Millions of Student Loan Borrowers’ Debts Will Be Transferred to a Company Notorious for Poor Customer Service

The move has generated some controversy because MOHELA has been previously punished by the Education Department of the US government for its failure to promptly send bill statements to student loan borrowers in the past. While Navient will still retain ownership of these loans, some are worried about how this massive transfer will affect the future of student loans in America.

The motivation for these actions came from a desire to “simplify the company, reduce its expense base, and enhance its flexibility as a result of the in-depth review overseen by the Board of Directors over the past several months,” the news release said.

A variable servicing model differs from a fixed cost model because it can respond to the rise and fall of servicing demands, which would theoretically save money.

They are basing this number on their full-year 2023 operating expenditures. Navient expects the transfer to MOHELA to begin in 2024 and aims to be “largely complete over the next 18 to 24 months.” (via Navient)

MOHELA enjoys a status as a quasi-government entity since it is owned by the state government of Missouri, owing to its creation by a group of Missouri lawmakers.

In 2023, USA Today reported that MOHELA was penalized by the federal Education Department for failing to send its then 2.5 million borrowers their billing statements on time. The delay in billing caused more than 800,000 of its borrowers’ loan accounts to become delinquent.

MOHELA was also ordered to place all affected accounts on forbearance, which will allow any additional accrued interest to be adjusted to zero. This provided relief to many borrowers who are on income-driven repayment plans.

This hiccup by MOHELA further increased the chaos that was ensuing, due to people finally starting to make payments. Some people had to start making payments on their student loans for the first time, and the process has become especially difficult to navigate.

“After a thorough review, we are announcing targeted actions intended to simplify our business, reduce our expense base, and increase our financial and operating flexibility,” he said. “Over the longer-term, we believe these actions will increase the value shareholders derive from our loan portfolios and the returns we can achieve on business-building investments.”

The department intends to monitor customer service calls and transition loan accounts to better-rated servicers if they determine the original servicer failed to meet satisfactory standards.

“The Biden-Harris Administration has made clear that we will not allow borrowers to pay the price for unacceptable servicing failures,” he said. “Today’s announcement should send a clear message to all our contracted student loan servicers that the Department will use the full scope of our oversight and accountability tools to ensure borrowers get the level of service they deserve.”

Poor customer service communication can make borrowers miss out on loan payments, costing a struggling loan borrower unnecessary stress and excessive costs. The past actions of these companies don’t give a good image of reliability for the future.

In just the past decade, the average student loan balance has increased by over 66%. The vast majority of this debt, over 92%, is owed on private loans. According to Federal Student Aid, the most owed loan type is direct consolidation loans, which total approximately $547.3 billion.

This has created both a financial and political crisis, with no clear way forward to address inevitable delinquencies and defaults that will come as a result of the unsustainable system. This debt doesn’t just go away though, and will continue to push down these students, reducing the opportunities that college was supposed to grant them.

Without a degree to help them secure a higher-paying job, they are stuck paying back these loans at a reduced rate, wracking up additional interest in the process.

The New York Fed estimates that between 38 and 40 percent of college graduates are currently working in jobs that do not require a college degree. While unemployment numbers have been fairly low recently in the United States, much of that might be because people are “settling” for a job that they can get instead of pursuing the job they dreamed of having.

In September 2023, the unemployment rate for recent college graduates with 4.4% while the average worker unemployment rate was 3.6%. When looking at college graduates as a whole, the unemployment rate is around 2.3% in that same period for them.

Over the decades, lots of government funding has gone to colleges to allow them to recruit as many Americans as possible. However, as college degrees became more common, they started to lose their luster.

Despite the intense political division in the United States, many can find common ground in wanting to increase the test scores and education levels of students. The result of this education attitude is an increased level of willingness to pass reforms that may be harmful for the sake of the greater good.

This forbearance was extended a few times until payments ultimately resumed in October of 2023. While this payment pause was helpful for people struggling with the pandemic, many borrowers are not in a much better position now to make repayments.

The plan is expected to forgive debt for nearly 80,000 borrowers in the United States. The administration hopes to target those experiencing financial hardship, but it is yet unclear just how eligibility will function. The US Education Department considers the limited loan forgiveness plan to be the “Plan B.” (via CNBC)

The plan would have allowed for loan forgiveness of up to $20,000 for qualifying student loan borrowers. Unfortunately for borrowers, this plan’s implementation was blocked by the Supreme Court before it could fully go into effect. Originally borrowers would be able to apply up to a deadline of December 31, 2023. (via StudentAid)

Some American citizens don’t like this idea because they find the notion they have to pay for someone else’s student loan debts through their taxes objectionable.

A common argument put forth by opponents of debt relief is that it will result in higher taxes and further drive up the costs of our colleges. A poll by the Cato Institute found that 76% of Americans would oppose student debt cancellation if it would result in these consequences.

For example, over half of Americans supported the Biden proposal to forgive $20,000 in debt, but only 29% of Americans supported canceling all student debt.

One proposal floated by activists and politicians is a program to provide free college of some level to Americans. The ISPOS poll found that a majority of Americans would support a two-year tuition-free program for community college.

However, proponents of free college only mean that college should be taxpayer-funded, instead of paid for at the individual level. Countries in Europe like Denmark, Germany, and Norway have some form of free or low-cost college education that it offers to students.

Opponents of free college proposals say that free college would affect the quality of education. They argue that part of what makes American colleges some of the most prestigious in the world is that they invest so much money into making good programs for students.

Many of these programs have strict restrictions regarding age, merit, income, or geography. In 2023, Michigan saw 100,000 applications for its Michigan Reconnect program, which helps residents over 25 with community college tuition. (via The Hechinger Report)

Certain private universities would likely see a huge drop in potential applicants, which would likely cause them to have to scale back their facilities and programs. This is difficult because many of these programs were built up over many years.

Low-income students, who typically qualify for more federal aid, often cannot benefit from these programs in the same way that higher-income students, who receive less federal aid, can.

As more and more students are pushed into college through scholarships and loan programs, colleges have to offer more amenities to compete. This results in rising education costs as colleges have to fund additional programs, housing, and benefits to capture more of these students.

This would be fine, except that worker wage compensation has not historically kept up with this inflation rate. The result is that people have less total income to spend on things because they are paying an increasing share of their total income for bills.

Many student loan borrowers are struggling to make payments due to a confluence of factors, including the pandemic. As politicians like Joe Biden flirt with loan forgiveness, borrowers feel tempted to take on more debt, confident that the politician they voted for will keep their loan forgiveness promise.

Only 22 percent of respondents said that they would have a plan on how they were going to keep up with student loan payments that restarted in October.