Most people don’t seem to like their student loan servicer — and for good reason. Here are the 10 most common student loan servicer mess-ups and why they happen.
In today’s episode, you’ll find out:
- The 10 most common student loan servicer mess-ups
- Why servicers urge switching to Revised Pay As You Earn (REPAYE)
- How switching to REPAYE can hurt some borrowers
- Why inaccurate payment counts for loan forgiveness happen
- How to get your payment count fixed
- Why inaccurately reporting your spouse’s income is a bad idea
- How to find out the repayment plan you’re actually on
- Why you shouldn’t wait on Public Service Loan Forgiveness (PSLF)
- Why you should use your tax returns to report your income
- How “paid ahead” status happens
- Why servicers will sometimes put you in forbearance or deferment
- Why servicers will avoid answering questions
- Why servicers don’t always tell you about your loan options
- How did loan servicing get this bad
- Congress’ role in bad student loan servicing
- Why the government won’t spend on better loan servicing
- What incentives might improve student loan servicing
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Episode 36 Transcript
Travis Hornsby [00:00:00]Today, we’re going to talk about a topic very close to my heart: student loan servicers screwing things up. One of the most common issues I see with folks complaining and searching stuff about student loans on Google is people’s search complaints about loan servicers all the time. In fact, it’s really pretty interesting because, you know, if you look at the search volume terms for things like, you know, FedLoan and Navient and Great Lakes and Nelnet and MOHELA and all these different loan servicers that basically collect people’s payments and count people’s payments, people are very frustrated, and there’s a whole bunch of reasons for that that we’ll get into later in the show.
Travis [00:00:38] You know, if you have anything you want to leave a comment — about stuff that you’ve been going through with your loan servicer — feel free to leave a comment on our show notes – StudentLoanPlanner.com slash 36. So if you want to check that out if you have your blood boiling and you just want to share something that you feel like your loan servicer did that you don’t like, you can certainly share it so other people can read and learn from it.
The 10 most common student loan servicer mess-ups
Travis [00:00:59] I wanted to give you a list of the 10 most common servicer mess-ups that I’ve seen. This is based on anecdotal evidence, but our anecdotal evidence is based off of the thousands and thousands of emails and comments that we get at Student Loan Planner. And you can definitely see patterns. You can definitely see how some servicers might have, you know, one thing that they’re kind of guilty of doing, and another one might have a totally different mistake that they do or thing that they shouldn’t be doing that they’re doing. And it’s really different across different servicers as to what kind of things that, you know, you might be susceptible to if you have your account with them.
Travis [00:01:32] So we’ll go into a couple of the different messages that I see. And, you know, this is — Again, this is my opinion, and we’re not necessarily formally accusing any of companies of this stuff. But, you know, so just to protect myself there. But we do see a lot of patterns of people falling victim to some of these what I think are mostly unintentional screw-ups.
1. Why servicers urge switching to Revised Pay As You Earn (REPAYE)
Travis [00:01:54] So, number one is telling everybody that you’ve got to switch to the REPAYE program — Revised Pay As You Earn — for whatever reason, and Great Lakes seems to like doing this a lot and telling people this. So, some of the loan servicers have this script that they read, sort of a formulaic thing that they’re supposed to follow that — the workers are. And they have recommendations for people across the board that they need to do.
Travis [00:02:17] So one of the more common (pieces of advice) is basically telling people in every situation that you’ve got to switch to the REPAYE program — Revised Pay As You Earn. Now, this is a good program for a lot of people. It’s 10% of your income. It’s25 years until forgiveness, and they give you a subsidy on your interest if you have a payment that’s lower under the REPAYE plan than what your interest accruing every month is.
How switching to REPAYE can hurt some borrowers
Travis [00:02:40] So, REPAYE can make a lot of sense for people that either are going for forgiveness or trying to pay their loan back. The problem is that one size does not fit all because this loan stuff is pretty complicated, and [there are] a lot of ways that you can hurt yourself and benefit yourself by getting on the right plan.
Travis [00:02:55] So, just as an example, one really common problem is physicians going for Public Service Loan Forgiveness (PSLF). So, in this case, you might have $200,000 of loans, and you become a surgeon making $300,000. If you were on the Revised Pay As You Earn plan, you might have to pay $2,500 month. Right? And the reason for that is because the Revised Pay As You Earn plan has no cap on the monthly payments. You have to pay 10% of your income, less a little bit of a deduction, and that’s it. OK?
Travis [00:03:22] Now, in contrast to that, the IBR (Income-Based Repayment) plan or the Pay As You Earn (PAYE) plan [have] a cap on the monthly payments. So you never have to pay more than the Standard 10-year plan. So, if you have $200,000 in debt, the Standard 10-year plan payment would be about $2,000 a month. And obviously, $2,000 a month is less than $2,500 a month.
Travis [00:03:43] In some cases, people are married, and so their REPAYE payment is even higher. So, consider an example where you have a dual-physician household where both are making $300,000. Well, on the Revised Pay As You Earn program, you would have to pay about $5,000 or $5,500 a month, whereas under the IBR or the PAYE plan, you’d only have to pay this $2,000-a-month figure because your payment amount is capped under those PAYE or IBR plans.
