09 - FSA Current State.pdf

August 2020

FSA CURRENT STATE

Student aid lifecycle

Awareness Application Disbursement Repayment Customer access information for Federal financial assistance and FSA in coordination with school financial aid offices

FSA in coordination with school financial aid offices

FSA through school financial aid offices

FSA through third-party servicers, collection agencies

▪ Customer learns about federal student aid options through online resources and the school financial aid office

▪ Applications submitted online through the Free Application for Federal Student Aid (FAFSA)

▪ Customer receives results of the FAFSA

▪ Funds are disbursed through school financial aid offices

▪ Customer is assigned to a third-party servicer

▪ After graduating school and a short grace period, customer begins making interest and principal payments

▪ Customers that are delinquent for more than one year enter default

▪ FSA, through its vendors and collection agencies, pursues default resolution

Owner Description

FSA CURRENT STATE AID LIFECYCLE HAS FOUR MAJOR PHASES, FROM

AWARENESS TO REPAYMENT

FSA ORIGINATES AND PROCESSES BILLIONS OF DOLLARS OF LOANS

Description

▪ FSA vendor-operated website that is the primary online and mobile resource for customers seeking information on federal student lending programs

▪ Contains detailed information on funding types and repayment options, as well as step-by-step guides

▪ Visited by 183.7 million users in FY2019

▪ The only major FSA website to follow the

FSA style guide; also the only major non-transactional website (purely informational)

Customer Engagement channels

StudentAid.ed.gov

FSAID.gov

▪ FSA vendor-operated website that customers use to create an FSA ID to be able to apply for federal aid

▪ Serves as a unique identifier across FSA’s systems throughout the loan lifecycle

▪ Single-sign on capability across FSA websites and systems is not currently possible, requiring customers to switch and re-log in

FAFSA.gov

▪ FSA vendor-operated website that customers use to apply for federal aid via the Free Application for FAFSA

▪ FAFSA collects user-inputted data and pulls data from the IRS

▪ Nearly 18 million applications in FY2019, including 65.9% of high school seniors as well as older students applying for the first time or for additional loans

▪ ~4.9 million inquiries (FY2019): live call (60.87%), automated (27.51%), chat (9.94%), email (1.58%), postal mail (0.11%).

▪ Roughly 30% of calls are referrals to loan servicers or other vendor help desks

▪ FSA vendor-operated call center (The Federal Student Aid Information Center), operated with studentaidhelp.ed.gov, which serves as a staffed resource for customers seeking live, personalized assistanceFSAIC

▪ Significant variability among schools in relevant loan options (i.e., tuition cost, available grants) creates challenges for student customers and for FSA to provide comprehensive information to borrowers

▪ Individual school-operated online resources and communication channels that greatly vary among the 5,767 partner schools

Schools

Key operational details

AWARENESS AND APPLICATIONDURING THE AWARENESS AND APPLICATION PHASE, CUSTOMERS NAVIGATE

MULTIPLE WEBSITES, CALL CENTERS, AND SCHOOL FINANCIAL AID OFFICES

Eligibility determination

▪ FSA processes data from FAFSA applications and other external sources (e.g., DHS, DOD, DOJ, IRS, SSA, SSS, and VA) to calculate eligibility for federal aid

▪ Need-based aid is calculated by subtracting an applicant’s Expected Family Contribution (“EFC”) from the cost of attendance at a given school

– Calculated through formula stipulated by law

– Takes family’s financial resources into account

▪ Eligibility for non-need-based aid is simply the difference between the cost of attendance and the sum of already-awarded aid

FSA processing system, using data from FAFSA, FSA databases, and other government data

Disbursement

▪ Based on a given school’s estimated need, FSA coordinates with ED to disburse the appropriate amount of aid funds to the school’s financial aid offices

▪ Schools assemble the financial aid package for each student, which may consist of federal loans and grants as well as funding from other public and private sources

FSA processing system, in coordination with school financial aid offices and Department of Education (ED)

Origination

▪ Schools report back to FSA the amount and type of federal aid included in each student’s financial aid package – FSA does not receive visibility into the financial aid package, only the federal-funded components

▪ FSA originates the corresponding loan securities

FSA in coordination with school financial aid offices

Activity

Description

Responsible party

DISBURSEMENTFOLLOWING APPLICATION, FSA DETERMINES ELIGIBILITY, DISBURSES AID FUNDS TO

SCHOOLS, AND ORIGINATES THE CORRESPONDING LOAN SECURITIES

Background Servicer Responsibilities Customer engagement

▪ Servicers perform all standard loan servicing activities including billing, collection, and monitoring

▪ Servicers also handle the customer education and back-end processing associated with complex repayment alternatives available to federal student loan borrowers

▪ A servicer generally retains an account until it defaults or repays

– Transfers between servicers of loans in good standing do occasionally occur – typically in order to consolidate a customer’s loans at a single servicer or because a customer has entered a special program (e.g., Public Service Loan Forgiveness, Disability Discharge, or TEACH)

▪ There are currently nine servicers in the FSA environment

– Four of the servicers are known as Title IV Additional Servicers (TIVAS), each of which operates its own core platform;

– The other five servicers are not-for-profit state agencies (NFPs), each of which licenses a platform from a TIVAS

– Perkins (ECSI) servicer perform loan servicing activity for the FSA within ED.

– The TIVAS begin servicing in 2009 and the NFPs were added shortly thereafter.

▪ Each servicer conducts customer outreach independently, including operating its own branded websites and call centers

– Customers are often confused by the transition that occurs after loan origination when instead of interacting with FSA or their school, they are contacted by a new, unfamiliar servicing company

▪ Call centers are a major investment at the servicers, given the complexity of student loan products and the need to provide personalized assistance to customers

THIRD-PARTY SERVICERS PERFORM FEDERAL LOAN SERVICING ACTIVITIES

REPAYMENT

Nine customer engagement channels

Four servicing platforms

PHEAA Great Lakes

Engagement layer

Core processing platform

Title IV Additional Servicers (TIVAS)

Each operates its own platform

Not-for-Profit State Agencies (NFPs)

Each licenses a platform from a TIVAS

Nelnet

PHEAA

Great Lakes Navient

Platform

THE SERVICERS HAVE INDEPENDENT ENGAGEMENT LAYERS AND USE FOUR

CORE PROCESSING PLATFORMS BETWEEN THEM

Navient Nelnet

REPAYMENT

Different customer channels and servicing platforms create

▪ Inconsistent customer experiences, as each servicer has separate mobile and online interfaces and call center operations

▪ Operational challenges from having to manage requirements (e.g., new products) and transfer loans

(e.g., data migration mismatches) as well as oversight across nine servicers and four platforms

Ed uc at io na l C om pu te r

Sy st em s, In c.

