Just seven months before the scheduled release of a new technology system intended to simplify. The repayment process for more than 35 million federal student loan borrowers. The Education Department is scrapping its plan and starting over.
The government is the primary lender for students who borrow for college. But it relies on eight outside contractors to service its $1.3 trillion portfolios. Those companies send out monthly bills, collect payments and guide former students through a repayment process that can take decades.
All of the servicers’ contracts expire next year. The Education Department planned to use that opportunity for a major overhaul that would replace its fragmented system with a more streamlined one.
Education Secretary Betsy DeVos described the agency’s vision last year and called for proposals from vendors to build it. In September, the department named the companies that would advance to the next round of bidding.
But seven companies, including Navient, filed legal challenges over the contracting process, saying it was filled with procedural errors. The Education Department “improperly created an unlevel playing field” by heavily altering its plans late in the process, Navient said in a lawsuit in October in the United States Court of Federal Claims.
Navient and others asked the department to cancel its project proposal and restart the solicitation process. On Friday, the agency agreed to do that. It said in a court filing that it would post a new contract solicitation next month.
That puts the agency up against a tight deadline. Several of its servicing contracts expire in June. The department had hoped to have much of its new system built by then — an already challenging goal that now seems impossible.
Liz Hill, an Education Department spokeswoman, said the agency still planned to make “major improvements” to its student loan system next year. The agency can extend its existing servicing contracts. she said and will do so as needed.
“The department continues to take steps to ensure the smoothest transition possible for federal student loan borrowers,” Ms. Hill said.
A Navient spokesman declined to comment on the agency’s decision.
The Education Department began planning to overhaul its servicing system more than four years ago, during the Obama administration. Bureaucratic challenges and political infighting have slowed it at nearly every step, according to those who have followed the process closely.
Student loan debt has more than doubled in the last decade, eclipsing every other kind of consumer debt besides mortgages. For many young adults, it is their largest financial obligation, and it can become a crippling one.
The government offers dozens of repayment options, including income-based plans that are supposed to keep payments affordable. But guiding borrowers through the complex thicket of plans can be complicated.
Federal loan servicers have for years faced accusations and lawsuits over collection tactics that critics have said are often shoddy and sometimes illegal. Two of them, Navient and the Pennsylvania Higher Education Assistance Agency, are fighting lawsuits from state attorneys general who say the companies made mistakes that added millions of dollars to borrowers’ tabs.
Navient is also the subject of a high-profile lawsuit by the Consumer Financial Protection Bureau. The company has denied any wrongdoing.
The Education Department hoped that its new system would fix some of the servicing problems through better technology and a more standardized process. The core of its overhaul is a planned new website that would help borrowers better manage their accounts and understand their payment choices.
“Reimbursing an understudy credit ought not to be muddled and it ought not to be disappointing,” Ms. DeVos said at an industry meeting a month ago. “You can pay your vehicle credit on your telephone and deal with your home loan on an application. An understudy credit ought to be similarly as simple to deal with.
That remains the department’s vision, but putting it into practice now seems likely to take years longer than planned.
“We’re stuck with the system we have, which is incredibly frustrating because everyone knows the system is bad and no one likes the system,” Ms. Campbell said. “This means we just have to keep kicking the can down the road.
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