The White House signaled last week that, with the resumption of federal student loan payments, federal student loan servicers can expect to face increased scrutiny. The Department of Education issued a “Framework for Student Loan Servicer Oversight and Accountability to Protect Borrowers” and indicated that “[t]he framework’s strategies help the Department to encourage servicers to better support borrowers and allows the Department to hold their feet to the fire when they have servicing failures.”

The framework includes the following:

Servicer Oversight.  The ED’s regular monitoring of its loan servicers is focused on whether servicers are providing quality customer service and accurately processing borrower payments and applications. The ED uses a risk-based approach to overseeing loan servicers that leverages borrower complaints, customer satisfaction surveys, interagency referrals, data monitoring, random sampling and servicer self-reporting.

• Direct servicer monitoring:  To monitor the quality of customer service provided by loan servicers, Federal Student Aid (FSA) staff  listens to and scores servicers’ customer service representatives interacting with borrowers, reviews borrower calls, reviews customer chats and conducts secret shopper calls to measure the accuracy of servicers’ responses to borrowers’ questions.  FSA staff also conducts secret shopper campaigns on broad return to repayment issues as well as specialty servicing issues such as questions on Public Service Loan Forgiveness.
• Partnering with federal and state regulators: The ED works with other government agencies, such as the CFPB and state attorneys general.  The ED notes that it “took steps earlier this year to update its interpretation of federal preemption to clarify states’ authority to enforce state consumer protection laws to facilitate close coordination between the Department and its state partners.”  (In August 2021, the ED issued a preemption interpretation in which it concluded that state laws regulating the servicing of federal student loans “are preempted only in limited and discrete aspects as further discussed in this interpretation.”  In July 2023, the ED issued a new preemption interpretation that revised and clarified its 2021 interpretation.)
• Leveraging borrower complaints: The ED’s leveraging of borrower complaints includes complaints filed through FSA’s Office of the Ombudsman.  The ED conducts regular monitoring of social media and news stories to track borrower experiences and see whether complaints it receives are isolated instances or an error that is impacting a broader subset of borrowers.

Servicer Accountability.  The ED may take the following actions against servicers:

• Withholding Payment: When servicers do not meet their contractual obligations or are not meeting acceptable standards, the ED may withhold payments based on the number of borrowers who are not being served.
• Suspending or Re-allocating Borrowers: If servicers’ perform inadequately, the ED can suspend the allocation of additional borrowers, or re-allocate borrowers to other servicers. The ED can also allocate new loans to high-performing servicers.
• Contractor Performance Reports (CPARS): The ED creates summary reports for each servicer using a government-wide grading system regarding various aspects of the servicer’s work.  CPARS are used as a factor when servicers are competing for new contracts.
• Corrective Action Plan: The ED requires servicers to fix servicing errors through remediation plans.

Borrower Forbearances.  When certain types of errors are detected, the ED directs servicers to place affected borrowers into a short administrative forbearance while the errors are resolved.  In certain circumstances where the ED believes potential servicer errors could harm a borrower’s progress toward loan forgiveness, the ED has directed servicers to count those periods in administrative forbearance toward Public Service Loan Forgiveness and income-driven repayment forgiveness and adjust accrued interest to zero.

Unified Servicing and Data Solution (USDS).  The ED will enhance its ability to reward servicers for positive results and hold servicers accountable for poor performance through the transition to the USDS in Spring 2024.  USDS is intended to place a stronger focus on servicer performance improvement by financially rewarding servicers that keep at-risk borrowers in a current repayment status.  USDS is also expected to provide increased cost transparency and allow the ED to better track servicer performance and incentivize servicers to meet the ED’s standards.

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