Perkins

These characteristics require a technological and operational architecture that is:

▪ Flexible and adaptable to new products and a shifting regulatory landscape

▪ Automated and highly-parameter-driven to take away manual functions and mitigate risk

▪ Capable of supporting aggregation at the customer and school level

▪ Extremely stable given the unique importance of the product

▪ Able to process at scale

Complex repayment plans: Dozens of repayment plans that are frequently changing and allow borrowers to often freely switch between at any time

Complicated reporting and interaction requirements: Financial reporting, auditing, security, and other requirements related to the unique mission of FSA create additional challenges

Unique processing rules and loan standards:

Products with unique business rules built into the architecture, particularly for forbearance

Back-office processing operations:

Application processing, error correction, and dispute resolution activities require substantial manual processing resources

SERVICING FEDERAL STUDENT LOANS IS COMPLEX DUE TO UNIQUE

PRODUCT, REPORTING, AND SECURITY REQUIREMENTS

Online

Call centers

In many instances, particularly regarding repayment and loan balance inquires, FSA provides a service that is also offered by the servicers, but the customer did not know who to contact

▪ FSA oversees at least 22 call centers:

– There are 11 call centers operated for Customer and

Schools

– There are 10 call centers operated by federal loan servicers

(and one for recovery)

– Customer inquiries are often resolved through a simple referral to the appropriate servicer call center

“How do I make a payment?”

“Who is Navient and why are they sending me invoices?”

“I can’t access my account.”

▪ FSA runs an internal Dispute Resolution Center for customers:

– Disputes and feedback are often related to aid repayment, school interactions, or suspicious activity

“My loan balance doesn’t look correct.”

“I thought I paid my loan on time?”

▪ FSA (through its contractors) operates websites that:

– host information on existing loans

– allow customers to make changes to their profile

– review repayment plan options and eligibility for forbearance/default

“I need to check my loan balance.”

“What are my repayment plan options?”

“Am I eligible for forbearance?”

Dispute Resolution

FSA PERFORMS SELECT CUSTOMER-FACING ACTIVITIES DURING THE

SERVICING PHASE OF THE CUSTOMER LIFECYCLE

Servicers

▪ FSA conducts extensive servicer oversight and monitoring

▪ Servicer performance data (e.g., call center KPIs) as well as customer and FSA employee data are compiled and used to allocate new borrower accounts among the nine servicers (higher performing servicers receive higher allocations)

▪ FSA retains a central data repository accessible by other FSA systems and students to login, view loan history, and change enrollment data

– Enrollment Reporting data and

Exit Counseling Completion data to Federal Loan Servicers

– Acts as a processing system to help establish student eligibility for Federal student aid as well as for various other programs

▪ A separate FSA database collects servicing data for analytics and reporting purposes

– Outputs include a complaints dashboard, improper payments dashboard, school closure analysis tool, and annual risk assessment

Data warehouseServicer Oversight Operational database

FSA ALSO PLAYS A BACK-END ROLE, RECEIVING DATA FROM SERVICERS FOR

OVERSIGHT AND INTERNAL PROCESSING

▪ If a loan is delinquent for more than 360 days, that loan’s servicer transfers the loan to a separate FSA vendor that manages defaulted loans (Debt Management and Collection System or

DMCS)

Initial loan default

▪ If a customer exits default, the loan is transferred from FSA back to a loan servicer (although not necessarily the customer’s original servicer)

Potential re-default

▪ If a customer defaults again (by missing payments for more than a year), the loan is transferred back to FSA’s defaulted loans system

Potential emergence from default

Activity Loan servicer FSA / Private Collection Agencies

▪ The customer is notified by DMCS that they have 60 days to bring the loan back into current repayment

▪ If the customer fails to make the requisite payments, information about the loan (customer contact information, loan balance) is sent to a Private Collection Agency (PCA), which begins resolution efforts

▪ Customers can exit default in one of two ways

– Rehabilitation: making all consecutive payments during a 10 consecutive months period.

– Consolidation: combining multiple loans into one new security with a specified set of repayment plan alternatives

▪ FSA’s defaulted portfolio includes 9.5M customer accounts with $192.6B outstanding as of Dec 2019

▪ Loans never expire or are written down (FSA still holds defaulted loans originated in the 1980’s)

▪ ~13% of borrowers who rehabbed in 2015-2016 were in default again within 13 months

▪ To exit default a second time, a customer can rehabilitate or consolidate (whichever they didn’t do the first time); exiting a third time (should they default again) is generally not possible except in special circumstances

RESOLUTION ACTIVITIES FOR DEFAULTED LOANS ARE COORDINATED

BETWEEN FSA AND THIRTEEN PRIVATE COLLECTION AGENCIES

Great Lakes

TODAYS ENVIRONMENT IN THE STUDENT AID LIFECYCLE…

Navient

DCC FAFSA

Awareness Application

COD

Origination

School Financial Aid Offices (~5800)

MOHELACornerStone

HESC Granite State

OSLANelnet

PHEAA

DMCS

Default Servicing

PCA

Collections

FSA Schools Federal Loan Servicers** Manage all phases of data management, processing and engagement

Department of Education

PCA

**Perkins loans are serviced separately by Educational Computer Services Inc.

Repayment

…IS SUPPORTED BY A COMPLEX SERIES OF INTERFACING SYSTEMS…

…IN WHICH 5 PRIMARY FSA SYSTEMS INTERACT WITH SERVICING AND RECOVERY

PARTNERS

Note: Includes recipients of Direct Loan and ED-held Federal Family Education Loan Program borrowers. Counts based at the loan level. As a result, recipients may be counted multiple times across varying loan statuses. Excludes <1M customers with status listed as “Other.”

