Session # 74 Loan Servicing Update

1. Session # 74Loan Servicing Update Sue O’Flaherty Cynthia Battle U.S. Department of Education

2. Session Agenda 1 The Servicing Landscape Measuring Performance and Managing Change in Multiple Servicer Environment Looking Back Looking Forward 2 3 4

3. Background Authority that Changed the Federal Loan Programs: Ensuring Continued Access to Student Loans Act (ECASLA) Secretary runs two main programs under ECASLA: • Loan Purchase Program (PUT) • Conduit Health Care and Education Reconciliation Act of 2010 (HCERA) The Student Aid and Fiscal Responsibility (SAFRA) Act: • Ended new loans under the Federal Family Education Loan (FFEL) Program • Required the Secretary to contract with not-for-profit servicers

4. Federal Loan Servicers: • Our Federal Loan Servicers must comply with all legislative and regulatory requirements. • Through the multi-servicer, borrower-centric approach schools may experience different processes and procedures offered by the servicers. Schools see many; but Borrowers see ONE! • The competitive structure of the servicing contracts allows for more innovation and creativity. • Together with our servicing team, we will work to serve borrowers and schools as efficiently as possible to: • Educate and inform regarding the tools and options available to assist borrowers in the management of their student loans • Offer multiple repayment options tailored to borrower preferences (i.e. online payments, ACH, check, etc.) • Provide self-service tools for borrowers and options to receive bills and/or correspondence electronically

5. Session Agenda The Servicing Landscape 1 “TIVAS” Title IV Additional Servicers “TIVAS” An acronym used by FSA which stands for the Title IV Additional Servicers. In communications with schools, borrowers, and the financial aid community, FSA uses the term “federal loan servicers.”

6. Federal Loan Servicers: • COD LDE • Origination • Disbursement • Loan Allocation • Servicer Assignment • Customer Service • COD = Common Origination and Disbursement System COD • LDE : Loan Distribution Engine: interface to assign loans to the federal loan servicers. • “Booked” Loan: occurs when the COD system accepts an origination record; links p-note to the record and accepts actual disbursement. • The federal loan servicer is assigned upon “booking” of loan. * Direct Loan Servicing Center (ACS) Decommission

7. Federal Loan Servicers: Loan Servicing Information – Federal Loan Servicer Team Changes • Direct Loan Servicing Center (ACS) Contract End: • Brings closure to the ACS servicer’s system and contact center for handling the day-to-day servicing of its William D. Ford Federal Direct Loan (Direct Loan) Program loan portfolio. • By August 29, 2013 – FSA will finish transferring the remaining Direct Loans to FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, or Sallie Mae. • The contact center will remain open for a short period of time after transfers have been completed to support transition related activities.

8. Federal Loan Servicers: Loan Servicing Information – Federal Loan Servicer Team Changes • Direct Loan Servicing Center (ACS) Contract End: • Over the next several months FSA will bring closure to other functions performed by ACS (Xerox).

9. Session Agenda The Servicing Landscape 1 “NFP” Not-For-Profit Servicers Not-For-Profit awarded federal loan servicing contracts under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation.

10. Not-For-Profit Servicers • NFP Facts: • 11Not-For-Profit Servicers (Prime) implemented and awarded federal loan servicing contracts under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation. • As of April 2013 (due to the Sequestration), the implementation of additional NFP’s was placed on hold. • Sequestration Affect on New Not-For-Profit Servicers • The sequester provisions of the Budget Control Act of 2011 limit spending levels in the account used to fund not-for-profit (NFP)  servicing operations.  In order to stay within these levels, the Department will be unable to bring any additional NFP servicers on board in FY 2013.  This includes NFP servicers scheduled for implementation during the remainder of the year and any servicers wishing to join existing servicing teams.  The impact of a potential sequester in FY 2014 is unclear at this time but could be a factor in implementation schedules and other decisions regarding NFP activities beyond FY 2013.

