Last month, the Biden administration announced a 90-day extension on a roughly two-year, pandemic-long pause on borrowers repaying their federal student loans. While many higher education advocates and experts welcome the move, some also say bigger reforms are needed. A mid-December report from Third Way, a think tank, unpacks one key player: student loan servicers, both how they work now and how they can better serve borrowers.
“Student loan servicing is a really complicated, often misunderstood element of higher education financing and the student loan process,” said Michelle Dimino, the education senior policy advisor at Third Way. “There are a lot of mismatches at play with servicing when it comes to what borrowers want and expect from their servicer—and what servicers are hired to do.”
Dr. Rajeev Darolia, a professor of public policy and associate professor of public policy and economics at the University of Kentucky, authored the report, which is titled “Getting it Right: Design Principles for Student Loan Servicing Reform.” The paper highlighted three ways servicing can improve, including clarifying the servicer's role and simplifying where as well as how borrowers get information. Such reforms, argues the report, could yield long-term benefits for borrowers and society at-large.
As servicers remain in the public eye with this extension, Dimino added that Darolia's paper could help people and policymakers make sense of the student loan apparatus.
“This report provides additional clarity on the servicer relationship and starts digging into the longer-term reforms for borrowers going forward,” she said. “It highlights critical design aspects, including how the financial incentives of contractors need to align with what borrowers want to see.”
Borrowers in default face some of the most punitive practices from servicers, practices that many advocates want to see changed. The default system can garnish borrowers’ wages, tax refunds, and some of their federal benefits while borrowers also pay high fees. Many people who have been more likely to struggle in the pandemic are more likely to be in default, noted Sarah Sattelmeyer, the project director for education, opportunity, and mobility in the higher education initiative at New America, an advocacy and research organization.
“For many families, the pandemic exacerbated financial insecurity that has been going on for decades—reflecting long-standing structural inequities and racism in health care, education, and wealth-building opportunities,” wrote Sattelmeyer in an email to Diverse. “And the pandemic itself has been unequal in that it has disproportionately negatively affected people of color, women, and low-income families. For these families, and for many others, the pause has been an important lifeline.”
With the extension of that pause, Sattelmeyer said she is now waiting to hear more about the Department of Education's plans for those in default.
“Providing defaulted borrowers with a quick, manageable pathway to bring their loans back into good standing during the pandemic would ensure that millions of families no longer experience the severe consequences of default and regain access to federal aid and other federal benefits,” she wrote to Diverse.
Betsy Mayotte, the president and founder of The Institute of Student Loan Advising (TISLA), a nonprofit organization that offers free and impartial student loan advice, added that borrowers can take key steps now to plan for their repayments restarting in about four months.
“The first thing is they need to make sure they know who is holding their loans,” said Mayotte, who mentioned that several big student loan servicers exiting the industry this year could cause confusion. “The best way to do that is to log into studentaid.gov and enter their details. The next thing to do is to make sure the servicer has all of their current contact information. Because important notices will be coming out soon, and they want to be sure not to miss anything.”
She was “wicked, wicked surprised” when the Biden administration announced another extension. While Mayotte said that the pause has been beneficial in the pandemic, she noted the continued pause could become a downside for some people.
“We’ve taken people who were in the habit of making payments out of the habit of making payments,” said Mayotte. “It might be a lot more difficult to get some people back in the habit of having their payments due again. Lifestyle creep is a real thing.”
Mayotte expects student loan scams to rise in the coming months as well. Her parting advice is for borrowers to be cautious: “If it sounds too good to be true, it probably is.”
Rebecca Kelliher can be reached at [email protected].