Travis [00:04:08] So, that is a big mess-up because when you get off of IBR or PAYE, you cannot get back onto it, unless — unless you have a partial financial hardship. Now, that doesn’t mean that you’re eating ramen noodles. Partial financial hardship just means that your calculated payment under PAYE or IBR — those two plans — it’s less than what the Standard 10-year plan is. Well, [in] a lot of cases people might not be eligible for PAYE, or they’re above the cap. So then you can’t get switched back on.
Travis [00:04:39] Now, this is another wrinkle to the equation. A lot of people don’t realize this, but when you consolidate student loans, it actually eliminates the Standard 10-year plan. You can only sign up for something called just the Standard Repayment Plan — which, golly, does that sound similar, right? The difference is, is if you have a bunch of consolidation student loans, then your Standard Repayment Plan is actually based on a 30-year schedule instead of a 10-year schedule. And those Standard Plan payments would not qualify you for PSLF if you’re making payments under the Standard Plan on a consolidation loan.
Travis [00:05:09] So, what’s interesting with that, is the Standard 10-year plan is an option for non-consolidation loans. So, if you get a situation where your servicer screws up and tells you to sign up for REPAYE when you really could have benefited a lot from the capped payment, then the situation is, is with non-consolidation loans, you could switch to the Standard 10-year and have payments count towards PSLF. And you wouldn’t be ruined — or at least, have a lot higher monthly payment than you would otherwise.
Travis [00:05:33] In contrast, with some of these loan servicers that just try to tell people to always switch to this REPAYE program, you know, you can create a situation where you’re not able to get back on the Standard 10-year plan, so the only option you have to get PSLF is to stick with this new, much, much higher payment under REPAYE.
Travis [00:05:51] This is a really, really common problem. It is caused by well-intentioned servicers and reps that are just trying to give people helpful advice. But the problem is, is when they give people advice instead of just collect the payments and count the payments, it starts causing problems because this one-size-fits-all thing can really, really hurt people that benefit from capped payments.
Travis [00:06:11] The other way it hurts people is people who benefit from married filing separately. Obviously, if you file taxes separately, you might be able to get a much, much lower payment under the Pay As You Earn or IBR plan compared to REPAYE. And they’re never going to do that level of detailed analysis because frankly, they’re not paid for it, right?
Travis [00:06:28] And that’s very important to consider, is if you’re not paid to do something, then you’re probably not going to do it as a company — just because the incentive structure is not there, and it doesn’t reward you for doing that. So, you’re either going to be looked at badly by your boss if you have long calls, or you’re not going to get a bonus. And neither one of those things is going to incentivize you to not do behavior that’s maybe in the interests of the borrower that’s not economically rewarded.
2. Why inaccurate payment counts for loan forgiveness happen
Travis [00:06:51] So, number two on our list of the most common servicer mess-ups is your payment count. Your payment count is totally wrong. If you have ever sent in the PSLF certification form, you know you will get back a number that is most likely incorrect more times than not. It seems like people are complaining because FedLoan gets their payment count wrong.
Travis [00:07:12] And I have a couple ideas of how this happens. One is that FedLoan gets data on these different loans in different ways. So, for example, you might have one loan that’s consolidated; it’s very easily tracked. And you might have another set of loans. You might have, like, 10 or 15 loans that are separate, that are not consolidated, and they might have a bunch of different payment counts from different loan servicers and different histories that have been kept track of.
Travis [00:07:34] So FedLoan doesn’t know that credit actually happened because maybe their system is broken in the sense that it doesn’t know how to transfer over the payment count from the old loan servicer. Or the system on the other end is broken, you know? Their servicer that’s transmitting the loans doesn’t give them complete information.
Travis [00:07:50] And obviously, FedLoan is supposed to be a steward of taxpayer money, too, and handing out the checks for PSLF. So, they’re going to be on the conservative side for saying whether or not you qualify for something, and they’re going to rely on you to challenge them if you think that the payment count that they’re giving you credit for is inaccurate.
Travis [00:08:06] Now, unfortunately, they’ve done such a bad job that the payment counts are so wrong that so many people have requested manual reviews that they have a one-year-long backlog right now to fix PSLF payment counts. That is a big problem, obviously.
How to get your payment count fixed
Travis [00:08:22] Now, there is one big way that you can get around that, that I know of, and that is contacting your congressperson’s constituent services office. If you’re in a smaller state, you might also reach out to your senator’s constituent services office. And what you’ll find is in every congressperson’s office, there’s this constituent services group. They’re not technically partisan. Their sole role for existing is to help constituents — people that live in the district — deal with federal agencies when they’re having problems. Because Congress has a lot better pull and a lot bigger impact when they send a letter to some agency than you are going to have as an individual, for sure.
Travis [00:08:58] So, in my anecdotal experience, people who have messed up payment counts or really, really problematic relationships with their servicers, when they contact the organization — their constituent services office for their congressperson or senator — and the person responds to the loan servicer, I’ve seen cases that were estimated at taking a year to fix payment counts get fixed in less than two weeks.
