Transcript: Sen. Tom Harkin’s Q&A w/ Federal Student Aid COO James Runcie on strengthening the federal student loan program for borrowers

Partial transcript of Sen. Tom Harkin’s (D-Iowa) Q&A with James W. Runcie, Chief Operating Officer of the Department of Education’s Federal Student Aid, on strengthening the federal student loan program for borrowers. The Senate Health, Education, Labor & Pensions Committee hearing was held on March 27, 2014:

Sen. Tom Harkin (D-Iowa):
Let me talk about servicers. In my opinion, borrowers are in the best position to know whether their servicer is doing a good job. And I’d like to know how much of their opinion counts. For example, I wished that Sallie Mae would have taken up our offer to appear here today but they decided not to. But I can tell you we continue to hear how unhappy people are with Sallie Mae quarter after quarter. Yet, the servicer still receives significant loan volume. Why is that? Can you walk us through the metrics you used to determine servicers’ performance and how do you plan on improving these metrics?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
One of the metrics that we use is customer – we have customer surveys, borrower surveys. We also look at the fraud prevention statistics. And there’s also school surveys as well. So there are a number of different metrics that we look at for all of the servicers. Because it’s a performance-based structure, all of the TIVAS [Title IV Additional Servicers] they compete with each other for future allocations. We’ve noticed that the customer satisfaction scores have all increased over the life of the contract so far. In addition, the default metrics have also decreased.

And so, while that’s not saying there aren’t instances where we can improve our oversight or the customer service operations, we think that the performance-based contract have been helpful in dictating behavior of the servicers.

Sen. Tom Harkin (D-Iowa):
Can you briefly tell me what you look at in terms of your contracts with these servicers and how they then subcontract – I guess I can use that word – with collection agencies? I’m going to get into this more with some of the other witnesses this morning. But how they deal with collection agencies and what those collection agencies do and how they perform and how much money they’re making? Do you look at that too?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Yes we do. We have a number of private collection agencies – about 22 or so. And those contracts are independent of the servicing contracts, and those PCAs are reviewed for performance as well. We’ve recently increased our monitoring of the private collection agencies. We monitor them four times a quarter. We listen to dozens and dozens of calls and then we also have special call monitoring for the loan rehabilitation program. So, we’ve been a significant level of oversight with respect to the collection agencies.

The collection agencies – there are some servicers that have collection agencies, but those contracts are independent.

Sen. Tom Harkin (D-Iowa):
So I guess my question is what is the Department of Education doing to ensure that they follow the law? These collection agencies, that they’re not over-charging borrowers and what fees they collect?

Let’s say one of these collection agencies gets one of these defaulted loans. They write a letter to the person who has borrowed the money. That person realizes they should pay it. They pay it. How much is the collection agency going to keep?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
You know, it’s a percentage base. It’s based upon circumstances. But it could be –

Sen. Tom Harkin (D-Iowa):
I thought it was 20%?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
18%. It could be as much as 18%.

Sen. Tom Harkin (D-Iowa):
So sometimes –

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Sometimes, depending on circumstances, it could be as much as 20%.

Sen. Tom Harkin (D-Iowa):
And so therefore if they wrote one letter and their debt was paid – $50,000 debt – they get 18% for writing one letter?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Yeah, but I think when you look at the maze of defaulted borrowers, there are going to be instances where there’s a tremendous amount of work to get some of those borrowers back into rehab or to rehab those borrowers and get them to be making payments.

Sen. Tom Harkin (D-Iowa):
But I understand. It’s my understanding that they still get a high percentage if they hardly do anything – write one letter. They still get a high percentage.

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Yeah, it’s based on success. It’s based on success.

Sen. Tom Harkin (D-Iowa):
Does that seem fair?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
Well, I think if you look at collection agency practices across all industries, I would think our collection compensation is in line or better within the industry. So I think part of it is the experiences across collections for different borrowers, you know, there’s variability and so some require a lot more work and some are less. Yes, you’re right. I mean, if someone – if it’s just one letter and they make a payment, then there’s a lot more profit potentially in terms of that particular instance.

Sen. Tom Harkin (D-Iowa):
As I pointed out in my opening statement, the estimate that we have is about $1 billion a year is what they’re making. But I can tell you, we’re going to take a further look look at that.

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