FSA Data Center Loan Portfolio report – Dec 2020 – PortfoliobyLoanStatus and Portfolio by Delinquency Status

Forbearance

In-school

Grace

Repayment

Loan status

Delinquent

Deferment

Default

21.78, 47.97%

6.91, 15.22%

8.53, 18.79%

3.57, 7.86%

3.1, 6.83%

0.41, 0.9%

1.1, 2.42%

Description Recipients (M / %)

▪ Repaying in good-standing

▪ Behind payments (more than a year) – held at

DMCS

▪ Customer is attending school

▪ Not currently repaying for an approved reason

▪ Not currently repaying for an approved reason

▪ Behind payments (less than a year)

▪ Customer recently graduated school

Comments

▪ ~19% of recipients are in default, but defaulted loans account for only 11% of outstanding principal given their smaller average size

▪ ~6.7M recipients, representing approximately 15% of all borrowers, have suspended payments for an approved reason such as unemployment or re-enrollment in an approved academic program

▪ Of the 42.8 million customers being serviced by FSA, nearly 50% are in current repayment

▪ Use of more complex loan programs such as deferment and forbearance represents 15.6% of the loan portfolio

▪ Nearly 18% of accounts have not begun repayments (in school or in grace)

SERVICERS MUST ALSO SUPPORT STUDENTS ACROSS 7 DIFFERENT TYPES

OF STATUS

FAFSA.gov

StudentAid.gov

BorrowerDis

NSLDS.ed.gov

FSAIC Portal

DisabilityDis

Feedback.Student Aid.ed.gov

FSAID.gov

MyEdDebt.ed.gov

FSA web and mobile portals

Purpose and context

▪ On Dec. 22, 2019, FSA launched Digital Customer Care platform, which brings together many websites that more than 120 million customers per year access under one platform. FSA manages 5+ distinct websites and mobile portals, various social media channels, web videos, and more through this platform.

– Websites hosted by various contractors including Accenture, BriefCase, GDIT, Maximus Federal Services

▪ Many FSA websites interface with systems including FSA ID, NSLDS, COD, and the IRS DRT

▪ Many of FSA’s websites, led by studentaid.ed.gov serve as the entry point to the student aid life-cycle by delivering integrated awareness, application products, and services to ensure that students and their families are aware of, have access to, and have applied for post-secondary financial assistance

▪ FAFSA is an FSA website and mySA is a mobile app through which students apply for aid

▪ Certain FSA websites allow the customer to retrieve loan status and loan and grant history information, as well as perform certain other functions or follow-on (non-funding) applications

▪ Finally, each of FSA’s external servicing partners manage their own distinct web (and in some instances) mobile portals through which customers can check status and perform functions relating to loan servicing

▪ FSA’s web group conducts extensive “customer listening” programs that collect and analyze customer data for use in improving applicant products and services and better understanding trends to improve current digital offerings

WEB AND MOBILE PRESENCE IN THE FSA ENVIRONMENT

Servicers Website Mobile myStudentAid Mobile App

CALL CENTERS IN THE FSA ENVIRONMENT

FSA call centers Servicer call centers Title IV Additional Servicing

Not-for-profit

Purpose and context

▪ Given the complexity of many topics in the FSA environment, FSA operates several different call centers that provide a live resource for customers and potential customers seeking individualized assistance

▪ The largest of these call centers by volume is FSA’s FSAIC, which handles ~4.9 million (2019) inquiries per year

– FSAIC is a mandated service under The Higher Education Act

– It handles questions across the customer lifecycle, from awareness through servicing and recovery. It’s most frequent inquiries concern:

▫ FAFSA inquiries: assistance completing, submitting, or correcting their FAFSA applications ▫ FSA ID inquiries: assistance creating or using an FSA ID to access resources across the FSA environment ▫ Inquiries about loan status or to lookup loan information that is available through NSLDS ▫ Inquiries about how to make a payment ▫ General questions when borrowers do not know who to contact

– Many of FSAIC’s inquiries are simple referrals to the FSA’s servicing partners, because customers do not recognize the non-FSA branding associated with their servicer and are therefore uncertain how to make a payment

– FSAIC vendor is Enterprise Services LLC

– FSAIC handles inquires through four principal channels of customer communication: agent-Handled phone calls (60.87%), IVRU complete (27.51%), chat (9.94%), and email

(1.58%), postal mail (0.11%) (2019)

– Supports inquiries in English and Spanish, as well as TTY calls for the hearing impaired

▪ In addition to FSAIC, FSA operates several other call centers for more focused inquires. Many of these call centers are designed for partner use rather than customer use

▪ Each of the servicers operates its own dedicated call centers that are external to the FSA’s resources; of these, Fedloan and Nelnet are the largest, each handling annual volumes that exceed those of FSAIC, frequent call topics include making payments and repayment plan applications

Student Loan Support Center

COD

School Servicers

DMCS

Maximus

Perkins

ECSI

Campus Help Desk

CPS/SAIG

Help Desk

NSLDS

Help Desk

Research Help Desk

Awareness

Application

Disbursement

Repayment

FSAIC

Performs functions across the lifecycle

Perkins

THE CURRENT STATE IS THE PRODUCT OF YEARS OF LEGISLATIVE CHANGES AND

IMPLEMENTATION CHALLENGES

Unsuccessful attempt to create a Common Servicer for Borrowers (CSB)

ECASLA passed: percentage of Treasury-funded loans jumps from 25% to 90% over next 2 years

4 Title IV servicers awarded contracts

SLRA passed: FSA moves to a 100% direct loan model, effectively ending the FFEL program and drastically increasing the potential size of FSA’s serviced portfolio

2008-10 was a transformational period for FSA: the move to 100% direct loans and multiple loan servicers defined FSA’s current environment

DMCS2 deployed

Studentaid.ed.gov is launched as part of an effort to consolidate FSA websites and create an integrated customer experience

FSA’s outstanding loans exceed $1T

White House launches PAYE and RePAYE– income-driven repayment plans

Re-compete launched to institute a multiple provider, performance-based servicing model

DMCS contract transitions to Maximus

SAFRA passed, requiring FSA to provide servicing contracts to not-for-profit servicers (14 initially, currently down to 5)

5-year option exercised to extend existing 9 servicers

Launched myStudentAid is a mobile-centric application for students and their parents to submit applications for Title IV student financial aid

Launched DCC an enterprise-wide, FSA-branded digital platform, or the new "digital front door," for FSA experiences from application through student loan repayment

SYSTEM DEFINITIONS

• System that originates securities and disburses funds

• Interface with:

• DCC – to add/update/retrieve demographic, tax, loan information.