Travis [00:09:20] So, that is a huge hack and something that a lot of the people are using in our community that’s really going pretty well. So if you’re stressed about your payment count being wrong. That is one of the best ways that you can fix it.
3. Why inaccurately reporting your spouse’s income is a bad idea
Travis [00:09:30] Now, number three on our list of really common student loan servicer mess-ups is I’ve really heard a lot of stories about servicers telling people to check that they can’t access their spouse’s income. And really, I’ve heard this at FedLoan more than any other servicer telling people to do this.
Travis [00:09:48] Now, this isn’t just wrong — I mean, this could be considered fraud, and a lot of people — I’ve heard people try to rationalize this and say, “Well, maybe I don’t know what my spouse earns. Maybe they don’t share that with me.” And, you know, I would say hogwash. That’s not going to hold up in any kind of audit, I don’t think.
Travis [00:10:05] Now, there is a legitimate time to answer that question, to check that box that you can’t access your spouse’s income. It’s in a situation where you’re separated from your spouse, or you have sort of this imminent divorce. Or if, you know, your spouse is, you know, for whatever reason, not near you, and you don’t have access to their information. Like, there could be a legit reason to check that box.
Travis [00:10:23] But, to the idea of filing a tax return with your spouse or living in the same household as your spouse — and the idea that you don’t know what your spouse earns is laughable. And that’s — I mean, you could potentially even consider that perjury because they say on the forms that under penalty of perjury, you swear that these things are true. So, I don’t think there’s much of a gray area there when you check that you can’t access your spouse’s income using the REPAYE plan.
Travis [00:10:46] Yet a whole bunch of FedLoan reps are telling people to do that because the FedLoan people are scared, and they just don’t know what to tell people because they get yelled at probably a lot for how bad the servicing job is. And so they’re just trying to tell people whatever they want to hear, and there’s not a lot of quality control, in my opinion, that’s going on at that company at all.
Travis [00:11:06] So what happens is you’ve got all these people going rogue and just making things up. And one of the most common things is checking this box that you don’t have access to your spouse’s income so that you pay a lower payment. And that’s what people are trying to help people do, is paying this lower payment.
Travis [00:11:19] So, that is a big issue, and it’s really common. Remember that it’s on you to do the right thing. Your servicer telling you to do something doesn’t necessarily absolve you for it being right. Just in the same way that, you know, a tax person or a CPA (certified public accountant) or [an] enrolled agent, if they tell you to do something on your taxes that ends up being shady, yeah, you might not get sent to jail or anything, but you certainly could have to pay some penalties and some fees. Right?
4. How to find out the repayment plan you’re actually on
Travis [00:11:44] Number four is that when one servicer says you are definitely on the “blank” repayment plan — you know, you can say IBR, REPAYE, PAYE. Honestly, a lot of times, the people on the phone can’t really be trusted on what repayment plan you’re actually on. A lot of times, they’ll say IBR when they really mean something else. They’ll say PAYE when you’re on REPAYE.
Travis [00:12:07] I’ve even had a lot of people at servicers say, “Oh, the repayment plans are the same thing.” Which is just a freaking joke because, you know, if they understood the math, they would know that they are not at all the same thing. Unfortunately, they’re extremely complicated. You can file separately, jointly. Twenty- to 25-year programs. Interest subsidies. You know, eligible for some, not others. I mean, goodness sakes, it’s complicated. So people that say that the repayment plans are the same thing just, you know, they just don’t understand math.
Travis [00:12:34] So, a lot of people — specifically, I hear this a lot — have problems with this. I think most often with FedLoan and Navient and sometimes with Nelnet. Great Lakes does a pretty good job telling people what repayment plan they’re signed up for, in my experience. So just be careful.
Travis [00:12:49] The best way to find out what repayment plan you’re on is technically the NSLDS (National Student Loan Data System) download, which is real ugly to look at. The second-best way to find out is just logging in and looking for what repayment plan you’re on. And if it doesn’t show that — like, sometimes I think Navient and FedLoan don’t even show that — then you can click to try to change your repayment plan. And if it’s showing you REPAYE and IBR — and you’re on an income-driven plan — to switch to, you know, then you know that you’re probably on PAYE. Right? So that’s just one issue that comes up.
5. Why you shouldn’t wait on Public Service Loan Forgiveness (PSLF)
Travis [00:13:16] Number five of the most common one servicing errors is a lot of the servicers will tell you that you only need to apply for PSLF after you’ve hit the 10 years of service. So, everybody but FedLoan is guilty, I think, of this at some point, of saying this — and there’s a reason, too.
Travis [00:13:35] The main reason that they tell you to do this is because the servicers only get paid if your account stays with them. And when you fill out the PSLF certification form, that account gets transferred to FedLoan Servicing, and FedLoan gets paid for that account that’s moved to them. So, there’s a huge economic incentive for the servicers to not tell you to certify for PSLF as soon as possible, even though that’s what’s in your best interest.