11. Not-For-Profit Servicers

12. Not-For-Profit Servicers • When are loans assigned to an NFP servicer? • A. Once the NFP has met and demonstrated compliance with all requirements and is deemed qualified and eligible. • Q. Do the NFP servicers perform under the exact same servicing guidelines as the TIVAS? • Requirements for the NFP servicers and TIVAS are basically the same. However, they are not exact. For example, NFP servicers do not service newly originated loans from COD. • Q. Which Direct Loan borrower accounts were transferred to the NFP’s? • We transferred existing Direct Loan borrower accounts currently assigned to the Direct Loan Servicing Center (ACS / Xerox).

13. Not-For-Profit Servicers • Q. How will a borrower know if his or her Direct Loans were transferred to a new NFP servicer ? • When we transfer a student or parent borrower’s Direct Loans from ACS/Xerox to a NFP servicer, the new servicer will correspond with the borrower after the transferred loans have been fully loaded to the system. • Additionally, ACS/Xerox notifies the borrower via e-mail they have been transferred and information about the new servicer.  The notice usually occurs 1-2 days after the transfer.  • Q. Where will the NFPs receive their loans once all of the loans have been removed from ACS/Xerox? • A. The current plan is the NFPs will get loan volume from the TIVAS. • Q. How long will the NFPs participate in the program? • A.  The NFP contracts are for five years with a 5-year additional option.

14. Not-For-Profit Servicers - Transfers

15. Federal Loan Servicers: Servicing Platform Partnerships • FedLoan (PHEAA) • MOHELA • Cornerstone • Aspire • Nelnet • ESA/Edfinancial • Granite State • OSLA • VSAC

16. Split Servicing • Borrowers with federally-owned loans serviced by more than one federal loan servicer. • FSA owns both Direct Loans and FFELP (PUT). • (PUT: Loans made under FFELP by lenders and subsequently purchased by ED) • Ongoing processes to resolve situations where a borrower’s federally-held loans are assigned to two or more federal servicers. • Federally-owned and commercial loans may still be split among servicers. • Consolidation sometimes viable option, but not in all circumstances. • Goal: All of a borrower’s federally-owned loans will be maintained by a single servicer.

17. Session Agenda Measuring Performance and Managing Change in Multiple Servicer Environment 2

18. Measuring Performance • Allocations based on rankings • Survey results • Default statistics • Most points for first place • One point for last place • Percent of new loans = percent of points

19. Oversight and Monitoring FSA provides oversight of servicer activities through monitoring to ensure that there is proper attention to customer service, operational processes, servicer requirements, and adherence to applicable regulations. Monitoring Activities include (but not limited to): • Process and Operational Monitoring • Weekly Issue Tracking and Resolution Meetings • Program Compliance Reviews • Call Monitoring • Internal & Financial Controls Audits • Monthly Data Reconciliation

20. Managing Change – Multi-Servicer Environment Requirement changes evolve from regulatory changes, policy updates, and new business decisions. Servicer Requirements

21. Managing Change – Multi-Servicer Environment Remember … Changes made to servicing platforms (systems) • FedLoan (PHEAA) • MOHELA • Cornerstone • Aspire Servicer Requirements • Nelnet • ESA/Edfinancial • Granite State • OSLA • VSAC • Campus Partner • EdManage • COSTEP • KSA • EDGEucation

22. Session Agenda Looking Back • Servicing Issues and Challenges • Borrowers • Schools • Process Improvements • Decision to Standardize Process 3

23. Looking Back Servicing Issues and Challenges

24. Looking Back Servicing Issues and Challenges • Transfer and Payment Processing Challenges: • Why did my loan get “sold” to a new servicer? • Notification of transfer • Loan status discrepancies • Payments made to prior servicer not applied timely

25. Looking Back Servicing Issues and Challenges • Understanding Income-Driven Repayment Options • and Consolidation: • Confusion about repayment options • Application and documentation requirements • Selecting PAYE for new consolidations

26. Looking Back Borrowers: Key Improvements • Redesign of on-boarding communications • Coordination and collaboration with previous servicer • Extended call center hours for problem resolution • Experienced and dedicated resources to resolve data issues • Communicating with borrower in the way they choose • Targeted communications and options for recently transferred borrowers (to assist with delayed payment posting)

