Student-loan borrowers facing bad customer service could be transferred to a 'high-performing' company if issues persist, Biden's Education Department says

The Education Department put student-loan companies on notice in new guidance: properly serve borrowers, or face the consequences.

• The Education Department released new guidance on holding student-loan servicers accountable.
• Borrowers could be transitioned to higher-performing servicers if their original servicer failed its duties.
• The department will also monitor customer service calls and score their quality.

President Joe Biden's Education Department just warned student-loan companies that they can't keep getting away with bad behavior.

On Thursday, the Education Department announced a new framework for holding services accountable as the transition back into repayment for millions of borrowers continues. The framework outlines how the department will monitor the quality of customer service borrowers are receiving from their servicers, along with punishments when servicers do not fulfill their contractual obligations.

"The Biden-Harris Administration has made clear that we will not allow borrowers to pay the price for unacceptable servicing failures," Secretary of Education Miguel Cardona said in a statement. "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."

When it comes to holding servicers accountable for bad behavior, the department outlined four actions it might take:

1. Withholding payment from the servicer when they "do not meet their contractual obligations or are not meeting acceptable standards," as seen with the $7 million in withheld pay from MOHELA in October

2. Suspending or re-allocating borrowers if a servicer shows they can't perform their required duties. Transferring borrowers to higher-performing servicers would have "direct financial impacts on servicers, because their compensation is largely driven by monthly fees for each borrower they service," the guidance said

3. Scoring servicers poorly on Contractor Performance Reports, which could lead to loss in future revenue

4. And requiring servicers to fix mistakes through remediation plans that the department ensures makes impacted borrowers whole.

Along with actions to crack down on servicers, the department also said Federal Student Aid will be listening to customer service calls and scoring them on their quality, along with working with federal and state regulators to ensure servicers are compliant with consumer protection laws.

And when the department detects any errors servicers are making with borrowers' accounts, it will instruct the servicer to place impacted borrowers into a "short administrative forbearance while the errors are resolved."

This announcement comes as the department is transitioning to a modernized servicing platform in the spring of 2024, which will allow it to bolster oversight over servicers. The new platform will also encourage better servicer performance by financially rewarding servicers that keep "at-risk" borrowers in a current repayment status, rather than being marked as delinquent.

The department also recently released a memo outlining a range of errors it has detected as borrowers began to enter repayment, including missed billing statements and inaccurate payments. Some of those borrowers have already been placed on forbearance as their servicers fix those mistakes.