Travis [00:14:00] And again, I don’t believe that a lot of these mistakes and mess-ups that the servicers are doing are inimical and evil. And I don’t think that it’s necessarily that intentional. I think this is really companies responding to incentives. That’s kind of what I think this is, is companies responding to incentives. And, you know, they have no interest in, you know, giving away your account to somebody else, especially if they can rationalize why they need to hold onto it. Right? That’s why I think you’re seeing a lot of the loan servicers play a game of “hold onto the accounts at all costs,” even when they need to tell you to leave their company to certify for a program that they don’t manage.
Travis [00:14:39] So, FedLoan is the only company that manages loan forgiveness under PSLF and tracking it. The other ones — If you keep your loans with Great Lakes, for example, for 10 years until PSLF — and sometimes, people are like, “Well, I like Great Lakes. They do a pretty good job.” Because Great Lakes has the best customer service satisfaction scores of any of the major servicers.
Travis [00:14:56] And the downside there is, yeah, but you’re not getting tracked for PSLF so that when you do apply for PSLF, you can have major problems actually getting your loans truly forgiven. So that’s number five, is not telling you to apply for PSLF when, you know, they don’t want to lose your account to somebody else.
6. Why you should use your tax returns to report your income
Travis [00:15:13] Number six on the most common student loan servicer mess-ups is telling you to use your pay stubs and avoiding reporting other income that’s listed on your tax returns. So, again, a lot of these reps want to be your friend — or want you to at least not yell at them. And so their main incentive is, “Goodness sakes, I just want this person to get the lowest payment they can so they’ll be happy with me and so they won’t yell at me.”
Travis [00:15:35] You know, I mean, putting myself in a rep’s shoes — for a student loan servicing rep — I would feel so stressed. It would be such a tough job. People are usually upset at you because your systems of your company are pretty bad. Right? Or at least, you know, they just haven’t been invested in, or you could say that — You can blame it on the servicer. You can blame it on Congress and the government. There’s a lot of people at fault here. It’s not just one group.
Travis [00:15:57] But whatever. You’re the person sitting in the chair, and what are you going to do? Like, you’re not going to probably get fired for giving inaccurate information because the servicers do that all the time, right? So, you’re probably going to get fired if you stick out by being super bad on your average call time — and probably that’s the main way. Also, if somebody escalates on you a whole bunch because they’re mad and always ask for a servicer, you probably get in trouble, you know, in most call centers for that kind of stuff. So, in that case, you know, you want to tell somebody what they want to hear. Right?
Travis [00:16:27] And so these reps are telling people to just use your pay stubs instead of your tax returns. And in some cases, that’s legitimate. So, for example, in community property states, you can have income on your tax returns way higher than your actual income is. You could have a new job that has much lower income, and so you would need to use pay stubs instead of your tax returns to accurately reflect your lower income. So, there are some times where it’s legitimate to use pay stubs.
Travis [00:16:49] But sometimes, loan reps just tell you to use them because maybe you have a bunch of rental income. Or you get a bunch of distributions from your business — like, you’re a business — like, you’re a dental practice owner. You’re a physician with a private practice. And you get most of your income from profit distributions. And the loan rep tells you what you want to hear and says, “Oh, you can just pay based on your W-2 wage that shows you make $70,000.”.
Travis [00:17:11] I had somebody recently that was filing that way. And just because loan servicers tell you to do that doesn’t mean it’s right or doesn’t mean you’re not going to get in trouble for that. So, you have to declare all of your income when you’re reporting, you know, your income for income-driven plans. And the best way to do that is your tax returns, unless you have a defendable reason why your pay stubs are a better indication of that.
7. How “paid ahead” status happens
Travis [00:17:31] Number seven of the most common mistakes of ten is putting your loan into “paid ahead” status. So, if you think about it, what that does is it keeps your account with them longer. The government pays a per-borrower amount every year to these loan servicers that manage loans for them. So that’s the main source of revenue that they get. They get some more revenue —
Travis [00:17:55] Some of the companies have student loan refinancing or loan — in-school loans that they’ll make. So, there’s some extra revenue sources from those kinds of products. Other ones will make investments in, you know, different kinds of educational companies. Like, Nelnet does that a lot, I think. So.
Travis [00:18:11] But, by and large, the primary way that they make money is by keeping borrower accounts for as long as possible. If you think about that, you know, in terms of what that rewards, you know, when you put your loan into paid ahead status, it gives you a, quote unquote, payment holiday. So your payment doesn’t have to start until much later, rather than keeping it going. And that keeps your account with these servicers for a longer period of time.
Travis [00:18:35] The problem with that is if you’re going for a loan forgiveness strategy, then that can really screw things up. Because, you know, PSLF — you know, you might get a whole long period of time where you’re doing qualified service, but you’re not getting payments that count because you are in paid ahead status.
Travis [00:18:49] And usually paid ahead status is as a function of somebody making a big mistake and paying extra on loans when they should not be paying extra on loans. I mean, it’s — oftentimes, it’s a borrower mistake on the front end that leads to the servicer mistake in the back end.
Travis [00:19:05] You know, paying extra on your loans that you’re going to be forgiven is a pretty foolish decision. But people do it. And I’m not saying that it means you’re dumb or anything. It just happens, right? People have good intentions. They want to try to pay back what they owe. They pay what they can.
