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Department of Education Student Debt Collection Contracting Injunction Extended
On May 31, U.S. Court of Federal Claims Chief Judge Susan G. Braden extended her preliminary injunction in a legal dispute involving the awarding of Department of Education (Department) debt collection contracts. She stated the order would stay in place “to preserve the status quo until the viability of the debt collection contracts at issue is resolved.”
Judge Baden’s order provides several reasons for her decision, all pulled from news reports, including: (i) a CFPB report stating that private collection agencies chosen by the Department offer uncertain value despite great cost; (ii) a New York Times article suggesting that oversight for the Department’s student debt would be transferred to the Treasury Department; and (iii) press reports announcing James Runcie’s resignation. Runcie served as the chief operating officer of the Office of Federal Student Aid.
The order has prevented the government from collecting on defaulted student loans—a halt which began on March 29 when Judge Braden issued a temporary restraining order in the matter.
Department of Education Releases Phase II Amending the Federal Student Loan Servicing Solicitation
On May 19, the U.S. Department of Education (Department) announced the formal amendment of Phase II of the federal student loan servicing solicitation. According to a fact sheet issued by the Department, the amendment outlines plans to select a single student loan servicer that all borrowers will interact with on a unified platform. This is a departure from the current system in which nine servicing companies handle borrowers’ payments of their federal student loans. The amendment further clarifies and lists the Department's expectations of the eventual servicer. U.S. Secretary of Education Betsy DeVos commented on the announcement, “[w]ith changes in the new amendment, we have simplified the process to ensure meaningful borrower protections while saving taxpayers more than $130 million over the next five years. Savings are expected to increase significantly over the life of the contract. Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes. Our amendment makes no changes to repayment plan requirements.”
As previously covered in InfoBytes, DeVos also rolled back Obama administration policies developed to guide the way in which the federal government contracts with outside servicers.
Education Secretary Rolls Back Obama Administration Federal Student Loan Servicing Policies
On April 11, Education Secretary Betsy DeVos rolled back Obama administration policies designed to reform how student loan servicers collect debt. In a memo sent to Federal Student Aid Chief Operating Officer James Runcie, DeVos formally withdrew several policy memos issued last year by former Education Secretary John B. King Jr. and former Education Undersecretary Ted Mitchell, citing the need to promptly address “shortcomings” and “inconsistenc[ies]” in the student loan servicing procurement process. DeVos further emphasized the need for change because of “a myriad of moving deadlines, changing requirements and a lack of consistent objectives” as well as a need to move forward “with precision, timeliness and transparency.” The withdrawn memos, dated June 30, 2016 and July 20, 2016 (as well as the corresponding October 17 addendum), were developed to guide the way in which the federal government contracts with outside servicers to ensure that borrowers get the service and protection they deserve. The guidance was intended to strengthen student loan servicing by increasing consistency, transparency, and accountability in the student lending marketplace (see previous InfoBytes post). By rescinding these memos, DeVos also removed the requirement that the FSA consider servicers’ past behavior when awarding contracts, including whether the company misled borrowers or engaged in abusive consumer service.
Not-For-Profit Educational Organization Claims Department of Education Lacks Transparency over Number of Student Loan Failures
On March 20, a not-for-profit educational organization (Plaintiff), announced a FOIA lawsuit against the U.S. Department of Education (Defendant) in the U.S. District Court for the District of Columbia. Judicial Watch v. U.S. Department of Education, No. 1:17-CV-00501 (D.D.C. Mar. 20, 2017). The complaint alleges Defendant failed to respond to a request for access to all records in Defendant’s possession relating to a “coding error” that incorrectly computed College Scorecard repayment ranges, thus “masking [the fact] that most borrowers are failing to pay down their federally-subsidized student loans.” Defendant acknowledged in January of this year that an error in the coding did lead to the “undercounting of some borrowers who had not reduced their loan balances by at least one dollar, and therefore inflated repayment rates for most institutions.” Plaintiff claims to regularly request records from various federal agencies in order to analyze and disseminate findings of interest to the public in an effort to “promote transparency, accountability, and integrity in [the] government” and states it will be “irreparably harmed unless Defendant is compelled to comply with FOIA.”
Department of Education Withdraws Student Loan Guidance; Bipartisan Legislation Introduced to Require APR Disclosure on Federal Student Loans
On March 16, the U.S. Department of Education (Department) Acting Assistant Secretary Lynn B. Mahaffie notified relevant agencies that the Department is withdrawing statements of policy and guidance regarding repayment agreements and liability for collection costs on Federal Family Education Loan Program (FFELP) loans as previously stated in its July 10, 2015 Dear Colleague Letter (DCL) GEN 15-14. GEN 15-14 barred a "guaranty agency from charging collection costs to a defaulted borrower who (i) responds within 60 days to the initial notice sent by the guaranty agency after it pays a default claim and acquires the loan from the lender; (ii) enters into a repayment agreement, including a rehabilitation agreement; and (iii) honors that agreement.” The Department emphasized that the "position set forth in the DCL would have benefited from public input on the issues discussed in the DCL,” and as a result, the Department has withdrawn the DCL and will not require compliance without the opportunity for the public to provide comments.
