The White House has issued new student loan reforms that put borrowers' protection at risk. Here's how the withdrawal of Obama-Era protections will affect you.
Federal student loan borrowers, listen up. Whether you're considering taking out loans, still in school, or already in repayment, policy changes in the Department of Education under the Trump Administration may affect you.
Secretary of Education Betsy DeVos rescinded certain student loan reforms the Obama administration planned. Specifically, she eliminated Obama-era guidelines for awarding contracts to loan vendors (the companies that give your loans).
What does all this mean for you? Let's explore.
Reforms were meant to fix the student loan system
Obama's reforms intended to simplify the complex federal loan system. Nine different loan servicing companies currently dispense federal loans. Navient is the country's largest loan company, followed by Nelnet, Great Lakes Educational Loan Services, HESC/Ed Financial, CornerStone, and more.
Before a company can become a federal loan servicer and debt collector, it needs to receive a Federal Student Aid contract. The Obama administration prioritized awarding these contracts to companies with the best customer service and the lowest rates of student loan default.
Still, the process of repayment is far from perfect. If you've ever navigated a student loan website or called your loan servicer to arrange a payment plan, you know how confusing the system can be. According to a report by the Consumer Financial Protection Bureau, other borrowers are just as frustrated as you are.
Borrowers are concerned about poor communication between schools and loan companies, trouble enrolling in income-driven repayment plans, and difficulty processing payments for students on a loan-forgiveness track, among other issues.
When borrowers aren't informed about flexible payment plans, they're at risk of falling behind on their payments. During the eight years of Obama's administration, 8.7 million loan holders defaulted on their student loans. Default rates have become a national concern. To avoid more defaults, Federal Student Aid encouraged loan companies to work with borrowers, rather than offer risky loans or impose severe financial penalties for missed payments.
Obama's old solution: A single vendor
One idea the Obama administration proposed would have combined the nine servicers into a single servicer.
The result would be one Education Department portal online. All federal loan holders would go through the same processes and use the same forms. The new loan platform would be similar to HealthCare.gov, where Americans chose from multiple health care providers through one website.
Federal education officials had concerns about this process and the massive transition involved. For instance, HealthCare.gov ran into many problems when the site launched, and a student loan site would face similar challenges from millions of student with diverse needs.
The bigger problem -- the government needed to pick one loan servicer to award the contract to. Loan companies bid on the opportunity, and three companies came out in front -- Naviet, FedLoan, and Nelnet (combined with Great Lakes).
The problem for borrowers: Navient, the largest servicers, has a less stellar history of customer service. The Consumer Financial Protection Bureau sued Navient in early 2017, claiming the company "illegally cheated borrowers out of repayment rights through shortcuts and deception." Navient allegedly encouraged struggling borrowers to pay more than necessary, misapplied payments, and withheld essential information from borrowers.
Student loan holders have complained about call centers at Navient and other servicers. Pressured to handle calls as fast as possible, call center staff members haven't steered borrowers towards affordable payment plans or informed them about extra fees.
DeVos's new solution: Cut federal costs
DeVos withdrew two memorandums issued by the Obama administration. The memorandums offered incentives for loan companies to provide good customer service.
This reversal means the government no longer has to consider default rates or borrower satisfaction when selecting servicers for Federal Aid contracts. Instead, the government will prioritize companies offering the least expensive services.
The new policy is likely a cost-cutting measure by DeVos, and puts the possible single-servicer platform in jeopardy. If Federal Aid does decide to pursue a single-servicer portal, they're more likely to pick the loan giant Navient as the servicer, despite their alleged treatment of borrowers.
Critics worry borrowers will bear the brunt of the change. Navient, for instance, was accused by the Consumer Financial Protection Bureau of paying customer service agents based on the time they spent per call. Agents were encouraged to deal with borrower calls quickly. Short call times meant enrolling borrowers in repayment programs that took less time to set up (like deferment and forbearance) rather than taking the time to inform borrowers about plans that would save them money (like income-driven plans or loan forgiveness).
What does this change mean for you?
If DeVos moves ahead with the single-servicers loan portal, your loan servicer may change. The general terms of your loan, like the interest rate and repayment plan, should stay the same. Lenders are required to let you know if any changes take place. So keep an eye on your e-mail for student loan notifications, and sign up for an account with your new servicers so you don't miss a payment if your loan changes hands.
Since loan companies are no longer incentivized by the federal government to find you the best repayment plan, you'll have to do your own research. You'll need to know which repayment options are available and how to apply for them. You want a plan that will save you money in the long term, not just the short term.
Keep track of what you owe and when and make sure all your payments are accounted for. It's a good idea to maintain a record of each payment you've made (when, how, and how much). Keep a copy of any paperwork you've sent your loan servicer, such as documentation of income.
Be your own advocate. If your current payment plan isn't meeting your needs, let your loan servicers know. Make sure you track the date and time of any phone calls to your servicer.
You have power to hold companies accountable for incorrectly posted payments and illegal debt collection practices. Know your rights as a borrower -- you do have them!
Another possibility, if you're totally fed up with federal student loan practices, is to refinance under a private lender. Private loan repayment terms are generally much stricter and less flexible than federal loan terms, so know your new obligations.
Remember
Though your student loan company was already hard enough to deal with? With new White House decisions, it could become even more of a hassle.
You'll need to keep a close eye on your student loan vendor in the upcoming months. Make sure your vendor hasn't changed. It it has, make sure you contact them and confirm your payment plan.
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