Travis [00:19:18] And then the servicer, basically with this incentive of keeping you around as long as possible, lets you stop making payments on all of these loans, which, in theory, it could help some people out. But, you know, it ends up hurting a lot of people because of extra interest charges that accrue and paying off the debt later and not getting forgiveness that they’re entitled to.
8. Why servicers will sometimes put you in forbearance or deferment
Travis [00:19:36] Number eight is putting you into forbearance and deferment instead of income-driven repayment options, which also keeps your account around with loan servicers for a longer period of time. And, if you think about that, a forbearance conversation is, like, a 30-second, two-minute conversation kind of thing. Income-driven repayment conversation is like a 10-minute conversation.
Travis [00:19:55] And a lot of these reports that have highlighted the failures in student loan servicing have shown that [there are] huge incentives for people to have a short phone calls so that they can serve more borrowers and hire fewer people to sit in the chairs and get a greater profit, either for shareholders — like in the case of Nelnet owns Great Lakes as well. So, Nelnet is a publicly traded company, and so is Navient.
Travis [00:20:18] And then the other of the big loan servicers is PHEAA (Pennsylvania Higher Education Assistance Agency) — FedLoan. They’re a quasi-governmental agency. They don’t necessarily have as big of a profit motivation, but they still want to have a low-bid contract come in so that they can manage programs. So they can have more workers, more importance. The executives will make more money the larger the organization is.
Travis [00:20:40] So, even if you’re not a publicly traded company looking out for shareholders, you know, you’re still going to have an incentive to put as few people in the chair as possible, which means that you need short phone calls so you can handle more calls and hire less people.
Travis [00:20:51] So, call centers are always battling against this issue of the fact that the longer calls they have, the more time they spend on the phone with people, the more expensive that is to the business. So, it’s kind of viewed as a cost center, and you want to keep costs as low as possible to make profits. So, that usually can result in some bad hold times or bad wait times for calls — or just bad service.
9. Why servicers will avoid answering questions
Travis [00:21:13] Number nine on the list of most common student loan servicer mess-ups is avoiding answering your questions. So, when you have a lot of questions, then that’s going to hurt their average time on the phone, which is going to run the number up for their report that they’re going to have with the supervisor. And I worked a very short time in a call center, actually, when I was doing this rotational program through this big financial institution. And it was really eye-opening and really made a lot more stuff makes sense on the way call centers work.
Travis [00:21:44] You know, the primary thing that people cared about — They cared about accuracy some, but the things that could get you in a lot of trouble were you having a security violation, which makes sense. Like, security violation is, like, talking about someone’s account before they’re actually secured on the phone. Like, you know it’s them through some sort of process that you have to take the customer through. And again, like, having a really, really high call time.
Travis [00:22:08] Now, some call centers try to avoid managing [the] call time because it results in lower-quality conversations. So, you’ll see companies that have a very high value — lifetime value of a customer, they’ll try to care less about call time. But for companies that have a much lower lifetime value for a customer, you know, your incentive is to have it short, sweet and quick. Right?
Travis [00:22:30] And so the student loan servicer situation is that the lifetime value of a customer is probably going to be pretty low compared to other kinds of companies, so their incentive is to really have, you know, really shorten conversations.
Travis [00:22:43] Now, I’m not going to mention the name of the servicer, but there was a report that had one company that they looked at that had a March Madness-style win competition that you could have. And the way that you won the competition was to have the shortest call time in your group. That just shows you what management is caring about measuring towards, is having short call times.
Travis [00:23:03] And again, when you have a lot of questions — When you need an explanation of the differences between PAYE and REPAYE. If you need an explanation of, you know, whether or not you could enter forbearance or do an income-based plan. Or even if you just have a lot of questions about what your accrued interest is, you know, there’s a great incentive on the other line of the phone for somebody to not answer that question — or at least answer it very quickly. So that’s one of the most common mess-ups, is just people dodging questions that are trying not to answer them.
10. Why servicers don’t always tell you about your loan options
Travis [00:23:29] Number 10 of the most common student loan servicer mess-ups is not telling you about your options for your loans. So, this could be consolidation. For example, if you have old FFEL (Federal Family Education Loan) loans that don’t qualify for PSLF, that’s what the Navient, one of the Navient lawsuits centers on, is a bunch of teachers saying that they were not told that they had unqualified loans for PSLF that needed to be consolidated.
Travis [00:23:50] There’s other issues, like not telling you about refinancing. So, for example, no loan servicer wants to tell you about refinancing because then they will lose that annuitized stream of income from servicing your account. They don’t have an interest in telling you about that because then they lose your account, and that’s not good for business. Right?
Travis [00:24:07] So, not telling you about consolidation, not telling you about refinancing, that cause you to potentially change loan servicers is a big mistake that I see with loan servicers. And that’s the number 10 one.
How did loan servicing get this bad?
Travis [00:24:20] So how did loan servicing get this bad? What happened so that the satisfaction rate of the average customer with their student loan servicer is similar to, you know, probably like a pawn shop or loan shark company? I mean — You know, I mean, it’s really pretty low customer service satisfaction scores for these places.