Earlier in the month, Representatives Randy Hultgren (R-IL), Luke Messer (R-IN), and David Scott (D-GA) reintroduced the Transparency in Student Lending Act (H.R. 1283)—bipartisan legislation requiring the disclosure of the annual percentage rate on federal loans issued by the Department of Education. In 2008 the Truth in Lending Act disclosure requirements were applied to private loans, but not to federal student loans—an omission that does a “gross disservice” to borrowers according to Hultgren. “The Department of Education is the largest consumer lender in the United States, and should provide the most transparent and helpful information to borrowers. Helping borrowers understand their debt obligations is an important first step to ensuring they are able to make their payments, and also helps prevent taxpayers from being on the hook for delinquent borrowers,” noted Hultgren.
CFPB Releases Updated Student Loan Payback Playbook Prototype
According to a January 17 blog post by CFPB Student Loan Ombudsman Seth Frotman, the CFPB has released an updated student loan Payback Playbook prototype, incorporating changes that the Bureau implemented after reviewing thousands of public comments submitted by student loan borrowers, consumer advocates, and other industry members. According to Mr. Frotman, the Bureau worked together with the Departments of Education and Treasury to develop “prototype disclosures” that “outline[] a path to affordable payments for struggling borrowers who are trying to avoid student debt distress.” The CFPB reports that it has shared the Payback Playbook prototype and the underlying consumer feedback data with the Department of Education. The joint efforts are part of a broader Department of Education initiative branded “A New Vision for Serving Student Loan Borrowers.”
GAO Issues Report on Compliance with the SCRA Interest Rate Cap by Student Loan Servicers
On November 18, the GAO announced the release of its report and recommendations following the watchdog agency’s review of application of the SCRA’s rate cap by student loan servicers. According to the report, entitled Student Loans: Oversight of Servicemembers' Interest Rate Cap Could Be Strengthened, the number of servicemembers receiving the interest rate cap for their student loans has greatly increased since the Department of Education began requiring federal student loan servicers to automatically check the Department of Defense’s SCRA database to identify those who are eligible.
The report also identified several challenges commonly encountered by servicemembers seeking to take advantage of the rate cap, including: (i) inaccurate SCRA information from the database; (ii) lack of a requirement that private loan servicers use the automatic eligibility check to identify eligible servicemembers; and (iii) lack of routine oversight of SCRA compliance for nonbank private student loan lenders and servicers. The GAO recommended, among other things, that the DOJ require private loan servicers to use the automatic eligibility check to identify eligible borrowers. The report also highlighted an issue with the Department of Education’s new borrower complaint system, which lacks the ability to track SCRA complaints systematically.
New NYDFS Regulation Requires All Institutions of Higher Education to Immediately Provide Uniform Financial Aid Award Information Sheet
On November 3, Governor Andrew M. Cuomo announced that the state Department of Financial Services has adopted a new regulation requiring all institutions of higher education and vocational schools in New York to immediately begin providing a uniform Financial Aid Award Information Sheet to undergraduate students when responding to financial aid applications. The U.S. Department of Education utilizes a similar form, however it is less extensive and is not mandatory – except for schools that accept assistance to make loans to military students. Additional information concerning the regulations and model forms can be found here.
Department of Education Releases Final Regulations Creating Additional Protections for Student Borrowers and Establishing New Federal Standard for Borrower Defense to Repayment of Student Loans
On October 28, the Department of Education announced new Final Regulations (81 FR 75926) to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct. The new regulations establish the conditions under and process through which a borrower may assert a defense to repayment, also referred to as a “borrower defense,” of a Federal Direct Loan. Specifically, a borrower may now be eligible for discharge of Federal loans whenever a postsecondary institution: (i) makes false and misleading statements about school or career outcomes, (ii) makes false and misleading statements about financing needed to pay for those programs; or (iii) the institution fails to fulfill specific contractual promises regarding program offerings or educational services. By contrast, the current standard allows borrowers to assert a borrower defense only where a cause of action would arise under applicable state law.
Under the new regulations, a school participating in the Direct Loan program is also prohibited from obtaining any form of pre-dispute arbitration agreement or waiver of a borrower’s right to initiate or participate in a class action lawsuit. Further, participating schools may no longer require that students engage in internal dispute processes before seeking relief under the new “borrower defense” provisions. The final regulations also impose certain notification and disclosure requirements on any school that is the subject of a lawsuit filed in court or that are voluntarily submitted to arbitration after a dispute has arisen. The new regulations are effective July 1, 2017.
Department of Education Outlines New Protections for Student Loan Borrowers
On July 20, Under Secretary Ted Mitchell of the U.S. Department of Education sent a memo to the Federal Student Aid Chief Operating Officer containing policy directives intended to “strengthen student loan servicing.” Developed in consultation with the CFPB and the Department of the Treasury, the memo provides direction in the following five areas: (i) economic incentives, directing the FSA to use “incentives that encourage servicers to help borrowers stay on top of their loans and avoid default while avoiding fixed-fee structures that create a disincentive to help struggling borrowers”; (ii) accurate and actionable information about account features, borrower protections, and loan terms; (iii) consistency in communications; (iv) accountability, directing the FSA to “step up monitoring of servicing vendors and to integrate complaint resolution into the oversight of those vendors”; and (v) loan data transparency. Commenting on the policy directives outlined in the memo, CFPB Director Richard Cordray noted that the joint servicing standards are intended to increase consistency, transparency, actionability, and accountability in the student lending marketplace.