WASHINGTON President Donald Trump's administration will soon offer an exclusive contract that will give one company the right to service billions of dollars of outstanding federal student loans now handled by four companies, officials said on Friday.
The U.S. Education Department, led by Trump pick Betsy DeVos, said the streamlining will save money and increase efficiency. But critics said student borrowers could suffer because a single company would be granted a monopoly, with no incentive to provide better customer service.
The Trump approach would represent one more radical change for the financial aid system that former President Barack Obama overhauled. Under Obama, a Democrat, much of the $1.3 trillion business of student lending was moved from banks and other companies to the federal government.
Four companies still handle servicing the loans. Navient Corp (NAVI.O), which was spun off Sallie Mae (SLM.O) in 2014, is the largest. Its stock rose 23 cents to close at $13.94, after popping to a session high of $14.14 shortly after the announcement. The others are Nelnet Inc. (NNI.N), Great Lakes Educational Loan Services, Inc, and FedLoan Servicing, also called PHEAA. Nelnet's stock closed down 0.5 percent on Friday.
The Consumer Financial Protection Bureau, a consumer financial watchdog agency, is fighting Navient in court over allegations the company deceived borrowers about repayment options and their rights.
In an op-ed piece published on the Wall Street Journal website Friday afternoon, DeVos wrote the Obama administration's servicing requirements created a "chaotic system" that generated numerous consumer complaints and was not sustainable.
She added the single servicer will establish a user platform and a standardized process for handling customer calls.
But Natalia Abrams, executive director of the advocacy group Student Debt Crisis, said Obama's plan to have servicing companies compete for federal contracts based on customer-service ratings would have been more effective.
"With zero competition, we are concerned about a 'too big to fail' student loan company that has zero incentive to work for students, borrowers, and their families," she said.
Trump is making good on Republican campaign promises to get government out of the business of student lending, and recently lifted limits on fees debt collectors can charge some defaulted borrowers. The Washington Post has reported he will propose major changes to loan repayment in his forthcoming budget, including eliminating a program that erases student debt for public-sector workers after 10 years of payments.
"The changes will certainly increase profits for the industry, but will do nothing to tame the high levels of default in the program," said Rohit Chopra, senior fellow at the Consumer Federation of America and former CFPB assistant director.
The CFPB says 1.2 million student-loan borrowers have defaulted in the past year and 90 percent of the highest-risk borrowers are not enrolled in affordable repayment plans, even though student-loan companies are supposed to inform borrowers about them.
(Reporting by Lisa Lambert; Editing by Jonathan Oatis and David Gregorio)