Congress’ role in bad student loan servicing
Travis [00:24:37] So, I think that part of the problem is with Congress. If you think about Congress, their bidding process for student loan servicing is mostly based off of managing defaults and having a low cost that you bid. Also, they want to have a geographic dispersion of operations in politically important districts.
Travis [00:24:57] So, for example, think about military contracts. Boeing and Airbus and these — Lockheed and all these big defense contractors will strategically place operations in very important states, very important congressional districts, specifically because they’re trying to win passage of a contract that they want to get that’s worth a lot of money to them. So you might not have operations in the most logical place, in the best place to have them. You might have them in specific areas that make sense politically for Congress.
Travis [00:25:27] Part of the problem is the incentives behind that. But also, you know, Congress does care about student loan servicing — about the cost. That’s their main concern. Congress has a lot of competing priorities. For Democrats, you probably want to have more money available to spend on social programs, on health care, on things that win you elections. For Republicans, you want to win elections with showing that you care about cutting taxes, and you probably don’t think that the government should be that involved in the student loan industry anyway. So, both parties have an incentive to not care about student loan servicing and the quality of customer service provided.
Travis [00:26:00] Congress also does not want a single loan servicer. So Navient is the biggest one. Congress does not probably want to be dependent upon Navient and so would probably never give them a contract to do all student loan servicing. Because then everybody’s data is with them, and the negotiation power, the leverage power over contracts, over bidding is less. And then you probably have to pay more money to them, and Congress wouldn’t want to do that, even though it might potentially be more efficient to hire only one servicer and let them do everything.
Travis [00:26:28] So, the biggest loan servicers are still pretty big. Congress does care about capacity. So, you have four big ones that really serve, like, 90% of the loans, I think. It’s Nelnet and Great Lakes, which are actually owned by the same umbrella company now. Navient is the biggest. And then FedLoan is the one that manages a lot of people’s loans but also especially PSLF loans.
Travis [00:26:47] These servicers, a lot of them — Like, for example, MOHELA, it stands for Missouri Higher Education Loan Authority. PHEAA stands for Pennsylvania Higher Education Assistance Agency. So, a lot of these places that manage loans these days actually started in the 60s, and they were companies that — Quasi governmental places that were born out of this idea of the Great Society around LBJ’s (former President Lyndon B. Johnson) time that taxpayers should help guarantee student loans and help people afford higher education [who] maybe couldn’t in the past.
Travis [00:27:16] So, that’s where some of these companies come from. The other ones just come from the profit incentive of being around, of being a company. So you had, you know, like a, I think a spin-off with Navient and Sallie Mae a few years ago where, you know, Sallie Mae used to do a lot of student loan stuff for the government, and then they decided to split off Navient so that Navient would focus more on the federal servicing aspect and Sallie Mae would focus more on the private loan aspect.
Travis [00:27:40] You know, you’ve had other companies like, you know, Nelnet and that, you know, purchased Great Lakes recently. So, you do have a lot of consolidation that’s going on, but you kind of have almost like this oligopoly kind of thing, where you have — I’m not sure if that’s the right word to use — but there’s four big players in servicing. And there’s a bunch of random ones that get small, little contracts handed out to them, maybe just so they can continue existing.
Travis [00:28:03] For whatever reason, most of the servicers are in the Midwest or Pennsylvania. Like, for example, Nelnet is in Lincoln, Nebraska. Great Lakes is in Madison (Wisconsin). Navient is in Wilkes-Barre, Pennsylvania, kind of near Scranton. And then Harrisburg (Pennsylvania) is the headquarters for FedLoan. So those places — I don’t know if those are particularly politically powerful places — but for whatever reason, you know, they’re a hotbed for student loan servicing.
Travis [00:28:24] So, servicers tend to be in out-of-the-way areas because their primary thing that they need to do to make profit is have a low-cost structure. So, you need to be able to hire people that don’t have maybe as many employment options as people in bigger cities. So, your core employer for a lot of these economically depressed areas is they used to be big factory towns.
Travis [00:28:42] Now, Nelnet and Navient are public companies, so they have a profit incentive. They need the servicing costs to be low. And, you know, the only really sources of additional revenue might be providing refinancing loans or private loans, maybe other investments in education-related companies.
Travis [00:28:56] So, you know, for example, Navient owns Earnest. Ernest is one of our referral partners. You know, I think that Earnest does a pretty good job refinancing people student loans — and you can check out StudentLoanPlanner.com slash refi.
Travis [00:29:07] And the main thing that matters when you refinance your loans is what is the interest rate. What’s the term, and what options do you have to choose from? That’s the main thing that matters it doesn’t really matter if it’s Earnest or Laurel Road or CommonBond or SoFi or whatever. It just — It’s mainly what is your interest rate, and do they have a good track record. I think that most of the ones do.
Travis [00:29:27] And, like, when you refinance your loans, it’s a heck of a lot easier to deal with because, instead of having, like, umpteen different options for paying back your loans when you refinance, you have one. And it’s called pay it back. So, it’s a way easier thing to deal with as a servicer when you have a fixed monthly payment that you know is supposed to come in no matter what, and you don’t have to answer all these questions about income-based repayment and forgiveness and this kind of stuff.
