The U.S. Department of Education will award one contract to Navient, GreatNet, or the Pennsylvania Higher Education Assistance Agency to service student loans and to build a platform to do so, James Manning, the acting under secretary of education, told reporters on Friday. The move is part of the next phase of the department’s revamping of how it chooses an outside company to service the billions of dollars in federal student loans it issues.
In April, Betsy DeVos, the education secretary, withdrew memos, issued during the Obama administration, that aimed to improve loan servicing. “Only by rescinding these memos would the department have been able to implement an amendment that achieves the goal of protecting borrowers at a lower cost to taxpayers,” Mr. Manning said.
Ms. DeVos echoed that sentiment in a statement released on Friday afternoon. “The federal student-loan-servicing solicitation we inherited was cumbersome and confusing — with shifting deadlines, changing requirements, and de facto regulations that at times contradicted themselves. Internal and external stakeholders both agreed it was destined for a massive and unsustainable budget overrun,” she said.
Other changes announced on Friday are the elimination of requirements for the servicer to provide some information in Spanish, and a reduction in outreach to borrowers in the income-driven repayment program.
The switch to a single servicer has already generated concern among observers that it would make the servicer too big to fail. “The approach may raise concerns that the Education Department will be overly reliant on a single student-loan company,” said Rohit Chopra, a senior fellow at the Consumer Federation of America and former assistant director of the U.S. Consumer Financial Protection Bureau. “The changes may increase profits for the industry, but will do little to tame the high levels of default in the program.”
The new system, Mr. Manning argued, would increase oversight by reducing the number of servicers that report to the department. The single servicer would be responsible for oversight of subcontractors it hired to manage its portfolio, and if a subcontractor underperformed, the primary servicer would be punished. The department is “confident” that the entity it selects will be “someone who steps up and can perform,” he said.
The Consumer Financial Protection Bureau, which had helped the department create the guidelines that are being changed, declined to comment on the new rules and whether it was consulted about them.
Twenty-one state attorneys general sent a letter in April to Secretary DeVos deriding her decision to rescind the Obama-era memos. “At a time when the need for common-sense federal student-loan-servicing reforms is undeniable, the department’s decision to roll back essential protections imperils millions of student-loan borrowers and families,” they wrote.
In an opinion essay published on Friday by The Wall Street Journal, Ms. DeVos wrote that “vital” borrower protections would not be stripped out. “Today’s announcement makes no changes to repayment-plan requirements, and it retains the vital borrower protections outlined in the previous administration’s memos,” she wrote.
Goldie Blumenstyk contributed to this report.