27. Looking Back Borrowers: Key Improvements • Increase Customer Awareness of IDR Plans • Implemented Electronic Income-Driven Application: • Can be used by borrowers with ED-held loans (Direct Loans or FFEL) • Can be used by borrowers with commercially held FFEL loans serviced by an entity that also services ED-held loans • On StudentLoan.gov • Retrieves the most recent tax information from two most recently completed tax years

28. Looking Back Borrowers: Key Improvements • Consolidation - Operational Solution for PAYE: • Borrower Selects IBR during the consolidation process • The newly-made consolidation loan is booked on the servicing system (with IBR selection) • The servicer will evaluate eligibility for PAYE before communicating with the borrower regarding selection • Updates to the LC web in process to explain revised steps

29. Looking Back Servicing Issues and Challenges

30. Looking Back Servicing Issues and Challenges • Borrowers are split between multiple servicers • Why don’t the servicers do everything the same way? • What are the servicers doing to help support our default prevention activities?

31. Looking Back Schools : Key Improvements • Servicers have improved the counseling to push the different repayment options before deferment and forbearance options • Some servicers have dedicated staff for different school segments • More financial literacy materials and support • Reporting improvements • Working with third party servicers

32. Federal Loan Servicers - Support Delinquency Support Activities: • Provide outbound targeted calling campaigns along with inbound call center representatives to help borrowers become current • Utilize electronic communication methods, such as e-mail, to keep borrowers informed about account status • Work with schools to obtain current available contact information - Utilize a variety of tools to get the most current data to contact borrowers (skip tracing on delinquent accounts) • Work in partnership with the school community to assist borrowers in the later stages of delinquency

33. Federal Loan Servicers - Support Delinquency Support Activities for Schools: (Examples) • Default Management Training and Webinars • Analyzing Servicer Specific Reports and Tools • Late Stage Delinquency Efforts • Incorrect Data Challenges • Work the CDR data

34. Federal Loan Servicers - Support Delinquency Support Activities: Servicers work to gather feedback and find ways to partner with schools on default prevention • Face-to-face meetings or conference calls with schools • Financial aid conference attendance • Presentations at conferences • Proactive phone calls • E-mail communication Reminder... Visit the Federal Loan Servicers in the exhibit hall!

35. FSA – Default Prevention Team FSA - Default Prevention Team was created to assist schools with: • Developing / refining their default prevention plan. • Assessing the resources schools have available in order to establish their team. • Understanding default risk through the use of servicer and NSLDS reports and tools. Please send your request to: defaultpreventionassistance@ed.gov Need Assistance? Contact Us!

36. Looking Back Process Improvements All counseling products on StudentLoans.govhighlight financial literacy concepts: • Entrance Counseling – required to receive a federal loan • Exit Counseling – required when the student graduates, leaves school or drops below half-time enrollment • Financial Awareness Counseling – optional • Cannot be required as condition for disbursement • Cannot replace Entrance Counseling

37. Looking Back Dynamic counseling tools help the student: • Make informed decisions about postsecondary funding • Understand their repayment obligation, using the students’ loan information in NSLDS • Develop a budget • Estimate monthly student loan payments • Explore paying interest while in-school and during periods of deferment and forbearance • Explore the impacts of deferment and forbearance • Learn about income-driven repayments plan options • Indicate a repayment plan preference (Exit Counseling)

38. Exit Counseling • Compare Repayment Plans • Indicate Repayment Plan preference • (which will be passed to the servicer)

39. Looking Back • Financial Awareness Counseling Tool (FACT) • Provides students with financial management basics, information about current loan debt, and estimates for student loan debt levels after graduation.  • The tool offers five interactive tutorials covering topics ranging from managing a budget to avoiding default.  • Students are able to access their individual loan history and receive personal feedback that can help them better understand their financial obligations. Process Improvements

40. Repayment Estimator • Retrieves federal student loan information available in NSLDS. • View and compare the repayment amount under each of the repayment plans. • At a glance comparisons between monthly payment amounts, total amounts paid, and total interest paid

41. Looking Back Decision to Standardize Servicing Processes In order to provide the best service to our customers, our servicing contracts are structured to allow for servicer creativity and innovation. However, there are times when decisions are made to standardize our servicing processes. Why the need for consistency or standardization? • Standardization makes sense when differences in servicer processing cause different results to borrowers in the same circumstance.

