What the government is doing to improve student loans

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What the government is doing to improve student loans


It's rare to go a day without the student loan debt crisis being covered in the news.

More than 41 million Americans currently carry nearly $1.4 trillion in student loan debt, and in addition to their debt load, borrowers frequently face problems with the student loan repayment process.

In response, the U.S. Department of Education recently outlined a new vision for the federal student loan repayment experience.

What do student loan servicers do?

The government currently has contracts with several companies that manage many student loan services, including billing, your payments and if you need to change repayment plans:

  • CornerStone
  • FedLoan Servicing (PHEAA)
  • Granite State
  • Great Lakes Educational Loan Services, Inc.
  • HESC / Edfinancial
  • Navient
  • Nelnet
  • OSLA Servicing
  • VSAC Federal Loans

When you take out a student loan, you're assigned one of these servicers - you don't get to select one. However, according to the Consumer Financial Protection Bureau (CFPB) there are no consistent federal standards for student loan servicers.

As a result, servicers can determine their own policies for things such as repayment or how borrowers can contact them.

In 2015, thousands of student loan borrowers reported problems they experienced with their federal loan servicers to the CFPB.

Here are three problems borrowers experienced under the old system, followed by three improvements borrowers can look forward to under the new one.

1. Difficulties with payment processing

According to the CFPB's findings, some borrowers who regularly sent in their monthly loan payment on time found that their loan payments were often treated as missed, which resulted in unexpected late fees and surprise interest charges. A late student loan payment can also negatively affect your credit score.

For instance, some servicers took over a week to post payments, which then were considered overdue.

Borrowers who'd submitted specific repayment instructions to their servicer also reported problems with their servicers not following these instructions.

Say you have multiple student loans with different interest rates. In that case, you may try to pay off loans with a higher interest rate first, by submitting instructions to your servicer.

But for some borrowers, their servicers either didn't receive or ignored these instructions and split their monthly payment proportionally across all the loans.

2. Breakdowns in customer service

Many borrowers felt that they didn't receive accurate or timely information about their student loans. They also reported that when they experienced an error having to do with their student loan repayment, they didn't know who to turn to or how to fix the problem.

Because there aren't uniform requirements for student loan servicers to deal with errors or provide information about a borrower's student loan, borrowers asked the CFPB to develop detailed procedures for their servicers that would result in a fairer process.

They also asked for a more streamlined complaint system for when their servicers failed to perform.

3. Problems enrolling in alternative repayment programs

You may need to consider an alternative repayment plan if you have a financial hardship that prevents you from making full payments, or any loan payments at all.

But borrowers reported that when they reached out to their servicers, their servicers told them to apply for forbearance or deferment or to just pay the full amount on time.

On top of this, when borrowers did apply for an alternative repayment plan, they were sometimes enrolled in the wrong plan because of paperwork processing errors.

What's going to change

In April 2016, the Department of Education announced its vision for a new loan servicing system that would help resolve the above problems, and others, that have plagued thousands of borrowers.

In July, the Department continued to build on this vision by outlining additional protections and customer service standards in a memo to the Federal Student Aid office.

Here are three improvements you can expect from this streamlined system:

1. A single web portal to offer simplicity and better access to information

A new single web portal for all borrowers should help to eliminate the inequality of access to information about student loans that borrowers currently experience.

On the new portal, borrowers will be able to see the latest information about their loans, make payments and apply for alternative repayment programs.

They'll also be given clear, actionable information during every step of the repayment process.

Although multiple servicers will still be involved behind the scenes, borrowers will only have one point of contact via the portal. This also means borrowers won't have to know or remember the name of their specific loan servicer.

2. Better customer service and accountability

Servicers involved in the loan repayment process will be held to much higher standards when it comes to customer service.

For one, borrowers can expect quick responses to their inquiries and complaints, and clear resolutions when problems occur. For example, borrower feedback should be acknowledged within 24 hours and all completed income-driven repayment plan applications should be processed within 10 business days.

The memo also directs the Federal Student Aid office to better monitor loan servicers, which should help ensure servicers maintain higher customer service standards.

3. A feedback and complaint system for borrowers who still run into problems

On July 1, the Department of Education launched the Federal Student Aid (FSA) Feedback System, which provides borrowers an outlet to submit complaints and provide feedback.

This system allows customers to submit feedback about their own experiences or on someone else's behalf.

Borrowers can submit complaints about federal loan servicers, collection agencies, the Department of Education or universities. The Department of Education has also committed to contacting schools when appropriate to resolve complaints.

Bottom line

It's still too early to tell how effective the government's efforts to overhaul the student loan experience will be, as, aside from the feedback system, the new vision has yet to be fully implemented.

It's also unclear how the change in presidency will impact its implementation, given that the Obama administration was responsible for outlining this vision.

Democratic presidential candidate Hillary Clinton revealed a comprehensive plan to reform student loans, though she hasn't explicitly tied this to the Obama administration's plan.

As for Republican presidential candidate Donald Trump, he proposed closing parts of the Department of Education, which may axe the entire new system that's been proposed, or at least parts of it.

Regardless, student loan borrowers may be encouraged by the government taking multiple steps to reform the system's current problems.

About the Author: Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over). Follow her at @MikaBhatia!

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