Senators criticize DOE for renewing Sallie Mae’s college loan servicing contract

Democratic Senators criticized the Department of Education’s decision to renew Sallie Mae’s college loan servicing contract even though the company has been under investigation for breaking federal rules and violating consumer protection laws.

Accusations against Sallie Mae have ranged from charging military personnel “excessive interest” on their student loans, incorrect billings, incorrect repayment terms, and “failure to inform consumers of their rights and obligations under debt compromises.” The company is being investigated by the FDIC, Justice Department, and Consumer Financial Protection Bureau.

A report released by the National Consumer Law Center also accused Sallie Mae of pushing struggling borrowers into the simplest but more costly repayment options, such as forbearance, “rather than explaining and assisting borrowers to obtain more favorable long-term solutions such as income-base repayment.”

At the hearing before the Senate Health, Education, Labor & Pensions Committee on March 27th, Sen. Tom Harkin (D-Iowa) questioned why the Department of Education is still awarding 18% of the student loan contracts to Sallie Mae despite the company’s troubled history.

“We continue to hear about how unhappy people are with Sallie Mae quarter after quarter. Yet, the servicer still receives significant loan volume,” Harkin said.

According to Sen. Elizabeth Warren (D-Massachusetts), Sallie Mae made about $100 million from servicing student loans between 2009 and 2010 “even while it broke the rules”.

James Runcie, the Department of Education’s Chief Operating Officer for Student Financial Aid, defended the renewal of Sallie Mae’s servicing contract, noting that the department has not determined if Sallie Mae committed a wholesale breach of its contract.

“In terms of their performance under the contract, there may be some instances where they are asked to remedy certain situations, whether it’s an employee that provides the wrong information. But in terms of a wholesale breach of the contract, that has not been determined as far as I know,” said Runcie. “We strictly monitor their compliance to the contracts, and we’re very open to looking at those contracts and seeing if there’s additional terms and things that we should put in there.”

Runcie said the Education Department’s performance-based structure – in which servicers compete with each other for future allocation of student loan borrowers – has been “helpful in dictating behavior of the servicers” to improve customer satisfaction and prevent fraud and default. Given that Sallie Mae ranked last in performance, the company is receiving the smallest share of new student loan borrowers.

Warren maintained that the department’s oversight measures may not be enough to curb Sallie Mae’s practices.

“The actions that you’re taking and the oversights that you’re exercising has obviously not been enough to correct the problem, and I’m very concerned about re-upping a multi-million contract with Sallie Mae when Sallie Mae has demonstrated time and time again that it’s not following the rules,” said Warren.

Runcie also indicated that Sallie Mae’s contract was extended to minimize service disruption for existing borrowers.

“We also felt in terms of dislocations to the borrowers because we would have to transfer 24 plus million borrowers if we didn’t extend the terms of the [Title IV Additional Servicer] contracts,” said Runcie.

Harkin remarked,”It sounded like your answer, Mr. Runcie, was that they’re too big to fail.”

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