NEW YORK--(BUSINESS WIRE)--The Department of Education announced at the end of August that it had renegotiated the terms of its student loan servicing contracts, which may benefit servicers with strong track records in delinquency and default prevention, according to Fitch Ratings. The revised terms follow the DOE's decision in June 2014 to exercise its option and extend these contracts through June 2019.
The new contracts include revised performance metrics and an updated allocation methodology, while providing incentives for keeping borrowers current and reducing delinquencies. We believe these changes could benefit the top performing servicers through revised account pricing and greater allocations of ongoing federal student loan volume.
Fitch believes that Navient Corp. (Navient, BB/Stable) could benefit from the revised terms given the company's strong track record in delinquency and default prevention. Navient could also benefit from a revised loan allocation methodology that eliminates the school survey and reduces the overall survey weightings in the performance scorecard. Navient has historically lagged its peers in these metrics. As of June 30, 2014, Navient serviced approximately 5.8 million accounts related to the DOE servicing contract and earned $62 million in servicing revenue through first-half 2014.
That said, the DOE also has separate contracts with seven not-for-profit entities to service student loans. According to the DOE and Nelnet Inc., these servicers will begin receiving allocations of new borrower accounts in early 2015. Previously, they had serviced existing loans only. Fitch expects this to at least partly reduce any benefits generated by the four current primary servicers: Navient, Nelnet, Great Lakes Educational Loan Services, Inc., and the Pennsylvania Higher Education Assistance Agency.
The new servicing contracts include a more granular pricing structure, as well as a tiered rewards system that provides servicers with additional compensation if certain delinquency metrics are achieved. The revised pricing structure reduces the fees paid for servicing delinquent loans and loans in forbearance, while increasing fees paid on current accounts.
Other notable revisions include changes to the performance scorecard, including new allocation metrics and revised weightings. The revised scorecard includes three new categories based on the percentage of accounts that are current, delinquent and in default. This compares to the previous methodology, which included two performance metrics based on defaults. The new categories are also more heavily weighted in the scorecard at 60%, up from 40% previously.
Furthermore, the revised allocation methodology reduces the survey weighting in the performance scorecard to 40% from 60%. The primary driver of the reduction was the elimination of the school survey metric that previously had been weighted at 20%. Other changes include an increase in the borrower survey weighting to 35% from 20% and a reduction in the federal personnel survey weighting to 5% from 20%.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.