• DMCS – receives lenders payment information

• NSLDS – weekly data exchange on student borrower information.

• FMS – sends FMS data on how many and which loans and grants to originate with Treasury

• Servicers – exchange loan information, repayment information

• Technical Specification: Oracle database, Java, IBM Cognos, Pivotal Greenplum

COD – Common Origination and Disbursement

• Consolidates and manages all financial transactions from FSA's feeder systems from loan disbursement through the repayment cycle

• Interface with:

• COD – exchanges data about G5 and other financial transactions.

• DMCS – exchanges Treasury reports, general ledger summary, loan transfer data etc.

• NSLDS – transfers lender demographic information

• Technical Specification: Oracle Federal Financials

FMS – Financial Management System

• New "digital front door," for federal student aid experiences from application through student loan repayment.

• Interface with:

• COD – to add/update/retrieve demographic, tax, loan information.

• DMCS – to retrieve discharge related information

• NSLDS – to add/update/retrieve contact information, ombudsman data, enrollment data etc.

• Servicers – exchange loan information, and case related information

• Technical Specification: Adobe Campaign, Drupal, Salesforce CRM

DCC – Digital and Customer Care

• System that tracks and manages collection activities associated with defaulted accounts that are no longer managed by the servicers.

• Interface with:

• COD – sends data on grants and loans.

• DCC – retrieves discharge related information

• NSLDS – weekly data exchange to update student loan history

• FMS – exchanges payment data to account for full loan portfolio which is passed onto G5

• Servicers – exchanges default data monthly, rehab direct loan and FFEL data

• Technical Specification: Debt Manager

DMCS – Debt Management Collection System

• FSA’s primary database of loans and grant data;

also performs a variety of processing and reporting functions

• Interface with:

• COD – weekly data exchange on student borrower information

• DMCS – weekly data exchange to update student loan history

• DCC – add/update/retrieve contact information, ombudsman data, enrollment data etc.

• Servicers – enrollment reporting data and completion data on a weekly basis from NSLDS

• Technical Specification: IBM Mainframe, IBM z/OS

NSLDS – National Student Loan Database System

APPENDIX: AS-IS

January 2018

THE STUDENT AID LIFECYCLE HAS FOUR MAJOR PHASES,

FROM AWARENESS TO RECOVERY

Student aid lifecycle

Awareness & Application Origination & Disbursement Processing & Servicing Recovery

FSA in coordination with school FA offices

FSA through school financial aid offices

Third-party servicers supported by FSA

FSA through third-party collection agencies

▪ Customer learns about federal student aid options through online resources and the school financial aid office

▪ Applications submitted online through the Free Application for Federal Student Aid (“FAFSA”)

▪ Customer receives results of the FAFSA and funds are disbursed through school financial aid offices

▪ Customer is assigned to a third-party servicer

▪ After graduating school and a short grace period, customer begins making interest and principal payments

▪ Customers that are delinquent for more than one year enter default

▪ FSA, through its vendors and collection agencies, pursues default resolution

▪ 120M+ FSA web visits

▪ 19.8M FAFSA apps

▪ ~$100B annual disbursements

▪ 15-20M annual originations

▪ >30M customers being serviced

▪ $1T portfolio being serviced

▪ 7M customers in default

▪ $120B portfolio in default

Owner Description

DURING THE AWARENESS AND APPLICATION PHASE, CUSTOMERS NAVIGATE

MULTIPLE WEBSITES, CALL CENTERS, AND SCHOOL FA OFFICES

Description

▪ FSA vendor-operated website that is the primary online and mobile resource for customers seeking information on federal student lending programs

▪ Contains detailed information on funding types and repayment options, as well as step-by-step guides

▪ Visited by 45 million users in 2017

▪ The only major FSA website to follow the

FSA style guide; also the only major non-transactional website (purely informational)

Engagement channel

StudentAid.ed.gov

FSAID.gov

▪ FSA vendor-operated website that customers use to create an FSAID to be able to apply for federal aid

▪ Serves as a unique identifier across FSA’s systems throughout the loan lifecycle

▪ Single-sign on capability across FSA websites and systems is not currently possible, requiring customers to switch and re-log in

FAFSA.gov

▪ FSA vendor-operated website that customers use to apply for federal aid via the Free Application for Federal Student Aid (“FAFSA”)

▪ FAFSA collects user-inputted data and also pulls data from the IRS

▪ Nearly 20 million applications in 2016, including 69.2% of high school seniors as well as older students applying for the first time or for additional loans

▪ ~7 million inquiries (2016): live call (70%), automated (21%), chat (7%), email (3%)

▪ Roughly 50% of calls are referrals to loan servicers or other vendor help desks (FSAID and loan inquiries are also common)

▪ FSA vendor-operated call center (The Federal Student Aid Information Center), which serves as a staffed resource for customers seeking live, personalized assistance

FSAIC

▪ Significant variability among schools in relevant loan options (i.e., tuition cost, available grants) creates challenges for student customers and for FSA to provide comprehensive information to borrowers

▪ Individual school-operated online resources and communication channels that greatly vary among the 6,000 partner schools

