Why student loan companies are in danger of becoming like airlines -

Why student loan companies are in danger of becoming like airlines

Credit: marketwatch.com

  • Oct 19 2017 21:15About: 1 month ago
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Two major student loan firms are planning to join forces.

Nelnet NNI, +10.19%  , a Lincoln, Nebraska-based student loan servicer, announced Thursday that it plans to acquire Great Lakes, a Madison, Wisconsin-based nonprofit servicer, for $150 million. If approved by regulators, the deal would mean that the number of large firms servicing government-issued student loans would drop from just four to three.

The announcement comes as the Trump administration is revamping the contracting process for hiring servicers to manage the federal student loan portfolio. It also follows years of complaints and probes from consumer advocates and state law-enforcement officials who have said that servicers don’t do enough to work in borrowers’ best interest.

The deal raises questions about whether an industry with fewer competitors will be able to effectively provide decent service to borrowers at a fair price to taxpayers, said David Bergeron, a senior fellow for postsecondary education at the Center for American Progress, a left-leaning think tank.

“With fewer competitors you have fewer opportunities to get the best quality service, but you also have fewer parties that are engaged in the work and fewer parties that compete on price,” said Bergeron, who worked at the Department of Education for more than three decades. “It’s like airlines,” he added.

Student loan servicers are the main point of contact for borrowers as they pay their bills. Borrowers are assigned a servicer when they start repaying their loans and can only change servicers if they enter into specific government programs or consolidate their debt. Servicers collect and process payments, handle changes to repayment plans and process applications for any kind of debt relief like a forbearance. Though borrowers don’t have the same freedom as in a traditional marketplace to leave a servicer if they’re not providing good service, shrinking the number of major firms operating in the space offers the “potential of diminishing service,” Bergeron said.

Taxpayers have reason to worry about the potential merger too, Bergeron said. Servicers are hired by the government through a lucrative, competitive contracting process to manage the government’s portfolio. “If you have one actor who is not driving the price down, you pay more and you pay more for less,” said Bergeron.

Ben Kiser, a Nelnet spokesman, noted in an email that the student loan servicing environment has gotten more competitive over the past several years, as the government has increased the number of overall servicers.

Nelnet and Great Lakes will continue to compete for new student loan volume under their existing contracts with the government, which are set to expire in 2019, according to a release announcing the news. It’s unclear how they will vie for contracts going forward. Government officials have yet to release the criteria servicers will need to abide by to win the next government contract. “Until they do, it is difficult to speculate on how we would respond,” Kiser wrote.

Nelnet and Great Lakes have been working together over the past couple of years to develop a new servicing system as part of a contracting process begun under the Obama administration. It would have required a single platform for borrowers to use to repay their loans regardless of their servicer. Right now, borrowers use different portals with different types of communications depending on their servicer. The idea behind the single platform was to make the repayment experience more consistent between servicers.

The Trump administration has abandoned that contract framework and it’s still unclear how they plan to replace it, but the acquisition “strengthens Nelnet’s case to participate in any new contract structure,” Michael Tarkan, a senior analyst at Compass Point Research and Trading, said in an analyst note.

In addition to the four major servicers there are also several, smaller, nonprofit servicers who handle borrowers’ accounts. Those, combined with the three major companies that will exist if the merger goes through, will still likely provide enough competition, said Bob Shireman, a senior fellow at the Century Foundation, a progressive think tank.

Shireman recalled pushing for more servicers in the late 2000s, when he worked in the Department of Education as Deputy Undersecretary. At the time, only one company was servicing the student loan portfolio. “It made sense from a competition standpoint to have more than one,” he said. “I don’t think we’re at the point where it’s too few.”

The deal is still subject to a waiting period that gives the Federal Trade Commission and the Department of Justice time to review it. “But the Trump administration’s ethos coupled with the existing competitive dynamics in the student loan servicing market lead us to believe that the odds of regulatory rejection are low,” Tarkan wrote in his note.



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