Smart Borrower Blog

Education Department Changes Course on Student Loan Single-Servicer Plan


Aug 3rd, 2017 @ 4:18 PM by Amber Nelson


The U.S. Department of Education is reversing course on its earlier plan to give the servicing of all federal student loans over to one company, a move motivated by criticism from lawmakers and companies who would lose out on current contracts.

In May, in an effort to reduce loan payment confusion and financial waste, Education Secretary Betsy DeVos announced that the Office of Federal Student Aid would no longer be serviced by nine different companies. A contract would be rewarded instead to one single company that would be in charge of servicing all $1.2 trillion in federal student loans. While that single servicer would be able to hire subcontractors to help, all loans would officially be serviced through just one clearinghouse, making it simpler and easier for student loan borrowers to make payments. The switch was also expected to save tax payers more than $130 million over the first five years.

Critics of the proposed change doubted whether one company could truly handle such a large load of student loans and if the lack of competition would also eliminate incentive to provide the best customer service.

“Secretary DeVos’ plan to hand a trillion-dollar federal loan portfolio over to just one private company would have created a ‘too big to fail’ federal contractor, eliminated market competition, and ultimately harmed borrowers,” said Senator Elizabeth Warren (D-Mass.). “It will be important to continue watching the department to evaluate whether its decisions are good for the millions of struggling federal student loan borrowers.”

DeVos said the new plan is to allow different companies to bid for contracts on database housing, system processing and customer account servicing.

“By starting afresh and pursuing a truly modern loan servicing environment, we have a chance to turn what was a good plan into a great one,” said DeVos in a statement Tuesday. She said the FSA has “identified potential ways to modernize FSA and to leverage new technology that will not only enhance the customer service experience for borrowers but will also protect taxpayers.”

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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