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TAMPA, FLORIDA - Good morning, everyone. Thank
you very much for inviting me to speak here at the National Consumer Law
Center’s Consumer Rights Litigation Conference. The work of the National
Consumer Law Center, and the work that many of you in this room do to directly
help consumers deal with the legal dimensions of their financial lives, is of
great importance. I commend you for your ongoing and persistent efforts
and insights on behalf of consumers.
The last time I joined this gathering it was 2010 and we met
in Boston. It was my first year at the Federal Reserve and my
remarks—which were my first set of public remarks as a Federal Reserve Governor—focused
on problems in mortgage servicing. Now, during my first year at the
Treasury Department, I want to focus on issues in student loan servicing and,
in particular, how we are working across the Obama Administration to drive
improvements in the servicing of student loans.
As you well know, millions of student loan borrowers are in
default on their student loans; many more could face default in the near
future; and countless others are struggling to keep their payments
Looking at just the federal student loan portfolio, the
Department of Education’s recently released cohort default rates indicate that
13.7 percent of borrowers that entered repayment in FY 2011 defaulted within
three years . For borrowers that entered repayment in FY 2011, 10% defaulted
within two years. If we look at default rates for borrowers who attended
for-profit colleges, the cohort default rates are even higher at 19.1 percent
this year. While students at for-profit colleges represent only 11 percent
of the higher education population, they accounted for 32 percent of borrowers
in the most recently released cohort and 44 percent of those who had
In total, there were approximately seven million federal
borrowers in default as of June 30th, and that has increased by approximately
200,000 borrowers in just the first half of this year.
In addition, while the Department of Education doesn’t
publish delinquency data on the guaranteed portion of the federal student loan
portfolio, nearly 1.7 million federal direct student loan borrowers are 90 days
or more past due, and hence at serious risk of default.
These numbers have caught your attention, my attention, the
attention of the Administration and the attention of regulatory agencies like
the Consumer Financial Protection Bureau, as well as a significant number of
market participants. Today there is a significant and necessary focus on
how we can prevent delinquencies and defaults and improve outcomes for
borrowers. There are many facets to the work the Department of Education
is doing in this regard, to more effectively reach borrowers and strengthen
servicing in the federal student loan portfolio. I want to spend our time
today focusing on the importance of effective student loan servicing and debt
From our experience in the mortgage market, we know the
importance of servicers informing borrowers and guiding them through the
process of identifying the best repayment options. Yet we also know that
absent proper supervision, enforcement, and well-structured incentives,
servicers can fall far short performing these functions well.
We are hearing about poor servicing tactics such
servicers allocating partial payments
proportionally across a borrower’s loans, causing all the loans to be
private student loan servicers charging late
fees when payments are received during the grace period after the due date ;
servicers failing to provide student loan
borrowers with sustainable repayment options, which only compounds financial
struggle instead of controlling it.
Theoretically, it is possible that these failures may turn
out to be short-term technical problems that will soon be fixed.
Nevertheless, with so many student loan borrowers interacting with servicers on
a daily basis, servicer actions matter.
Federal student loans present demands for servicing that are
different from private student loans, given that they are subject to different
terms and offer different borrower protections. However, borrowers have
made similar complaints with federal student loan servicers as with private
servicers which essentially are the same entities . Servicers have
provided inadequate information on repayment options and failed to enroll them
in an income-driven repayment plan. With more than 40 million federal
student loan borrowers interacting with servicers and debt collectors, servicer
and debt collector actions heavily influence the ability of students to
complete their higher education, avoid the consequences of delinquency and
default, and achieve their educational potential to the benefit of themselves
and to the benefit of the country. In short: a lot is riding on the
content of servicer actions.
As we know from experiences of mortgage servicing in 2010,
servicing loans involves far more than sending statements and processing
Student loan servicing cannot be one-size-fits-all. Placing
student loan borrowers in an appropriate and sustainable repayment plan is
time-consuming, detailed work. The structural incentives under which the
servicers operate must be aligned with the interests of student loan borrowers
and the public mission.
While our country has an interest in reducing barriers to
higher education, and the federal government has a responsibility to taxpayers
that is tied to the performance of the loans, the interests of federal student
loan servicers are not going to be tied to these outcomes unless the terms of
their contracts are structured correctly. To oversimplify a bit, the servicers
make money by maximizing revenue earned and minimizing expenses while
performing the actions spelled out in their contracts with the government. So
this begs the question: how can contracts be optimally structured in such a way
that a profit-maximizing servicer will be motivated to meet the needs of
borrowers and the federal government?
