Policy

DeVos Kills Plan for Multibillion-Dollar Student Loan Servicing Platform

• By Derek B. Johnson
• 08/02/17

This week, the United States Department of Education abruptly cancelled a multibillion solicitation for a consolidated student loan servicing solution, throwing the project's long-term future into question.

A statement released by the department indicated the long-planned finance platform will be replaced by a new project — called the Federal Student Aid Next Generation Processing and Servicing Environment — before the current set of federal student loan servicing contracts expire in 2019.

"Doing what's best for students will always be our number one priority," said Secretary of Education Betsy DeVos. "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."

The original solicitation was released last year under the Obama administration with the intention of handling loan servicing, discharges, consolidation, financial reporting, defaults and collections for the more than $100 billion doled out in federal student aid every year.

In April, DeVos oversaw a series of changes to the solicitation, most notably a shift from relying on multiple service providers (preferred by the Obama administration) to a single service provider, with other providers acting as subcontractors.

Other changes to the original solicitation included removing a requirement to program a "payback playbook" developed by the U.S. Digital Service and the Education Department's Office of Federal Student Aid, which helped borrowers optimize their repayment strategies.

The changes immediately ran into bipartisan resistance on Capitol Hill, with legislators expressing concern about the effect that moving to a single servicing provider would have on competition and customer service.

Just hours before the Department of Education killed the bid, Sens. Elizabeth Warren (D-Mass.), Roy Blunt (R-Mo.), James Lankford (R-Okla) and Jeanne Shaheen (D-N.H.) introduced legislation that would have blocked the move. In a statement, Warren said she was "glad" the administration changed course but that lawmakers will be monitoring the new project with equal scrutiny.

"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 Warren.

According to the initial solicitation, the new plan envisions separate contractors for the account servicing and the technology platform, "so that cost efficiencies can be achieved and current state-of-the-art technologies can be deployed and evolve in the future."

The Obama administration spent two years planning for an overhaul of the student loan servicing system, collaborating with stakeholders in the Consumer Financial Protection Bureau and Treasury Department. In July 2016, Department of Education Undersecretary Ted Mitchell crafted a memorandum laying out a borrower-friendly vision for student loan servicers that was designed to underpin the new software system.

Clare McCann, director of federal policy for New America’s higher education initiative, said the bid's cancellation and DeVos' statements indicate that the process will likely start from scratch.

"It’s definitely true right now that not all servicers do all components of that [type of work] well," she said. "It's an opportunity to bring in new players who handle data a little better."

"Best case scenario: This probably gets delayed by another two years," said McCann. "It seems likely most if not all of what was in the Mitchell memo is going to be struck and rewritten for this new procurement."