- Two student-loan companies are shutting down in December, impacting 10 million borrowers.
- Seth Frotman, exec. director of the Student Borrower Protection Center, said it brings a chance for reform.
- Student-loan companies have been scrutinized for decades over accusations of misleading borrowers.
- See more stories on Insider's business page.
While payments on student debt were on pause during the pandemic freeze, two student-loan companies – the Pennsylvania Higher Education Assistance Agency (PHEAA) and Granite State Management and Resources – announced in July they would be shutting down their loan services in December.
This means that 10 million borrowers will be paying their student debt to different companies once the payment pause lifts – Granite State has already announced where its borrowers will be transferred – but despite the administrative difficulties that might arise, an expert said this could be good thing.
Seth Frotman, executive director of the Student Borrower Protection Center and former student loan ombudsman for the Consumer Financial Protection Bureau (CFPB), told Insider that while there is naturally concern over the sheer number of borrowers who will have to be transitioned to new student-loan companies, it will be a step in the right direction given what PHEAA has done in misleading and harming borrowers.
"Borrowers no longer being forced to deal with this company is a good thing," Frotman said. "At the heart of every student loan scandal that hurt borrowers, PHEAA was at the center, from harming teachers, to military borrowers, to public servants."
PHEAA did not immediately respond to Insider's request for comment. After announcing that FedLoan Servicing was shutting down, it previously told Insider that during its 12-year contract, student-loan programs had "grown increasingly complex and challenging while the cost to service those programs increased dramatically."
It also said it would help to transition borrowers to a new loan company for as long as needed after its contract ends.
Aside from PHEAA, the student-loan industry as a whole has been under scrutiny by lawmakers and advocates for decades over accusations of fraudulent behavior that caused borrowers to take on debt they can't pay off.
Frotman said reforms are overdue. "I think that the days of people accepting half-hearted measures and ill-conceived fixes are over," he said.
Administrations 'pile one set of failures on top of another'
There are currently nine student-loan companies that manage student debt for 45 million Americans, and in recent years, the CFPB, along with lawmakers like Massachusetts Sen. Elizabeth Warren, have been pushing for better oversight over those companies following findings of bad practices.
For example, Insider previously reported on Warren's oversight of student-loan company Navient, formerly known as Sallie Mae, under President George W. Bush in 2006. When she was a Harvard Law professor before becoming a senator, she pointed out Sallie Mae's abuses, and throughout the Obama and Trump eras, she and other Democrats released findings that Navient had pushed borrowers into forbearance and misled them on their options, among other things.
Frotman said he hopes Biden will live up to his campaign promises of reforming student-loan programs, like the Public Service Loan Forgiveness (PSLF) program, which is projected to deny 80% of applicants for at least another five years without reforms.
"We have seen successive administrations just pile one set of failures on top of the other," Frotman said. "And the President has promised that this is one of his top priorities."
The student-loan industry was established by President Lyndon B. Johnson to be equitable and accessible for all, but once Congress created Sallie Mae in 1973, the industry turned into a profit machine that helped spawn the $1.7 trillion student-debt crisis.
Now, with two student-loan companies ending their contracts with the Education Department, Frotman said it sends a message that the "malfeasance and incompetence in the industry" will no longer be tolerated.
The final payment pause extension brings 'a serious sense of urgency' to fix the system
Education Secretary Miguel Cardona extended the freeze on student-loan payments and interest through the end of January, noting that this would be the "final extension" of the pause. Frotman said given that the administration made it clear there will not be any additional extension, reform needs to happen immediately before payments resume.
"What this does is signal a serious sense of urgency that the department needs to deliver on its promises," Frotman said. "We need to actually fix the system before we turn payments back on."
The Education Department has already enacted $9.5 billion in targeted student-debt cancellation but has yet to act on Biden's campaign promises of canceling $10,000 in student debt per borrower, along with forgiving debt for minority communities. It has started the process of reforming loan forgiveness programs, though, although actually implementing changes could take years.
Warren and other Democrats continue to push for widescale student-debt cancellation for every borrower, and Warren previously told Insider in an interview that "the days are over" when student-loan companies "could do a terrible job.
"The world has changed for student-loan-debt servicers," Warren said. "They can't sign a contract, do a lousy job, cost borrowers tons of money, and still get their contracts renewed."