Schools

Key operational details

AWARENESS AND APPLICATION

FOLLOWING APPLICATION, FSA DETERMINES ELIGIBILITY, DISBURSES AID FUNDS

TO SCHOOLS, AND ORIGINATES THE CORRESPONDING LOAN SECURITIES

Eligibility determination

▪ FSA processes data from FAFSA applications and other external sources (e.g., SSA, DHS, VA) to calculate eligibility for federal aid

▪ Need-based aid is calculated by subtracting an applicant’s Estimated Family Contribution (“EFC”) from the cost of attendance at a given school

– Calculated through formula stipulated by law

– Takes family’s financial resources into account

▪ Eligibility for non-need based aid is simply the difference between the cost of attendance and the sum of already-awarded aid

FSA processing system, using data from FAFSA, FSA databases, and other government data

Disbursement

▪ Based on a given school’s estimated need, FSA coordinates with DoED to disburse the appropriate amount of aid funds to the school’s FA offices

▪ Schools assemble the aid package for each student, which may consist of federal loans and grants as well as funding from other public and private sources

FSA processing system, in coordination with school FA offices and DoED

Origination

▪ Schools report back to FSA the amount and type of federal aid included in each student’s award package – FSA does not receive visibility into the full award package, only the federal-funded components

▪ FSA originates the corresponding loan securities

FSA in coordination with school FA offices

Activity

Description

Responsible party

ORIGINATION AND DISBURSEMENT

THIRD-PARTY SERVICERS PERFORM FEDERAL

LOAN SERVICING ACTIVITIES

Background Servicer Responsibilities Customer engagement

▪ Servicers perform all standard loan servicing activities including billing, collection, and monitoring

▪ Servicers also handle the customer education and back-end processing associated with complex repayment alternatives available to federal student loan borrowers

▪ A servicer generally retains an account until it defaults or repays

– Transfers between servicers of loans in good standing do occasionally occur – typically in order to consolidate a customer’s loans at a single servicer or because a customer has entered a special program (e.g., Public Service Loan Forgiveness, Disability Discharge, or TEACH)

▪ There are currently nine servicers in the FSA environment

– Four of the servicers are known as Title IV Additional Servicers (“TIVAS”), each of which operates its own core platform; the other five servicers are not-for-profit state agencies (“NFPs”), each of which licenses a platform from a TIVAS

– The TIVAS begin servicing in 2009 under a 5 year contract (the NFPs were added shortly thereafter) with a 5 year extension, which was exercised in 2014. The existing contract expires in 2019

▪ Each servicer conducts customer outreach independently, including operating its own branded websites and call centers

– Customers are often confused by the transition that occurs after loan origination when instead of interacting with FSA or their school, they are contacted by a new, unfamiliar servicing company

▪ Call centers are a major investment at the servicers, given the complexity of student loan products and the need to provide personalized assistance to customers

PROCESSING AND SERVICING

THE SERVICERS HAVE INDEPENDENT ENGAGEMENT LAYERS AND

USE FOUR CORE PROCESSING SYSTEMS BETWEEN THEM

PROCESSING AND SERVICING

Nine customer engagement channels

Four servicing platforms

NelnetPHEAAGreat Lakes Navient

Engagement layer

Core processing platform

Title IV Additional Servicers (“TIVAS”) Each operates its own platform

Not-for-Profit State Agencies (“NFPs”)

Each licenses a platform from a TIVAS

Different customer channels and servicing platforms create …

▪ Inconsistent customer experiences, as each servicer has separate mobile and online interfaces and call center operations

▪ Operational challenges from having to manage requirements (e.g., new products) and transfer loans

(e.g., data migration mismatches) as well as oversight across nine servicers and four platforms

Nelnet

PHEAA

Great Lakes

Navient

Platform

SERVICING FEDERAL STUDENT LOANS IS COMPLEX DUE TO

UNIQUE PRODUCT, REPORTING, AND SECURITY REQUIREMENTS

PROCESSING AND SERVICING

These characteristics require a technological and operational architecture that is:

▪ Flexible and adaptable to new products and a shifting regulatory landscape

▪ Automated and highly-parameter-driven to take away manual functions and mitigate risk

▪ Capable of supporting aggregation at the customer and school level

▪ Extremely stable given the unique importance of the product

▪ Able to process at scale

Complex repayment plans: Dozens of repayment plans that are frequently changing and allow borrowers to often freely switch between at any time

Complicated reporting and interaction requirements: Financial reporting, auditing, security, and other requirements related to the unique mission of FSA create additional challenges

Unique processing rules and loan standards: Products with unique business rules built into the architecture, particularly for forbearance

Back-office processing operations:

Application processing, error correction, and dispute resolution activities require substantial manual processing resources

STUDENT LOAN PRODUCTS ARE MORE COMPLEX THAN

STANDARD CONSUMER OR CREDIT LENDING PRODUCTS

Example characteristics of the federal student loan environment

Write-offs are not allowed, so defaulted loans can remain on the platform almost indefinitely, and borrowers can claim benefits that apply retroactively throughout the life of the loan

Student loans function as installment loans, but most unsecured credit platforms are revolving platforms (designed for credit card products) that have difficulty handling the complexity of student loans

If the borrower pays over the minimum, the servicer often must apply the remainder across multiple loans which may be on different repayment plans

Borrowers can stop making payments for a number of reasons (e.g., financial difficulties, medical expenses, employment change) but remain in good standing

Borrowers in recovery can be rehabilitated or consolidate their loans and move back to servicing multiple times during the history of their loan (~13% of borrowers who rehabilitated were back in recovery within 13 months from 2015-16)

Installment lending

Over-payment processing across multiple loans

Backward compatibility Forbearance Rehabilitation and consolidation

PROCESSING AND SERVICING – UNIQUE RULES

INCOME-BASED REPAYMENT PLANS ARE PARTICULARLY

COMPLEX AND HAVE GROWN IN NUMBER AND ADOPTION RATE

Characteristics of repayment plans

Nearly 30 permutations of repayment plans are currently offered…

▪ Customers can currently elect between eight different repayment plans (with over 30 permutations)

