Comments on Federal Student Aid's Unified Servicing and Data Solution

Thank you for the opportunity to comment on the U.S. Department of Education's Office of Federal Student Aid's (FSA) vision for the Unified Servicing and Data Solution (USDS). There are many positive aspects to FSA’s updated approach to student loan servicing, including

• An increased ability to oversee and monitor specialty programs.
• A more streamlined approach to, and a reduced need for, transferring accounts.
• A more streamlined experience for borrowers in terms of their ability to easily manage their accounts, track their statuses, and consistently access new and available tools.
• A more robust technical infrastructure which gives FSA increased access to data and the ability to more easily directly communicate with borrowers and partners.
• A flexible framework that allows the system to adapt to a changing environment.

This RFI response is focused in two areas. First, we discuss three concerns New America has with the USDS system, as envisioned by FSA. Second, we highlight the lack of information in the RFI about desired borrower outcomes and the performance standards, compensation structure, and oversight and enforcement efforts FSA will employ to hold vendors accountable.

Concerns with the USDS system

The complexity of the system may contribute to negative borrower experiences

FSA envisions that, as part of USDS, borrowers will eventually be able to call a main 1-800 number and engage with their servicers around day-to-day management of their accounts, including accessing income-driven repayment (IDR) plans, deferments, and forbearances. However, if borrowers need access to specialty servicing—programs that include Public Service Loan Forgiveness (PSLF), TEACH Grants, and Total and Permanent Disability (TPD) discharges—they will be transferred to a BPO.

While FSA notes that servicers will be trained to answer basic questions about BPO-managed programs—and that all vendors will “receive detailed requirements to ensure they appropriately understand their roles”—FSA must tightly manage call flows and address problems in real-time so that borrowers are engaging with specialists and not getting lost in a maze of call transfers. For example, a borrower could first need assistance with PSLF, and be transferred to a BPO, but then realize they need to submit an IDR application or ask about deferments and forbearances, which could potentially involve being transferred back to a servicer.

The BPO vendors—unlike the current servicers, which are more autonomous—will receive training from (or coordinated by) FSA and also rely on FSA for strategies to engage with borrowers. FSA has traditionally not provided servicing strategies as directly as it plans to do with the BPOs as part of USDS, and it will be helping these vendors manage some of the most complex processes within the loan repayment system, including PSLF and default.[1] Given this dynamic, it will be important for FSA to ensure that, in addition to being user-tested and based on best practices, the information servicers are giving borrowers and the information BPOs are providing is consistent. FSA must also put a public plan in place—including oversight mechanisms to monitor its own capacity and guidance—to quickly build or acquire the necessary tools and expertise internally to support BPOs in managing these programs.

The new USDS model creates additional work for FSA in that it must actively manage BPOs while still providing oversight for all vendors. However, recent government reports have indicated that FSA has been understaffed and has not always provided sufficient oversight, especially at current staffing levels. While the RFI indicates that FSA has “bolstered its workforce and business practices to improve vendor oversight for all new awards and increased capacity to monitor the BPO contact centers via the DCC contract,” at the very least, FSA must still manage and provide oversight of the DCC contract and other parts of the Next Gen system. Thus, FSA must also put a public plan in place to bring additional resources and capacity to bear to monitor its vendors, assess complaints in real time, and ensure borrowers are receiving correct information and access to the most beneficial plans and tools.

Movement to a single FSA brand may prevent or delay holding individual actors accountable

While USDS provides a more streamlined experience for borrowers, in the new structure, eventually, many actors will be operating under a single FSA brand. It will be critical for borrowers to continue to have transparency into the entity that is managing their loans, answering their calls, and providing guidance and access to resources. This will allow borrowers to advocate for themselves; work with legal aid, state attorneys general, or other entities; file complaints that allow FSA to more quickly and easily identify problems and patterns; and understand who to hold accountable, should something go wrong.

