Federal Student Loan Servicing Accountability and Incentives in Contracts

Darolia, Rajeev; Sullivan, Andrew

doi:10.21799/frbp.dp.2020.05

Discussion Paper

Federal Student Loan Servicing Accountability and Incentives in Contracts

Abstract: Student loan servicers play a critical and underappreciated role in federal student oan programs. The federal government contracts out to servicers an array of many of the most critical functions related to student loan repayment, including account management, payment processing, and the provision of information about payment plans and solutions for distressed borrowers. In fact, most borrowers’ interactions with federal student loan repayment are almost exclusively with their servicer. We aim to improve upon the scarce research literature about federal student loan servicers by exploring the complicated set of measures that determine how servicers are compensated for servicing each debtor and awarded portfolios for future business. The coverage and construction of these measures influence servicers’ behaviors by creating strong incentives that coincide to varying degrees with the goals of the government, public, student loan borrowers, and the servicers themselves. Understanding accountability and incentives in current and past contracts is critical as the U.S. Department of Education reforms servicer contracts and responsibilities through its Next Gen Federal Student Aid initiative.

Keywords: student loans; servicing; government contracts;

JEL Classification: H52; I22; I28; L33;

https://doi.org/10.21799/frbp.dp.2020.05