Travis [00:29:51] FedLoan is actually a quasi-governmental agency, and I think that their problems with their servicing are not as much driven by the motivation of minimizing costs as it is just, I think, a lack of paying attention, a lack of competence. It’s very clear that they don’t know what they’re doing, especially as it regards to the PSLF program, in my opinion.
Travis [00:30:10] So, why is servicing not very good? Part of the problem is not with servicers. It’s actually with Congress. So, Congress put all of these repayment plans in the latest promissory notes for consolidation loans. So, if you go look at consolidation loans, you will see in the consolidation loan promissory note a list of every repayment plan that you can sign up for PAYE, REPAYE, Extended, ICR (Income-Contingent Repayment), Graduated — and maybe I’ve repeated some of those. But just like every single one is listed in that promissory note.
Travis [00:30:38] So you can make a legal argument that the servicers and the government [are] obligated to provide all of those options to people who want to pay their loans back with that specific plan, which is really, really good for a student loan consulting firm like ours because we can take advantage of all the nuances and save people money.
Travis [00:30:55] But it’s not good for a servicer who’s trying to deliver a service to the government and the customers that have student loans at a low cost because it becomes very, very complicated. How do you switch between payment plans? How do you know which one somebody is on? How do you know which one is better than another one? You know, how do you calculate what the payment is supposed to be and make sure that that’s correct? When you have a lot of repayment plans, it makes it super complicated.
Travis [00:31:19] And what’s interesting, too, is the government wants to create a new loan program under the Prosper Act or the Aim Higher Act, depending on what party you’re in. And the program — I read it — it would create a brand-new loan type with a brand-new kind of repayment plan. And while that program might be kind of easy to service and it might be kind of easy to maintain, you also have to maintain all these old loans that are under these old programs, and you have to figure out how to do that. You have to keep those around. You don’t just get to wipe your hands clean of that.
Travis [00:31:46] And that’s squarely in the fault of Congress. That’s their fault. They’re the ones that made the programs. They’re the ones that made it needlessly complicated. And they’re the ones that wrote the promissory notes — and, you know, (the) Department of Education is.
Travis [00:31:58] So, one complaint or comment, I guess, I’ve seen with the, you know, the person who resigned as head of the student loan ombudsman office with the CFPB (Consumer Financial Protection Bureau), he kind of said that, you know, “We created a trillion dollar bank in the Department of Education, and the Department education was never meant to be a bank.”
Travis [00:32:13] So I agree with that. I mean, that’s — it’s all these kinds of unintended consequences coming home to roost. You know what’s interesting, too, is you might say, well, you know, student loan servicing doesn’t have to be bad. It could be good because we have precision-guided missiles. We have nuclear silos. You know, we have drones and rockets that go to space. And all these things are really impressive and super technical, and they — And a lot of them work very well, and it’s just very impressive what the government can buy and build through contractors. Right? So it doesn’t have to be bad.
Why the government won’t spend on better loan servicing
Travis [00:32:43] But I will challenge you on that because the government is willing to spend a lot of money on things that are complicated and high risk and high value to both the people in Congress and also voters. And to be honest with you, there are a lot of student loan — student loan borrowers out there that would want to have good servicing, but it’s not going to be high up on the list of what’s going to move the needle for somebody whose vote probably.
Travis [00:33:05] You know, you don’t see single-issue voters for student loan servicing contracts provided to the most competent company. Right? You see things about gun control, taxes, health care, abortion, immigration. Right? Those are the big things that move the needle on people’s votes more so than student loan servicing contracts. And so because of that — Also, I guess I should say a lot of people want a strong military. Right?
Travis [00:33:29] So the reality is the government is going to be willing to spend a lot of money on these highly technical systems and weapons systems and space and all these different things. They’ll spend a lot of money on that because that is sort of something that you have to get right or else it could be potentially catastrophic. Right? And the government is not going to be willing to spend a lot of money on paying for financial decision making.
Travis [00:33:52] Look at the CFPB, right? Even, you know, the Democrats want it to be a regulatory agency with teeth, and the Republicans want it to be a financial education division of the government. You can say the Democrats want to fund it more. But, you know, nobody wants to throw $10 billion or $20 billion dollars a year at the CFPB and help with more financial education. Nobody’s calling to do that, and that’s because, you know, for better or for worse, the government cares more about having a strong military, strong health-care system, more so than they care about giving people good counseling options on their loans. They just care about what the price is they have to pay for it.
What incentives might improve student loan servicing
Travis [00:34:26] So, to create better financial outcomes, I think, for borrowers with student loan servicing being better, I think the government would have to double or triple their spending on servicing and create incentives for student loan servicers to have good borrower satisfaction and would also need to give people the option to change student loan servicers. And that’s currently not the case, for all intents and purposes.
Travis [00:34:46] And so you’d have to create new associate positions for people that are just there to help educate people on, you know, ‘what is a budget?’. How do you make your monthly payment? I mean, very basic things, you know, almost like a de facto financial planner for people who can’t afford one. You know, you really have to create a position like that, I think, to have good outcomes from student loan servicing.