– Standard: fixed payments up to a 10 year term

– Graduated: increasing payments up to a 10 year term

– Extended: fixed or graduated payments up to a 25 year term

– Income-based: 5 different plans that link payments to income

▪ There are dozens of repayment plans that, although no longer actively offered, still must be processed because there are older loans in the FSA portfolio that have not switched to a current plan

…adding to the complexity are the unique characteristics of repayment plans

▪ Within each of these plans there can be variations in term, repayment profile, and other characteristics (e.g., loan consolidation, financial hardship, other loans held by the same customer)

▪ Customers can freely switch between plans

▪ ~21% of borrowers that are in current repayment require negative amortization that the servicer needs to capitalize once a year subject to unique rules, either because they do not pay enough (~9% of borrowers) or because they qualify for $0 monthly payments (~12%)

…and the likelihood for increased growth in the number of repayment plans offered

▪ Repayment plans can be redefined or created by legislation and then must be quickly supported (e.g., within 2-3 months) requiring servicers to update their processing capabilities and retrain their representatives

▪ A number of different income-related plans have been launched in recent years (PAYE in 2012, RePAYE in 2015) as part of an emphasis on returning customers to good standing

▪ 27% of recipients are on income-related repayment plans, but the number electing them has tripled in the last three years

Repayment plan overview Unique characteristics Growth

PROCESSING AND SERVICING – REPAYMENT PLANS

SERVICING STUDENT LOANS IS ALSO COMPLEX DUE TO OTHER

REQUIREMENTS RELATED TO SECURITY AND REPORTING

Cybersecurity Audit requirements

Accounting and financial reportingCash management

▪ Systems must comply with security and privacy controls for federal information systems and organizations

▪ All FSA and non-FSA data within physical and digital architecture must be segregated so that virtual machines exist on physically separate equipment

▪ All personnel must complete a federal background investigation, restricting access so that non-US citizens living outside of the United States cannot access FSA systems or data

▪ Required support for audits and reviews includes:

– FSA’s annual Financial

Statement audits

– Assessments of internal controls and risk for improper payments

– FISMA audits and programs audits by GAO, OIG, and OMB

▪ Credit reform codes are unique identifiers for each loan, that servicers are responsible for maintaining, reassigning under certain conditions, and using to track reporting of loans to the government

▪ Payments must be made through Treasury Lockbox with a process to receive lockbox return files and no funds directly managed by the system

▪ All transactions must be reported to FSA’s financial management system through standardized reporting templates

PROCESSING AND SERVICING – INTERACTION MODEL

Servicer functions that require substantial manual processing

MANY SERVICER ACTIVITIES ARE DIFFICULT TO AUTOMATE

AND REQUIRE SIGNIFICANT BACK-OFFICE STAFF TO COMPLETE

Despite significant investment in staff reduction initiatives, Great Lakes and Nelnet – two FSA TIVAS which collectively service approximately 75M loans across 15M customers – have nearly

800 full-time back-office personnel devoted to these and other manual processing activities

▪ Error and dispute resolution investigation and processing efforts, including:

– Direct and indirect credit bureau disputes filed by borrowers or initiated by the credit bureaus

– Account maintenance, including manual data correction of errors identified through data integrity scans and in response to FSA change requests

– Payment processing, including researching lost or misapplied payments and payment reapplication at the request of borrowers or FSA

▪ Manual review, validation, and processing associated with enrollment, applications, and requests for various borrower programs and loan status adjustments, including:

– Income-driven repayment plans: application and eligibility review, income checks and payment calculations, and annual recertification

– Military service members: deferments and forbearances, SCRA and hostile pay benefits

– School and borrower enrollment processing, including manual entry of hard-copy applications

– Deferments, forbearances, and consolidation requests

– Special programs, including TPD and loan forgiveness programs

– Specialty claims, including death, closed school, and borrower defense requests

Application processing Error correction and dispute resolution

PROCESSING AND SERVICING – MANUAL PROCESSING

FSA PERFORMS SELECT CUSTOMER-FACING ACTIVITIES DURING

THE SERVICING PHASE OF THE CUSTOMER LIFECYCLE

In many instances, particularly regarding repayment and loan balance inquires, FSA provides a service that is also offered by the servicers, but the customer did not know who to contact

▪ FSA oversees at least 8 customer and partner-facing call centers:

– These call centers are in addition to the nine call centers operated by the servicers (and one for recovery)

– Customer inquiries are often resolved through a simple referral to the appropriate servicer call center

“How do I make a payment?”

“Who is Navient and why are they sending me invoices?”

“I can’t access my account.”

▪ FSA runs an internal Dispute Resolution Center for customers:

– Disputes and feedback are often related to aid repayment (37%), school interactions (27%), or suspicious activity (13%)

“My loan balance doesn’t look correct.”

“I thought I paid my loan on time?”

▪ FSA (through its contractors) operates websites that:

– host information on existing loans

– allow customers to make changes to their profile

– review repayment plan options and eligibility for forbearance/default

“I need to check my loan balance.”

“What are my repayment plan options?”

“Am I eligible for forbearance?”

Online

Call centers

Dispute resolution

PROCESSING AND SERVICING – FSA INVOLVEMENT

FSA ALSO PLAYS A BACK-END ROLE, RECEIVING DATA FROM

SERVICERS FOR OVERSIGHT AND INTERNAL PROCESSING

Servicers

▪ FSA conducts extensive servicer oversight and monitoring

▪ Servicer performance data (e.g., call center KPIs) as well as customer and FSA employee data are compiled and used to allocate new borrower accounts among the nine servicers (higher performing servicers receive higher allocations)

▪ FSA retains a central data repository accessible by other FSA systems and students to login, view loan history, and change enrollment data

– Enrollment Reporting data and

Exit Counseling Completion data to Federal Loan Servicers

– Acts as a processing system to help establish student eligibility for Federal student aid as well as for various other programs

▪ A separate FSA database collects servicing data for analytics and reporting purposes

– Outputs include a complaints dashboard, improper payments dashboard, school closure analysis tool, and annual risk assessment