Absent proper contractual incentives, proactive measures by
the servicer to prevent borrower defaults—which could be a win-win for the
student loan borrower and the government—might result in the servicer losing
money. Why? Because the servicer must do a substantial amount of
work with a student loan borrower to find the option that best meets the
borrower’s needs before the borrower becomes delinquent or in default. Loss
mitigation options, such as enrolling borrowers in income-driven repayment
plans, require individualized case work. Thus, the servicer needs to invest in
resources, including trained personnel who can deal with often complex one-off
transactions. The incentives created by the contract with the lender—be
it a private lender or the federal government—will matter to the ultimate
performance of the servicer in dealing with the borrower.
And so, this is an important consideration that has guided
the Department of Education’s recent efforts to restructure its contracts for
federal student loan servicers. In August of this year, the Department of
Education used contractual terms and obligations to direct the ways in which
servicer actions optimize the performance of the federal loan portfolio by
paying for better outcomes. They have increased the amount that servicers
are paid for keeping borrowers current, placed greater weight both on helping
borrowers avoid delinquency and on borrower feedback when allocating new loans
to servicers, and added incentive payments for servicers who are able to drive
down borrower delinquency rates.
Given that these contracts have only been in place for two
months, we cannot yet evaluate how they will affect student borrowers.
But, we do know that without incentives for high-touch servicing, the standard
business model for the servicing industry would seem to put a thumb on the
scale in favor of delinquency and default. The renegotiated contracts are
a useful step to shape and improve the incentives in student loan servicing and
drive better borrower outcomes. And the Department of Education will monitor
how servicers perform under these new incentives and metrics to reassess how
they can be strengthened.
With regular monitoring, evaluation, and ultimately
enforcement, we can determine what refinements are needed to ensure that
incentives are not being “gamed” and that they are driving improvements in
servicer performance and better borrower outcomes. The benefit of proper
incentives will not be realized if they are not rigorously enforced and
adjusted. We can reward servicers who excel at serving students and
sanction servicers who do not meet the contracts’ standards.
Now let’s turn from delinquency to default. When federal
student loans enter default status, they move from a servicer to a debt
collector. The Department of Education has contracts for debt collection
with 22 student loan debt collection entities, often referred to as private
In the case of federal student loans, the Department of
Education assigns defaulted loans to debt collectors based on their relative
performance. This is measured on a quarterly basis across five metrics,
with the largest emphasis for performance placed on the amount of money that an
agency is able to recover and the value of loans rehabilitated from its
assigned borrower accounts .
However, as I previously discussed, incentives may be
misaligned here as well. Unlike most forms of consumer debt, defaulted
federal student loans can be rehabilitated and returned to good standing, and
debt collectors currently receive significant compensation for this
service. Yet many close observers and practitioners, like you, have
suggested that private collection agencies are not doing enough to help
borrowers accomplish this goal and are otherwise thwarting good borrower
This is a troubling sign and may suggest that the incentives
should be refined, just as the Department of Education has recently refined its
contracts with servicers. Federal student loan debt collectors need to be
encouraged to remove loan accounts from default when possible, as well as deal
fairly with borrowers, and the incentive structures in debt collector contracts
should convey these priorities.
After the Department of Education refers the defaulted loans
to a private debt collector to engage in collection efforts, the loans are also
referred to the Treasury Offset Program, as required under the Debt Collection
Improvement Act. This mandatory, last-resort program for federal debts
will withhold certain federal benefits due to borrowers until a loan is repaid
or satisfactory payment arrangements are made.
In the case of federal student loans, this typically does
not occur until after at least 420 days from when a borrower first became
delinquent. Prior to being placed in the Treasury Offset Program, borrowers
receive a written notice indicating the balance of the defaulted debt, the plan
to move the debt into the Offset Program, and a notice of borrower
rights. If the borrower does not repay, the debt is placed in the Offset
Program and the borrower is informed when a payment is withheld. Servicers’
actions themselves are critically determinative of whether the loan moves into
the Treasury Offset Program, and whether accordingly, the federal government’s
strong tools of collection are triggered.
Withholding payments — Social Security, Earned Income Tax
Credits, a tax refund—are a last resort in recouping federal debt precisely
because they can have severe effects on borrowers. For this reason alone,
the objective in demanding effective servicing is to prevent borrowers from
ever reaching this point.
