Treasury Notes

 An Update on the Fiscal-Federal Student Aid Pilot for Servicing Defaulted Student Loan Debt

By: David Lebryk

Today, Treasury’s Bureau of the Fiscal Service (Fiscal) is releasing a report on the first year of its pilot program with the Department of Education’s Office of Federal Student Aid (FSA) launched last year to learn more about the way the government collects on defaulted student loans. In a previous post, I shared some initial observations from the pilot, which will conclude in 2017. The report released today includes detail on the results during the first year of the pilot, describes our initial observations from the experience of assisting defaulted student loan borrowers, and suggests recommendations to improve the experience of defaulted student loan borrowers.

During the pilot, FSA referred 16,242 loans owed by 5,729 borrowers with a balance of approximately $80 million to Fiscal. In the first year, Fiscal sent more than 33,000 letters to borrowers and initiated more than 21,000 outbound calls in an attempt to reach borrowers and assist them in resolving the default status of their loans. Based on Fiscal’s first-hand experience working with these borrowers, the report discusses the following challenges inherent in the collection processes for all defaulted student loans:

Contacting Borrowers: Speaking with borrowers is critical to helping them enter into a repayment agreement; however, Fiscal was only able to reach approximately 33 percent of borrowers by phone, and borrowers answered less than 2 percent of outbound calls. Borrowers in default may be more willing to take action on their loan if they have clear information about the available options and are contacted using consistent Department of Education branding.   

Complexity of Available Repayment Options: The number and complexity of repayment options provide borrowers several alternatives to evaluate to determine the optimal approach for their circumstances. Borrowers are generally unaware of different repayment options and may be ineligible for certain repayment options like rehabilitation and consolidation if they have used these options in the past. Providing more borrower-centric resources, such as clear descriptions of repayment options and a single portal for student loan information, may complement the work of trained call center agents. 

Navigating the Rehabilitation Process: Borrowers opting to rehabilitate their loans often have difficulty meeting the program requirements of providing documentation of their income, making nine on-time payments in a period of 10 months, and completing the required paperwork. Simplifying the rehabilitation process and reducing the steps borrowers need to take could potentially ease the burden and increase rehabilitations.

Transition to a Sustainable Repayment Plan Following the Completion of Rehabilitation: Once borrowers complete a loan rehabilitation, they will need to interact with a new servicer and may need to select a repayment plan to maintain affordable payments. Further aligning the monthly payment amounts available to defaulted borrowers with those available to current borrowers may help to reduce borrower confusion and re-defaults. 

The pilot has already helped provide insight into many of the challenges in servicing defaulted student loans. The second year of the pilot will continue to allow Fiscal and FSA to gather more data about this process, gain further insights, and identify opportunities to better help borrowers. Fiscal and FSA will continue to explore ways to increase borrower contact and effectively counsel borrowers on how to evaluate and implement the best options for resolving their defaulted student loans. Additionally, for borrowers already enrolled in payment agreements, Fiscal will continue to provide assistance to those borrowers as they complete the program requirements.

The full report on the pilot’s first year is available here​.​

David Lebryk is the Fiscal Assistant Secretary at the U.S. Treasury Department.​​​

Posted in:  Student Loan
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