Contracts should be used as a mechanism for, and FSA should engage in, data transparency

USDS will facilitate additional and easier access to data for FSA, but the student loan contract system remains largely hidden from public view. FSA should make more existing and new servicing-related data publicly available, including servicer performance by key metrics; enforcement actions taken against contractors; change requests, contract modifications, and guidance given to vendors; and more robust data on short- and long-term borrower outcomes broken down by debt size, income, race (where possible), and other demographic factors. This will allow researchers, policymakers, and FSA itself to better understand how servicing practices affect borrowers’ experiences in repayment, promising interventions, and appropriate performance thresholds, compensation, and accountability measures.

A need to focus on borrower outcomes

The USDS RFI does not include information on FSA’s plans for performance measures, compensation and incentives for servicers, and enforcement mechanisms. However, these are the most important tools to ensure borrowers’ experiences are high-quality and that the system requires, prioritizes, incentivizes, oversees, and enforces activities that lead to long-term borrower success.

Contracting requirements must be focused on a range of dynamic borrower outcomes

Current requirements for servicers tend to focus on individual actions and borrowers’ statuses during snapshots in time instead of how borrowers move through the system and longer-term outcomes. For example, servicers are rewarded for borrowers being current on their loans but not necessarily for how they got there. Within the new environment, standards should include a focus not only on borrower outcomes—such as reducing rates of delinquency and default, remaining in IDR over time, and accessing specialty programs and discharges—but also on interim steps needed to get there, such as curing a delinquency, recertifying for IDR, moving quickly out of forbearances, staying current after exiting default, and processing paperwork efficiently and effectively.

FSA should use a combination of contract requirements, service-level agreements, and best practices to set performance floors for vendors and ensure those that fail to meet metrics can be and are penalized (see below).[2] Performance should be measured—and accounts awarded—against these standards in both absolute and relative terms.

Compensation and incentives must align with desired borrower outcomes

FSA must compensate servicers in ways that incentivize them to prioritize long-term borrower success. In the current system, pathways to desired outcomes may not be lucrative for vendors. For example, bringing severely delinquent loans back into good standing can be a resource-intensive process, and servicers are paid the least to manage these accounts.

FSA must assess where servicers are currently devoting resources and the cost of successfully servicing different types of loans. This information is not public, making it challenging for external partners to provide guidance and suggestions and for FSA to establish appropriately-sized incentives linked to specific outcomes. However, potential principles for a compensation structure could include:

• Flat payment rates for specific tasks or statuses with additional rewards for desired longer-term outcomes, which could include discharges, full payoffs, forgiveness, and spending little time in delinquency or forbearance, among others
• Incentives along pathways that lead to positive outcomes, such as:
  • IDR enrollment, retention, and efficient and effective paperwork processing
  • Curing defaults or delinquencies
  • Avoiding use of long-term forbearances
• Compensation for successfully servicing at-risk borrowers or those who have struggled to repay
• Allowing another entity to engage with a borrower if the first vendor is unsuccessful

FSA should continuously assess incentives and adapt as new information and best practices emerge.

Oversight and enforcement actions must emphasize metrics, requirements, and borrower outcomes

In addition to rewarding servicers and vendors for successes, as described above, FSA must regularly and actively monitor their performance and penalize those who, for example, fail to meet metrics, do not follow consumer protection laws, and have high rates of delinquency, default, or long-term forbearance usage. Penalties should include reducing the volume of assigned accounts, reducing compensation, assessing fines, engaging in enforcement actions, and ultimately, removing vendors from the system.

FSA should work with federal and state partners on its vendor-related oversight and enforcement efforts. Going forward, FSA and its partners must track issues in real time, identify patterns of problematic behavior or outcomes, and work quickly toward borrower-friendly resolutions. But these groups must also use existing data to address documented, longer-term servicing problems and misconduct and create consistent borrower remedies where FSA or other agencies find evidence of wrongdoing.

The USDS system spreads borrower interactions across multiple entities and vendors. A major challenge will be to define and identify who is responsible for borrower success. As FSA works to centralize some of the responsibilities currently held by servicers, it must also hold itself accountable (or be held accountable by third parties) for borrower outcomes and system functionality.

[1] While the RFI remains largely silent on FSA’s plans to manage default, that system is complex, confusing, and punitive for borrowers and not well integrated with the rest of repayment.

[2] While FSA notes a desire to “maintain competition among the servicers,” some aspects of the system would benefit from identification, development, and dissemination of best and consistent practices.