42. Decision to Standardize Examples of Decisions to Standardize Servicing Processes Forbearance Limits Capitalization Prepayments

43. Decision to Standardize Forbearance Limits The Basics: • A forbearance is used to postpone or reduce a borrower's monthly payment amount for a limited and specific period during which the borrower is charged interest.  • A general forbearance can be granted on a borrower's loan(s) for up to 1 year (12 months) at a time. • After 1 year (12 months), the borrower is required to reapply to renew the forbearance. • A general forbearance does not have a specified time limit.

44. Decision to Standardize Forbearance Limits Identifying the Issue: • Through monitoring our loan portfolio, we discovered that some borrowers were on general forbearances for extended periods of time. • Goal to ensure borrowers are adequately advised or counseled of alternative repayment options. • Therefore, the forbearance process and rules were reevaluated to place a limit on a borrower request to extend forbearance, in cases where there was 36 months of consecutive forbearance.  

45. Decision to Standardize Forbearance Limits Objectives: • To establish healthy repayment habits and behaviors • Counsel borrowers on all the eligible repayment plans (with focus on the income-driven repayment options) before a forbearance granted Standardization Rules: • When a borrower has received 36 months of consecutive forbearance, the request to extend the forbearance will not be automatically granted • To allow for extenuating circumstances, a forbearance may only be extended if a supervisor has reviewed and determined that efforts to place the borrower on an affordable repayment plan or deferment (if eligible) have been attempted and an extension justified • The justification for the extension must be noted on the borrower's account

46. Decision to Standardize Capitalization Background: • All of our servicers were compliant with the rules and requirements for capitalization.  • The capitalization regulations provide a certain amount of discretion on the frequency of capitalization (for example, the Secretary may capitalize at point “x”). • The update to our practice ensures consistency in interest capitalization between Direct Loans and federally-held Federal Family Education Loans (ED – held loan portfolio) for all the federal loan servicers.

47. Decision to Standardize Capitalization: Rules Interest capitalization occurs when the interest that has accrued is added to the principal balance of the loan, and interest is then calculated on the new principal balance.  Our servicers have updated their systems to consistently capitalize interest at the following events: • At the end of the grace period • At the end of a deferment or forbearance period, or consecutive periods of deferment or forbearance (specifically, this covers the scenario if a borrower enters a period of back-to-back deferment or forbearance.  The servicer would only capitalize once – at the end of the final status change)

48. Decision to Standardize Capitalization : Rules • For ICR: • During periods of negative amortization, annually • Negative amortization interest capitalizes only until principal balance is 10% greater than original principal from when borrower entered repayment • Otherwise, normal capitalization rules apply • For IBR: • No longer qualifies for payments based on income (no longer has a partial financial hardship) or • Leaves IBR entirely • For Pay As You Earn: • No longer qualifies for payments based on income (no longer has a partial financial hardship) or • Leaves Pay As You Earn entirely • Interest capitalizes only until principal balance is 10% greater than original principal amount when borrower entered plan

49. Decision to Standardize Prepayments The Basics: • A prepayment is a payment that is made when no payment is due or when a payment is made for more than what is due. • When a borrower makes a prepayment, the excess amount is applied first to interest, then principal. • Issue: how much is the borrower billed for in the next month. • Default rule – excess payments treated as intended to cover next month. • Borrower can always express contrary intent.

50. Decision to Standardize Prepayments Identifying the Issue: • Borrowers mistakenly believe that treating payment as intended for next payment does not secure additional principal reduction • It does, because payment immediately applied. • Identified that how borrowers provide instruction was inconsistent between servicers. • Borrowers are accustomed to writing payment instruction on the check or transmittal, which servicers don’t necessarily receive. • Not all servicers provide easy way for the borrower to indicate what intent is when making online payment. • Not all servicers explain on the bill how to handle instructions for prepayments.