Data warehouseServicer Oversight Operational database

PROCESSING AND SERVICING – FSA INVOLVEMENT

RESOLUTION ACTIVITIES FOR DEFAULTED LOANS ARE COORDINATED

BETWEEN FSA AND A GROUP OF PRIVATE COLLECTION AGENCIES

▪ If a loan is delinquent for more than 360 days, that loan’s servicer transfers the loan to a separate FSA vendor that manages defaulted loans (Debt Management and Collection System or

“DMCS”)

Initial loan default

▪ If a customer exits default, the loan is transferred from FSA back to a loan servicer (although not necessarily the customer’s original servicer)

Potential re-default

▪ If a customer defaults again (by missing payments for more than a year), the loan is transferred back to FSA’s defaulted loans system

Potential emergence from default

Activity Loan servicer FSA / Private Collection Agencies

▪ The customer is notified by DMCS that they have 60 days to bring the loan back into current repayment

▪ If the customer fails to make the requisite payments, information about the loan (customer contact information, loan balance) is sent to a Private Collection Agency (“PCA”), which begins resolution efforts

▪ Customers can exit default in one of two ways

– Rehabilitation: making nine consecutive payments in a two month period

– Consolidation: combining multiple loans into one new security with a specified set of repayment plan alternatives

▪ FSA’s current defaulted portfolio includes 22M loans ($120B outstanding; 7M customer accounts)

▪ Loans never expire or are written down (FSA still holds defaulted loans originated in the 1980’s)

▪ ~13% of borrowers who rehabbed in 2015-2016 were in default again within 13 months

▪ To exit default a second time, a customer can rehabilitate or consolidate (whichever they didn’t do the first time); exiting a third time (should they default again) is generally not possible except in special circumstances

RECOVERY

Enterprise service bus

Servicers

Schools

National Student Loan Database System

Studentaid.

ed.gov FAFSA Private

Collection Agencies

CPS:

Eligibility

Determination

Integrated Technical Architecture

Dispute resolution center (Salesforce)

FSAIC

Education Data Warehouse & Analytics

Access and Identity Management System

FSA ID

Mobile

In person

Call center

Workflow

Hosted services

CRM

Data transfer

Web1

Data processing

System of record

Analytics

Identity Management

Engagement

Middleware

Processing

Data storage

IT activity Customer lifecycle

Application School RepaymentDisbursementAwareness Recovery

UNDERLYING FSA’S OPERATIONS IS A HIGHLY FRAGMENTED TECHNICAL

ARCHITECTURE…

Student Aid Internet Gateway

Financial Management System

COD:

Origination + Disbursement

Debt Management Collection System

1 Other websites include StudentLoangs.gov, NSLDS.ed.gov, MyEdDebt.eg.gov, among others

Financial Management System

…IN WHICH 4 PRIMARY FSA SYSTEMS INTERACT WITH SERVICING AND

RECOVERY PARTNERS

Enterprise service bus

Servicers

Schools

Studentaid.

ed.gov FAFSA Private

Collection Agencies

Integrated Technical Architecture

Dispute resolution center (Salesforce)

FSAIC

Education Data Warehouse & Analytics

Access and Identity Management System

FSA ID

Mobile

In person

Call center

Workflow

Hosted services

CRM

Data transfer

Web

Data processing

System of record

Analytics

Identity Management

Engagement

Middleware

Processing

Data storage

IT activity Customer lifecycle

Application School RepaymentDisbursementAwareness Recovery

Student Aid Internet Gateway

National Student Loan Database SystemCPS:

Eligibility

Determination

COD:

Origination + Disbursement

Debt Management Collection System

The National Student Loan Database System is a central data repository for federal student aid recipients, lenders, servicers, and schools

The Common Origination & Disbursement system disburses funds and originates the corresponding securities

The Central Processing System determines a borrower’s eligibility for federal loans using data from FAFSA and other internal and external sources

The Debt Management and Collection System manages defaulted loans and coordinates collection activities across the PCAs

TABLE OF CONTENTS FSA’s current operating environment

Detailed system profiles

Additional materials

Appendix

FSA portfolio overview

THE FSA-HELD PORTFOLIO IS OVER $1.1 TRILLION ACROSS 37M

CUSTOMERS, AND GROWING AT ~7% P.A.

Outstanding principal ($B) and loan recipients (M)

SOURCE: NSLDS Q4 2017; Note some customers have both legacy FFEL loans and direct loans

1,040

1,130 1,213 1,292

1,147

1,500 50

1,250

1,000

132012

Recipients M

Outstanding $B

1,366

+7% p.a.

Principal

Recipients

FSA-serviced loans

Externally serviced loans

▪ A small part of the portfolio consists of legacy FFEL loans that are serviced externally

– 5M recipients (Note that the

FFEL program ended in 2010, so this component will continue to decline)

▪ FSA services 84% of total outstanding federal student loans by principal

– 37M recipients

– 174M loans

SERVICERS MUST ALSO SUPPORT STUDENTS ACROSS 7 DIFFERENT

TYPES OF STATUS

Note: Includes recipients of Direct Loan and ED-held Federal Family Education Loan Program borrowers. Counts based at the loan level. As a result, recipients may be counted multiple times across varying loan statuses. Excludes <1M customers with status listed as “Other.”

SOURCE: NSLDS Q4 2017

Forbearance

In-school

Grace

Current

Loan status

Delinquent

Deferment

Default

18%

8%

16%

36%

9%

5%

8%

Description Recipients (M / %)

▪ Repaying in good-standing

▪ Behind payments (more than a year) – held at

DMCS

▪ Customer is attending school

▪ Not currently repaying for an approved reason

▪ Not currently repaying for an approved reason

▪ Behind payments (less than a year)

▪ Customer recently graduated school

Comments

▪ 16% of recipients are in default, but defaulted loans account for only 10% of outstanding principal given their smaller average size

▪ Expressed as a percentage of non-defaulted accounts (held at the servicers), 43% of accounts are currently repaying

▪ 7M recipients, representing approximately 17% of all borrowers, have suspended payments for an approved reason such as unemployment or re-enrollment in an approved academic program

▪ Of the 37 million customers being serviced by FSA, more than a third are in current repayment