Travis [00:35:04] Unless you pulled it directly out of your paycheck. And that’s one proposal in the new Congress and the Senate, that they will just pull it all out of your paycheck. And that would work in the sense of it would — you’d forcibly pay it through payroll servicing, but you’d probably would have a lot of people with their own businesses that would have an extra tax they’re unprepared for. So, I would just expect that the number of people with a tax debt they have to go on a payment plan for would increase if you did that.
Travis [00:35:30] But companies respond to incentives. And right now, the only incentive is to care about default rates and to carry about keeping your customers around for as long as possible, since you’re paid a per-borrower fee for every year that customer exists on your loan rolls.
Travis [00:35:45] So, those are the only two incentives, period. And, you know, yeah, you want to — probably as just a person, right? — as a company, you want to be known for doing the right thing. Or you want to at least not be sued all the time, right? So, there is somewhat of an incentive to care about more things than that, but that’s really the primary two that effect your bottom line.
Travis [00:36:03] So I think most of the sins of student loan servicers are sins of just not doing anything against their best interest actively that would potentially be in the best interest of other people. So that’s just one of those parts about capitalism that a lot of people get annoyed with. And you try to correct for that with competition, and you try to correct for that with regulation. But I don’t know if that’s ever going to go away necessarily with the current system that we have.
Travis [00:36:25] You know, you can look at Coca-Cola with the amount of sugar they have in their drinks. Johnson & Johnson with baby powder. I saw — heard this thing on NPR (National Public Radio) the other day with Dow Chemical having this problem with some chemicals seeping into the groundwater for the stuff they make non-stick pans with.
Travis [00:36:40] So, that’s just something that’s always going to happen with a capitalistic system. I don’t know necessarily that it would be better with a different system, but student loan servicing is not created for the borrower’s best interest. That’s just the reality.
Travis [00:36:53] And so what I would suggest is that if you have a very basic loan situation — $20,000 to $30,000 or less — then go ahead and take the recommendations of your student loan servicer because your case is not very complicated. You might use our refinancing links and get a cash-back bonus.
Travis [00:37:08] So you might do that, and you might try to pay off your debt as fast as possible. And you might listen to some of these anti-debt podcasts to try to get you out of debt a little faster — keep you emotionally motivated. But if your setup is pretty simple, then, you know, you might not need a lot of help.
Travis [00:37:22] But if you have over $100,000 of student loan debt, you are in the top 6% or 7% most indebted borrowers in the United States. And when you call these servicers, you are getting somebody who talks to somebody like you one in every 10 times at best. Right? And probably less than that. And also, you’re getting somebody with a very strong incentive to get you off the phone as quickly as possible.
Travis [00:37:47] And you’re also dealing with somebody that makes maybe $15 an hour — who, when they leave that position, might take a job in retail or some other job. It’s not necessarily a high-skill job. And in that case, you know, you’re taking advice— financial advice — from somebody who has no interest or obligation in making sure that your best interest is being protected.
Travis [00:38:08] So, not to say that you can’t do it on your own or listen to your loan servicer. I do think that the best thing to do is get your loan servicer to do your income-based recertifications for free. I think that that’s easy to do. I think that going through the certification process is something that you should do yourself.
Travis [00:38:24] That’s one reason why we don’t do any paperwork for people. We refuse to fill out the income-based recertification forms. We refuse to fill out the consolidation forms. One because, you know, it’s maybe questionable to do that just for legal reasons. But also second is I don’t think it’s a valuable service to provide because I think you can do that for yourself very easily in 15 minutes a year by paying attention to your finances. And the results of that are going to be much, much better long term than if somebody else did it for you.
Travis [00:38:50] So my suggestion — and this could be a self-interested suggestion. You know, admittedly, somebody could probably accuse me of that. But I think that looking back at these 10 mistakes — just to recap them, right? So, the 10 mistakes that servicers make, they tell you to switch to REPAYE. They get the wrong payment count. They tell you to check the box that you can’t access your spouse’s income. Four is that they tell you you’re on the wrong repayment plan. Five is they tell you not to apply for PSLF until you’re at the 10-year mark. Six is that they tell you to use an inaccurate count of your income, like pay stubs, when your tax return shows more income. Seven, they put you into paid ahead status on your loans. Eight, they put you into forbearance or deferment when they shouldn’t. Nine is they avoid answering your questions. And 10, they don’t tell you about consolidation and refinancing.
Travis [00:39:33] So, these mistakes with servicers are the reason — one of the reasons — that I founded Student Loan Planner, is to help people be an independent source of professional help. And yeah, there’s a cost to it, but I think it’s a fair cost. And I think we have a huge impact on our borrowers because our customer satisfaction ratios are very high up there with Costco — and boy oh boy, does my mother-in-law love Costco. So, that’s the goal, is to help change people’s lives — whether or not you listen to our stuff for free, which is great, or if you pay for it.
Travis [00:40:01] So, thanks so much for listening. And if you have any comments you want to make, again, leave a comment on our blog — show notes at StudenLoanPlanner.com forward slash 36. Thanks so much.