New Report Examines Massive Overhaul of the Department of Education’s Student Loan Servicing System

February 15, 2024 — Press Release

USDS will improve servicing environment for borrowers, Congress must approve additional funding for effective implementation

WASHINGTON –  Last year, the U.S. Department of Education (the Department) awarded new student loan servicing contracts to five companies under the Unified Servicing and Data Solution (USDS) solicitation to improve student loan servicing, provide better customer service to borrowers, and better hold servicers accountable. A new National Consumer Law Center (NCLC) report analyzes the USDS contract, set to go live in the spring, and its potential impact on student loan borrowers’ rights and experiences.

“The USDS contract presents a better servicing environment for borrowers and offers significant oversight and financial disincentives to reduce servicer misconduct and errors. The financial disincentive under USDS—particularly the risk of losing revenue for failing to provide quality service to borrowers, if effectively monitored and not watered down—offers some meaningful protection against systemic servicing problems. While some provisions of USDS will be straightforward to implement and assess, there are a number of provisions that are murkier, and how FSA implements and oversees them will significantly impact their effectiveness in ensuring quality loan servicing,” said Alpha Taylor, staff attorney at the National Consumer Law Center and author of the report. “If appropriately funded and implemented, USDS will improve the servicing environment for borrowers. Congress must approve the Department’s request for additional funding if they want a realistic shot at effective implementation.”

Under USDS, the Department seeks to create a centralized loan servicing environment that will increase its ability to perform effective oversight and meet the needs of borrowers. Additionally, over the longer term, the Department aims to move full account management, branding, and repayment from the servicers’ websites to studentaid.gov.

In the report, New Federal Student Loan Servicing Contracts, New Promises: Will It Make a Difference for Borrowers?, borrower advocates note that the USDS contract incorporates many of the recommendations they called for to make servicing work better for borrowers, including: 

• enhanced performance standards that evaluate servicers based on the quality of service they provide to borrowers; 
• structuring servicers’ compensation and new account allocation around how effective they are at helping borrowers avoid delinquency and default; 
• reforming specialty loan servicing; and 
• creating a single entry point through studentaid.gov where borrowers can manage their loans.

But without adequate funding for the Office of Federal Student Aid (FSA), advocates caution that the Department cannot fully implement USDS as envisioned in the contract and will likely face challenges holding servicers accountable to the enhanced customer service requirements and accountability features of the contract. Congress must approve the Department’s request for additional funding to FSA to ensure effective implementation of USDS. 

To ensure a successful transition to the USDS servicing environment, the report finds that the Department must:

• conduct rigorous oversight and penalize servicers who do not perform in accordance with the new contract; 
• ensure that the common borrower-facing information and applications that borrowers will be driven to under USDS are accurate, functional, accessible, and consumer-tested; and 
• commit to transparency by finally making all servicer contract documents, including change requests and contract modifications, available to the public, and by resuming publication of data on servicer performance and new account allocations.

“In light of the long record of servicer misconduct, it is critical that the Department commit to transparency and make public information regarding the changing terms of the USDS contract, servicers’ performance under the contract, and the Department’s actions in response,” Taylor said. “This is not a situation in which the public can or should simply trust the Department that the USDS contract is being satisfied and that servicers are performing well.” 

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The NCLC’s Student Loan Borrower Assistance Project provides information about student loan rights and responsibilities for borrowers and advocates. We also seek to increase public understanding of student lending issues and to identify policy solutions to promote access to education, lessen student debt burdens, and make loan repayment more manageable.