This is why Department of Education Under Secretary Ted
Mitchell is in the process of identifying additional actions that the
Department can take to strengthen the outcomes for federal student loan
borrowers. This work is focused on ensuring that all students have access
to high-quality servicing and effective collections to prevent and remediate
I also want to briefly mention a final risk that arises with
In 2009 and 2010, during the height of the mortgage crisis,
I often saw signs plastered on telephone poles that read: “Mortgage relief
now!” or “Need to refinance?” or “We buy houses!” followed by a catchy 1-800
number to call. We knew then that these were not advertisements, but were
scams, and that they were emblematic of the desperation that borrowers were
experiencing with mortgage servicers.
Remembering these telephone poles is like the re-run of a
bad movie: will student loans fuel the next onslaught of shadowy, fee-ridden
offers that claim to provide borrowers with the elusive opportunity to
eliminate their debt? I worry about the emergence of a student loan “debt
relief” industry. When student loan servicing fails to work for borrowers,
vulnerable borrowers turn to the friendly phone number on the telephone
Players in the debt relief field are typically for-profit
companies that claim to offer various ways for borrowers to consolidate or
rehabilitate their existing student loans. These companies do not operate
on behalf of the federal government and, as recent work by the National
Consumer Law Center has noted, these firms can pose serious threats to consumer
protection because they engage in questionable practices and charge egregious
and unnecessary fees. Borrower complaints show that misleading claims are
used to trick borrowers into paying unreasonable amounts to enroll in options
that may not even exist or to access repayment options they are entitled to
without charge .
As you well know, these are not the only consequences
student loan borrowers confront when their loans become delinquent or enter
default status. Delinquencies are reported to the private credit bureaus
and can inhibit a borrower’s access to future credit for buying a home,
starting a business, or completing or furthering education. Borrowers may
also have a portion of their wages taken directly from their paychecks.
In other words, they may disengage from personal and professional development,
and may drop into the ranks of those preyed upon by scams. Additionally,
the fresh start afforded by bankruptcy is not available for student loan debt,
unless student loan debtors mount a case that proves undue
Given the weight of these and all the consequences I’ve
discussed, as well as the importance of higher education in our nation’s
prosperity, it is imperative that we structure an effective servicing and
collection regime focused on helping borrowers avoid default and
Actions in this vein have already begun. The recently
renegotiated servicer contracts are a critical step in aligning servicer
compensation to outcomes that enhance borrowers’ ability to take advantage of
sustainable payment plans that minimize delinquency and default. And
while the Department of Education has made crucial strides to improve student
loan servicing and debt collection, we must stay focused.
As I’ve said before, the United States has a world-class
higher education system that is the envy of the world, and our system of
federal student lending should be world-class and world-famous as well.
Driving improvements in our student loan servicing and debt collection systems
are an essential part of this aspiration.
Because so much is riding on getting these systems right,
and because student loan borrowers have such little measure of individual
choice or recourse, we know there is more work to be done. Many of you
have been doing a lot to point out problems we face and to give student loan
borrowers some protection and redress when wronged, and we rely on you for this
I also would like to see a more detailed review of default
and delinquency data and differential borrower outcomes by type of
institution. This may present opportunities on the next frontier of
improving borrower outcomes.
The Administration has enhanced and will continue to enhance
its ability to drive improvements in servicer and debt collector actions and
systems. We need to continue close scrutiny of the issues I’ve discussed,
and, as necessary, adapt the servicer contracts to require such improvements as
well as follow through with appropriate enforcement action that addresses them.
Thank you very much for your continued attention to this
topic, and for the invitation to speak with you today.
 Three-year Official Cohort Default Rates for Schools,
Federal Student Aid, available at: http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdrschooltype2yr.pdf
 Annual Report of the CFPB Student Loan Ombudsman,
October 16, 2014. http://files.consumerfinance.gov/f/201410_cfpb_report_annual-report-of-the-student-loan-ombudsman.pdf.
 For federal student loans, the loan holder is the
federal government, and servicing is primarily contracted to the Title IV Additional
Servicers (TIVAS). The TIVAS are Great Lakes Educational Loan Services, NelNet,
FedLoan Servicing, and Navient, (which was formerly Sallie Mae).
 Private Collection Agency Contracts, Federal Student
 NCLC, Searching for Relief: Desperate Borrowers
and the Growing Student Loan “Debt Relief” Industry, June 2013.