▪ Use of more complex loan programs such as deferment and forbearance represents 17% of the loan portfolio

▪ Nearly a quarter of accounts have not begun repayments (in school or in grace)

ALTERNATE VERSION

THE FSA PORTFOLIO CONTAINS 8 CURRENT REPAYMENT PLANS, BUT

VARIATIONS AND COMBINATIONS ALONG WITH LEGACY PLAN SUPPORT

LEAD TO MORE THAN 30 IN TOTAL

SOURCE: NSLDS Q4 2017

Note: Includes both Direct Loan and ED-held Federal Family Education Loan Program loans, only includes customers who have elected a repayment plan (e.g., not in school, grace, or in default)

$57 B 8%

Standard $221 B 27%

Legacy

Extended $92 B 11%

Graduated $85 B 10%

Income-sensitive

<$1 B <1%

$192 B 23%

$27 B 3%

Income-contingent

$62 B 7%

$95 B 11%RePAYE

Income-based

PAYE

Eight repayment plans ($B / % of principal)

▪ Income-driven plans are the fastest growing plan type (with elections nearly tripling in the last three years)

▪ >30 permutations requires building significant complexity and customization into platforms

…result in over 30 permutations

CONSOLIDATION STANDARD REPAYMENT

STANDARD REPAYMENT

FIXED PAYMENT FIXED TERM

CONSOLIDATION GRADUATED REPAYMENT

GRADUATED REPAYMENT

GRADUATED 10-YEAR REPAYMENT

REVISED PAY AS YOU EARN PLAN

POST-REVISED PAY AS YOU EARN ALT PLAN

PAY AS YOU EARN REPAYMENT PA

PAY AS YOU EARN REPAYMENT P1

ICR REPAYMENT - FORMULA AMOUNT

ICR REPAYMENT - CAPPED AMOUNT

ICR REPAYMENT - POST-HERA/CCRA

INCOME-CONTINGENT REPAYMENT

IBR REPAYMENT - FINANCIAL HARDSHIP

IBR REPAYMENT - NO FINANCIAL HARDSHIP

IBR 2014 REPAYMENT - PFH

IBR 2014 REPAYMENT - NO PFH

INCOME-SENSITIVE REPAYMENT

ALTERNATIVE/OTHER (10+ PLANS)

>30

EXTENDED FIXED REPAYMENT

EXTENDED GRADUATED REPAYMENT

FIXED PAYMENT EXTENDED TERM

Tr ad iti on al re pa ym en t p la ns In co m e-dr iv en re pa ym en t p la ns

Presenter Presentation Notes Does not include in-school, grace, default

STANDARD REPAYMENT PLANS REPRESENT THE BULK OF LOANS BY

NUMBER OF LOANS

SOURCE: NSLDS Q4 2017

Result in over 30 permutations

<1 <1%

Standard 51 46%

12%Graduated

RePAYE

Income-sensitive

Income-contingent

Extended

Income-based

16%

9%

6%

6%

PAYE

1%

Eight repayment plans ….

(M loans / % of loans)

CONSOLIDATION STANDARD REPAYMENT

STANDARD REPAYMENT

FIXED PAYMENT FIXED TERM

CONSOLIDATION GRADUATED REPAYMENT

GRADUATED REPAYMENT

GRADUATED 10-YEAR REPAYMENT

REVISED PAY AS YOU EARN PLAN

POST-REVISED PAY AS YOU EARN ALT PLAN

PAY AS YOU EARN REPAYMENT PA

PAY AS YOU EARN REPAYMENT P1

ICR REPAYMENT - FORMULA AMOUNT

ICR REPAYMENT - CAPPED AMOUNT

ICR REPAYMENT - POST-HERA/CCRA

INCOME-CONTINGENT REPAYMENT

INCOME-SENSITIVE REPAYMENT

IBR REPAYMENT - FINANCIAL HARDSHIP

IBR REPAYMENT - NO FINANCIAL HARDSHIP

IBR 2014 REPAYMENT - PFH

IBR 2014 REPAYMENT - NO PFH

EXTENDED FIXED REPAYMENT

EXTENDED GRADUATED REPAYMENT

FIXED PAYMENT EXTENDED TERM

ALTERNATIVE (5 PLANS) / OTHER (>5 PLANS)

>30

Note: Includes both Direct Loan and ED-held Federal Family Education Loan Program loans, only includes customers who have elected a repayment plan (e.g., not in school, grace, or in default)

FSA’S PORTFOLIO IS SPREAD ACROSS THE FOUR CORE SERVICING

PLATFORMS AND DMCS

38 7 45

107.5 2.5

6 8

Loans MCustomers M Outstanding principal $B

Total

SOURCE: NSLDS Q4 2017

Se rv ic in g R ec ov er y DMCS

TIVAS / core servicing platform Licensed NFPs

364319 46

1,070

213181 32

NFPs TIVAS DMCS

Detailed system profiles

Additional materials

Appendix

Aid life-cycle phase

FSA MAJOR SYSTEMS ARCHITECTURE OVERVIEW

Internal data flows External data flows

EDWA

FSA ID

OCTS

CPS

FMS

FSAIC

ISE

NSLDS

COD

IHEs Loan servicers (9) PCAs (15+)

DMCS

Federal student aid

Partners

Awareness Application RepaymentDisbursement Default

SYSTEM DIAGRAM DEFINITIONS

Definition

ISE Integrated Student Experience Websites, headlined by studentaid.ed.gov, that provide customers and potential customers with information about the FSA environment

FSAIC Federal Student Aid Information Center Customer service call center that offers customers and potential customers live assistance with questions regarding FSA

FDMS Feedback Dispute Management System Manages the information and activities associated with the resolution of customer issues involving disbursement and servicing of loans

CPS Central Processing System Determines a borrower’s eligibility for loans and notifies students and educational institutions of the results of the eligibility calculation

NSLDS National Student Loan Database System FSA’s primary database of loans and grant data; also performs a variety of processing and reporting functions

COD Common Origination Disbursement System that originates securities and disburses funds

EDWA Enterprise and Data Warehouse Analytics FSA’s secondary…