Education Secretary Betsy DeVos and the Trump administration reportedly is planning to reorganize the beleaguered $1.3 trillion student debt program.
About 42 million Americans currently have federal student loans, and borrower complaints have reported poor customer service, unexpected delays, and lost paperwork, CNN Money recently reported.
For years, defaults have mounted despite the improving U.S. economy and the money invested in collecting education debt, Bloomberg reported.
"These issues can extend their repayment time and increase how much they end up paying off" over the long run, CNN Money reported.
"Unfortunately, borrowers continue to report difficulties and setbacks as they try to work with their servicers to manage their loan debt," said Consumer Financial Protection Bureau Director Richard Cordray in a statement last month.
The Trump administration plans to offer an exclusive contract that will give one company the right to service billions of dollars of outstanding federal student loans now handled by four companies,
DeVos expects to save the government $130 million over the next five years.
"Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes," DeVos said in a statement.
But critics said student borrowers could suffer because a single company would be granted a monopoly, with no incentive to provide better customer service.
The Trump approach would represent one more radical change for the financial aid system that former President Barack Obama overhauled, Reuters reported. Under Obama, much of the $1.3 trillion business of student lending was moved from banks and other companies to the federal government.
Four companies still handle servicing the loans. Navient Corp, which was spun off Sallie Mae in 2014, is the largest. Its stock rose 23 cents to close at $13.94, after popping to a session high of $14.14 shortly after the announcement. The others are Nelnet Inc., Great Lakes Educational Loan Services, Inc, and FedLoan Servicing, also called PHEAA.
The Consumer Financial Protection Bureau, the consumer financial watchdog agency, is fighting Navient in court over allegations the company deceived borrowers about repayment options and their rights.
In an op-ed piece published on the Wall Street Journal website, DeVos wrote the Obama administration's servicing requirements created a "chaotic system" that generated numerous consumer complaints and was not sustainable.
She added the single servicer will establish a user platform and a standardized process for handling customer calls.
But Natalia Abrams, executive director of the advocacy group Student Debt Crisis, said Obama's plan to have servicing companies compete for federal contracts based on customer-service ratings would have been more effective.
"With zero competition, we are concerned about a 'too big to fail' student loan company that has zero incentive to work for students, borrowers, and their families," she told Reuters.
Trump is making good on Republican campaign promises to get government out of the business of student lending, and recently lifted limits on fees debt collectors can charge some defaulted borrowers, Reuters reported.
The Washington Post has reported Trump proposed major changes to loan repayment in his budget blueprint, including eliminating a program that erases student debt for public-sector workers after 10 years of payments. It also calls for eliminating subsidized loans for low-income students.
"The changes will certainly increase profits for the industry, but will do nothing to tame the high levels of default in the program," said Rohit Chopra, senior fellow at the Consumer Federation of America and former CFPB assistant director.
The CFPB says 1.2 million student-loan borrowers have defaulted in the past year and 90 percent of the highest-risk borrowers are not enrolled in affordable repayment plans, even though student-loan companies are supposed to inform borrowers about them.
To be sure, the system as it recently stood definitely need to be changed. Student loan defaults are a bonanza for the debt collection industry, Bloomberg revealed.
"The federal government has, in recent years, paid debt collectors close to $1 billion annually to help distressed borrowers climb out of default and scrounge up regular monthly payments. New government figures suggest much of that money may have been wasted," Bloomberg reported.
Nearly half of defaulted student-loan borrowers who worked with debt collectors to return to good standing on their loans defaulted again within three years, according to an analysis by the Consumer Financial Protection Bureau.
For their work, debt collectors receive up to $1,710 in payment from the U.S. Department of Education each time a borrower makes good on soured debt through a process known as rehabilitation, Bloomberg reported.
They keep those funds even if borrowers subsequently default again, contracts show. The department has earmarked more than $4.2 billion for payments to its debt collectors since the start of the 2013 fiscal year, federal spending data show.
"The government often pays debt collectors nearly 40 times what they bring in, federal records show. Take the government's rehabilitation program, which targets people who have defaulted on their debt—meaning they missed nine months of payments. If a borrower subsequently makes nine on-time monthly payments of as little as $5 during a 10-month period, their loans are returned to good standing and the default is supposed to be wiped from their credit reports. But the CFPB found that more than 40 percent of these borrowers defaulted again within three years," Bloomberg revealed.
"Even when borrowers don't default, debt collection efforts often yield little. Close to 80 percent of borrowers who rehabilitate their debt make the minimum $5 monthly payment, according to a 2015 estimate by the National Council of Higher Education Resources, a lobbying group that represents student debt collectors and servicers. That means the Education Department is paying its debt collectors up to $1,710 per borrower to collect around $45, regardless of whether the borrower continues to make her payments," Bloomberg revealed.
(Newsmax wires services the Associated Press, Bloomberg and Reuters contributed to this report).
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