Warner and Chris Coons. A group of wealthy investors would pool their money to create an ISA, which in turn would pay the tuition for students that it deems are worthy investments. In exchange for getting fully funded tuition, the student would agree to “share” a percentage of their future income for a certain period of time.
What could possibly go wrong?
Because of racist and sexist pay gaps, white men would be better investments for ISAs and be offered the most favorable terms, the shortest periods of indenture, and the lowest percentage of income they are required to “share.” Latina workers, on the other hand, who on average make just $0.55 for every $1 a white man makes, are a riskier investment. Investors expect students who attend historically black colleges and universities to pay a higher rate of their incomes.
Thinking about becoming a social worker or a public school teacher? Good luck convincing an ISA to pay your tuition. Or if they do, they will expect a larger percentage of your pay for more decades — maybe even the rest of your life. Thinking about going into finance or working at a big Wall Street firm? Now that is the kind of student the ISAs would love to fund. Universities would respond to these market demands, as they already have under our current system, by shrinking the humanities and expanding high income STEM and finance fields.
The liberal think tank dystopian vision is equally bleak. For liberal reformers, the problem is not that working people are forced to mortgage their futures for higher education, but that we have made everything too complicated to allow people to make rational, market-based decisions. Their solution is called Next Gen, a “modernization” of the debt-for-education system first dreamed up by think tankers and policy wonks within the Obama administration and implemented by Trump’s Secretary of Education Betsy DeVos, now slowly being put into effect over many years.
The goal of Next Gen is in the name: it is a massive overhaul designed to preserve the status quo of student debt for the next generation. Think about Next Gen as an attempt to remove the middlemen, or at least hide them under the hood by funneling everyone through the same technical interface where a dizzying array of privatized partners become invisible. Debtors won’t even know which private company is servicing their student loans, and accounts can be seamlessly transferred from one company to the next without the student’s knowledge or consent.
Next Gen tries to align market incentives with enforcement, rewarding good customer service with more accounts, and punishing bad servicers for breaking the regulations. The idea is to create a virtuous cycle. Their goal is to build a more “personalized” and efficient Rube Goldberg machine to extract wealth from working-class people who dare to step out of line by getting an education, while subjecting learning to even more intensified market logic, as this promotional video shows.
It’s a plan based, at least, on the recognition that the current system is broken. Over the last twenty-six years, the government has made five different extremely complicated “income-driven repayment” (IDR) plans as well as the aforementioned PSLF program — and none of them work. To date, only thirty-two people have ever had a single penny cancelled by an IDR plan and initially over 99 percent were denied the promised forgiveness under PSLF.
Next Gen, its boosters promise, will streamline and optimize this injustice. Right now, nobody can make sense of the five IDR plans to find out which one is right for them. With Next Gen, you won’t have to, because it will have access to your IRS records, which it will use to automatically debit your bank account based on a percentage of your income. It will all be so seamless and efficient that you’ll barely even notice you’re poor.
Under the current system, when a student debtor defaults, they often have their wages garnished as punishment. Under Next Gen, the Department of Education will prevent defaults by starting you out with what amounts to wage garnishment, set to a specific percentage of your income for a fixed period of time. You might be wondering what the difference is between Next Gen and an ISA. It’s a good question.
One current danger is that FSA might use this opportunity of loan servicer contract terminations to go all in on Next Gen, building out the effort’s servicing portion to handle all of the newly homeless accounts.
But there is another odd dynamic at work here. Next Gen is such a bureaucratic beast that it is doomed to fail. The only chance it has of working is if we just cancel most of the existing student debt.
Time to Fight
These two dystopias aren’t the only possibilities. There is a third option: a future where student loans are abolished and education is free.
Although it is quite a bit watered down to align with the promises Biden made during the campaign, there is a version of College For All that could pass as a part of the next reconciliation bill. This would allow many lower-income students to get high-quality education at public universities without having to take on massive amounts of debt.
Last week, the Biden administration announced a “final extension” of the student loan moratorium through the end of January 2022. There are many factors at play in this decision. The announcement came on a Friday afternoon, which is typically a time when announcements are made to avoid press coverage. The White House doesn’t see the extension as good news — they see it as an embarrassment that contradicts their message that the economy is recovering. The giant servicer shuffle was a major factor that forced their hand by making it hard to quickly turn payments back on. The situation is only going to be slightly different next February.
In the meantime, debtors should keep in mind that student loan servicers are a weak point and a potential organizing target.
This is a moment to bring more people into the movement to transform our higher education system. Instead of suffering in silence, struggling borrowers need to come together. We have six months before they are going to try to force you back into repayment to organize to win cancellation instead.
Borrowers should aspire to much more than getting set up with a new loan servicer with a snazzy digital interface and praying that PSLF or IDR will eventually come through for them. Student loan servicers, by definition, shouldn’t exist. Public college should be free and all existing student debt should be abolished, making loan servicers obsolete and debt servitude a thing of the past.