How Student Loan Servicers Can Contain Pandemic Risk

This article was first published on April 7, 2020.

The historic $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act provides federal student loan borrowers complete payment deferment relief through September 30, 2020, during which all principal, interest, and fee payments will be halted. The relief applies to student loans owned by the Department of Education, which represent $1.5 trillion and 43 million borrowers (see Notes).

Loan servicers should prepare for potential risks that will impact operations, information security, customer support, human resources, and financial planning. Our paper offers key ways to be ready

Responding effectively to the US CARES Act in the midst of the novel coronavirus pandemic is a multidimensional and cross-enterprise challenge to servicers of student loans, a challenge that touches different parts and aspects of the organization. Successfully implementing the requirements of the Act and emerging from this crisis will require a coordinated set of actions across the business, operations, human resources, information security and finance teams.

Our paper prepares loan servicers for the following potential risks that will impact operations, information security, customer support, human resources, and financial planning.

In addition to the immediate steps that should be taken to implement the forbearance program, loan servicers should prepare for the following potential risks that will impact operations, information security, customer support, human resources, and financial planning.

1OPERATIONS

Enhance and expand quality assurance protocols. Firms should recognize this increased risk and expand and enhance their quality assurance procedures accordingly. Increase randomized sampling rates for audit and review as much as is practical, utilizing idle or underutilized resources from elsewhere in the enterprise.
2INFORMATION SECURITY AND CYBER RISK

Get ahead of fraudsters. Bad actors often see tough times such as these as an opportunity to take advantage of vulnerable customers. Servicers should take rapid action to equip customers with the information they need to avoid scams. Consider creating a page listing potential scams customers might receive, highlighting common characteristics of scams, and set up a hotline for customers where they can report scams.
3CUSTOMER SUPPORT AND SUCCESS

Prepare for the end of forbearance and potential payment shocks. The CARES Act grants deferment of all payments through September 30, 2020. However, it is not certain that borrowers will have financially recovered after this period. As a result, when borrowers exit the forbearance period, even though interest has not accrued during the relief period, they may suffer a payment shock if their cash flows are still recovering, and they are catching up on various other financial obligations. Loan servicers should try to anticipate this effect through analysis and proactive outreach to and check-ins with borrowers during the forbearance period in anticipation of its end.
4HUMAN RESOURCES AND REMOTE WORKFORCE MANAGEMENT

Ramp up remote onboarding of customer-support professionals Millions of borrowers will be seeking support and answers to questions in this rapidly evolving environment. This may create not only logistical challenges (for example, shipping telephone equipment to new hires), but also workflow challenges (such as needing to create a new workflow so that less experienced teams can be deployed effectively). During the forbearance period, servicers should not only aim to address inbound requests from borrowers, but also determine a strategy for proactively reaching out to borrowers to help them through this crisis and prepare for the end of the forbearance period.
5FINANCIAL PLANNING AND ANALYSIS

Plan for different scenarios and outcomes Servicers should plan for multiple scenarios — including different durations of forbearance — so they are prepared financially and operationally. Institutions should conduct a driver-based revenue and cost analysis and evaluate how the income statement might evolve under different scenarios and plan accordingly. These challenges will also apply — in varying degrees — to servicers of other types of student loans (such as private loans and Federal Family Education Loans), as well as private originators. These servicers and originators will also have their own unique challenges and considerations, such as offering other types of relief programs to borrowers in hardship and fielding requests and inquiries from customers frustrated that their loans are not covered under the Act.

In this time of great uncertainty, the CARES Act will have an impact on the student lending and servicing industry. Getting through this difficult period and providing support to customers — while still managing the financial fallout — will require institutions to go above and beyond the call of duty and to take swift and systematic action. The steps taken by student loan servicers in the next few weeks will determine how they emerge from the crisis — financially and reputationally.

Oliver Wyman stands ready to continue to support clients as they navigate this difficult situation. We are monitoring the COVID-19 events in real time and have compiled resources to help our clients and the industries they serve.