While President-Elect Biden begins preparing for his transition to the White House in January, discussion is swirling over whether he would be able to enact sweeping changes, given a closely-divided Congress. If Democrats fail to win two runoff elections in Georgia in January, Republicans would continue to control the Senate and could block much of Biden’s agenda, even while Democrats maintain a slim House majority.
But some potentially sweeping changes do not necessarily require any input or involvement from Congress. One such area ripe for change is student loan servicing.
The U.S. Department of Education’s federal student loan servicing system has been widely criticized for years. A recent report uncovered over 5 million student loan servicing errors that could cause lasting financial harm to student loan borrowers, particularly for borrowers seeking relief through the Public Service Loan Forgiveness (PSLF) program. Another report issued last year by the Department of Education’s own Office of Inspector General found ongoing and systemwide failures by federal student loan servicers. That report blamed both the servicers themselves, and the U.S. Department of Education for its failure to hold them accountable. And the federal Consumer Financial Protection Bureau (CFPB), an independent consumer watchdog agency, has also found widespread problems with student loan servicing.
As President, Biden could dramatically improve the student loan servicing system. And he does not need Congress’s participation. Here’s what he could do.
Greater Oversight and Direct Accountability
In 2017, the Trump Administration rescinded key student loan servicer guidance implemented under President Obama that was intended to protect student loan borrowers. That guidance tied positive student loan borrower outcomes to the ability of student loan servicing companies to retain servicing contracts with the U.S. Department of Education. With that guidance rescinded, student loan servicers arguably have had less of an incentive to improve the experience of student loan borrowers.
A future Biden administration could change the landscape by issuing new, stronger guidance tying student loan servicers’ continued access to the vast federal student loan portfolio with borrower satisfaction and compliance with federal law. The Department of Education could also better monitor complaints and servicers’ adherence to federal guidelines, and report its findings publicly, creating more accountability.
New Education Secretary
Biden’s assumption of the presidency would terminate Betsy DeVos’s tenure as Secretary of Education. DeVos has been a controversial figure in President Trump’s cabinet for the last four years, enacting policies and regulations that consumer advocates argue have harmed student loan borrowers. A whistleblower recently accused DeVos’s administration of intentionally making it harder for student loan borrowers to apply for certain student loan relief programs.
Biden has expressed support for popular student loan programs like Borrower Defense to Repayment, Income-Based Repayment, and Public Service Loan Forgiveness, and would likely select a new Education Secretary committed to implementing new policies and protocols designed to strengthen these programs. For example, Biden has called for Income-Based Repayment enrollment to be automatic. Currently, borrowers must be aware of income-driven repayment programs, affirmatively apply for them, and then renew the programs on time every year; at every step, there is room for borrower and servicer error. A new Secretary of Education could make the application and renewal process automatic, which would largely cut out servicers and substantially reduce costly errors and delays.
New Student Loan Servicer Contracts
Many of the Department of Education’s student loan servicing contracts are ending within the next year. The Education Department previously announced its intent to use the re-contracting process to proceed with a huge overhaul of its federal student loan servicing system.
In a June press release, the Department indicated that it signed servicing contracts with five new companies, which would subsequently take over much of the federal student loan portfolio: EdFinancial Services, F.H. Cann & Associates LLC, MAXIMUS Federal Services Inc., Missouri Higher Education Loan Authority (MOHELA), and Texas Guaranteed Student Loan Corporation (Trellis Company). Once implemented, these changes could cause millions of student loan borrowers to experience potentially disruptive transfers to new servicing companies. One such transfer is already occurring, impacting a million borrowers.
A future Biden administration would be likely to closely reevaluate the proposed overhaul, and may opt to scrap some of the changes altogether. Biden could use the re-contracting process to tie student loan servicers’ financial incentives to borrower satisfaction, low complaint rates, and adherence to federal law regarding student loan programs. His administration could also decide to keep some current student loan servicers on board if they have established a more positive track record or agree to adhere to higher customer service standards.
The Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) was established under the Obama administration to provide independent oversight and regulation of the financial services industry. This includes federal and private student loan servicing. The CFPB initiated major litigation against student loan giants Navient and National Collegiate Student Loan Trusts on behalf of student loan borrowers. Over the course of a decade, the CFPB returned nearly $12 billion to 29 million people wronged by financial institutions.
Under President Trump, however, the CFPB’s top leadership was replaced, and its oversight activities reduced. In 2018, the CFPB’s Student Loan Ombudsman resigned in protest, accusing the CFPB’s new leadership of “abandoning the very consumers it is tasked by Congress with protecting.”
Under a Biden administration, the CFPB leadership could be replaced again, and the Student Loan Ombudsman unit restored. A recent Supreme Court decision held that a President can terminate and replace the CFPB director without cause. This would provide Biden with a free hand to reshape the CFPB and reinstall consumer rights-focused leadership, allowing the agency to return to its mission to aggressively oversee student loan servicers and other financial institutions.
Cancellation of Student Debt
Advocates for student loan borrowers are pushing Biden to bypass Congress and utilize executive authority granted under the Higher Education Act to enact sweeping student loan forgiveness. While Biden has not stated publicly whether he intends to do so, he repeatedly emphasized his support for broad student loan forgiveness during the presidential campaign. Biden had proposed forgiving all undergraduate federal student loan debt for borrowers with annual incomes under $125,000 who attended public colleges and universities, as well as historically black colleges and universities (HBCUs) and private minority-serving institutions (MSIs). He also expressed support of $10,000 in across-the-board student loan forgiveness as a form of economic stimulus.
Widespread cancellation of student loan debt would have the effect of eliminating millions of student loan borrower accounts from servicer portfolios. Loan forgiveness of just $10,000 would eliminate all student loan debt for an estimated 16.3 million borrowers, or 36 percent of all borrowers, and reduce by half the loan balances for another 9.3 million (an additional 20 percent of all borrowers). With far fewer borrower accounts to manage, student loan servicers could be better equipped to properly handle the remaining accounts, with a lower risk of errors and fewer costly delays.
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