Isn’t It Time We Put Borrowers First?

November 27, 2018 by Sameh Elamawy

Silicon Valley likes to talk about disruption. From how you hail a cab to how you shop for groceries, technology developed in Silicon Valley has changed almost every part of the average American’s life.

But we haven’t disrupted one fundamental aspect of most people’s lives yet – student loans and how they are regulated, despite rising levels of loans every year. Today more than 45 million student loan borrowers hold $1.5 trillion in student loan debt – a shocking level of debt that impacts the choices of those borrowers for decades. Why haven’t we disrupted student loan servicing?

One big reason is that over 90% of student loans are originated by the Department of Education’s Federal Student Aid (FSA), which selects servicers and collectors to manage the debt. These private companies benefit from years-long contracts with FSA with limited competition – and thus have no incentive to improve their service to borrowers.

Millennials, who hold the bulk of student loan debt, are the most connected generation in history. Cutting the cord on cable television, communicating through social media, using the latest in consumer products — millennials are hardwired to use mobile devices to get results.

So for something as important as their student loans, then, why do we require borrowers to pick up the phone and call someone, or — even worse — fax information to a student loan servicer?

Current servicers use technology developed in the 1980s, before the current class of 2022 was even born. Their cumbersome software makes it hard for servicers to quickly take in information like changes in income and status updates such as whether a borrower is a public employee, eligible for loan forgiveness, or an active duty servicemember. For borrowers who want to see the impact a new job and salary might have on their overall loan repayment plan, servicing software — using ancient technology, and dependent on human interaction — cannot even do the complicated mathematical calculations needed to recalculate a 10- or 20-year installment student loan. It’s even difficult for borrowers to check if they qualify for a Federal deferment or forbearance program.

These technological shortcomings are expensive for the servicers and harmful to borrowers. State Attorneys General around the country have brought lawsuits against servicers that have put people into the wrong repayment plans, misapplied their payments, destroyed their credit, and failed to provide borrowers with basic information about their loans.

As the midterm elections usher in new leadership, the Education and the Workforce Committee has the opportunity to think boldly and creatively about designing a new student loan servicing paradigm for the 21st century. In searching for ways to mitigate the impact of crushing student loan debt, the Education and Workforce Committee should look closely at the key role that servicers play as the conduit between borrowers and lenders (or the Department of Education, for federal student loans).

Creating a system that allows students to succeed while protecting US taxpayers will require a new way of thinking — disruption, even. As Congress prepares to tackle the Higher Education Act reauthorization in 2019, they should include some of the newest ideas and technology in their blueprint for student loan financing reform. These ideas include allowing borrowers to choose their servicer, thereby facilitating competition and improved service quality, and importing successful ideas from consumer finance and retirement frameworks, such as a “best interests” standard, which would mandate that servicers always work in the best interest of the borrowers. These are commonsense ideas that should be considered on a bipartisan basis.

FSA spends billions of dollars per year on contracts with private servicers and debt collectors to administer federal student loans. Yet for all this money spent, the industry has not kept pace with technology in other areas of financial services such as payments. Technology is critical to improving the borrower experience and saving US taxpayers money. All servicers should be required to develop online tools, for example, that easily allow income verification; determine automatically what alternative repayment or deferment plans for which borrowers qualify, allow changing the due date on a payment to better fit an income schedule and give borrowers the opportunity to see in real time how an increase or decrease in payment affects a loan’s overall balance and timeline.

Ideas like these will modernize our student loan system in the best possible way, bringing much-needed fresh thinking, transparency and oversight to an industry that touches millions of Americans.

Congress should expect and demand more from the companies that have such significant impact on the financial health of the next generation of workers—companies that ought to be helping borrowers learn responsible financial management. Technology is the only viable path to get those results.

Sameh Elamawy is the co-founder and CEO of Scratch, a San Francisco-based loan servicing company. Elamawy serves on the Consumer Advisory Board of the Bureau of Consumer Financial Protection.

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