HOW STUDENT LOAN SERVICERS CAN CONTAIN PANDEMIC RISK - Davin Chow Vivian Merker Ege Gürdeniz - Oliver Wyman
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HOW STUDENT LOAN SERVICERS CAN CONTAIN PANDEMIC RISK Davin Chow Vivian Merker Ege Gürdeniz
How student loan servicers can contain pandemic risk
The historic $2.2 trillion Coronavirus Aid, Relief
and Economic Security (CARES) Act provides SEC. 3513. TEMPORARY RELIEF
federal student loan borrowers complete payment FOR FEDERAL STUDENT LOAN
deferment relief through September 30, 2020, during BORROWERS.
which all principal, interest, and fee payments will be
(a) IN GENERAL.—The Secretary
halted. The relief applies to student loans owned by
shall suspend all payments due
the Department of Education, which represent
for loans made under part D
$1.5 trillion and 43 million borrowers.1
and part B (that are held by the
Responding effectively to the CARES Act in the Department of Education) of title
midst of the novel coronavirus pandemic is a multi- IV of the Higher Education Act of
dimensional and cross-enterprise challenge to 1965 (20 U.S.C. 1087a et seq.; 1071
servicers of student loans, a challenge that touches et seq.) through September 30,
different parts and aspects of the organization. 2020
Successfully implementing the requirements of
(b) NO ACCRUAL OF INTEREST.—
the Act and emerging from this crisis will require
Notwithstanding any other
a coordinated set of actions across the business,
provision of the Higher Education
operations, human resources, information security
Act of 1965 (20 U.S.C. 1001 et
and finance teams.
seq.), interest shall not accrue on
In addition to the immediate steps that should be a loan described under subsection
taken to implement the forbearance program, loan (a) for which was suspended for
servicers should prepare for the following potential the period of the suspension …
risks that will impact operations, information
security, customer support, human resources, and
financial planning.
OPERATIONS
Enhance and expand quality assurance protocols
Deploying a vast program like the CARES Act in such a short timeframe is a high-risk undertaking
prone to errors even under normal circumstances. The task, however, is made more challenging
due to the fact that institutions have to implement the requirements of the Act even as they face
other COVID-19-related challenges and pressures (such as managing with a remote workforce).
Unchecked, errors could lead to qualifying borrowers being erroneously billed or accruing
interest during the forbearance period, which could have legal, reputational, and financial
repercussions for loan servicers while creating stress for borrowers.
1 Source: National Student Loan Data System (NSLDS). As of Q1 2020. Federal student loans that were issued by private
lenders pre-2010 under the Federal Family Education (FFEL) Program are not covered except for those that have since been
transferred to the ownership of the government (e.g., through a crisis era program)
© Oliver Wyman 2How student loan servicers can contain pandemic risk
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. Where errors
and patterns of errors are found, undertake a swift root-cause analysis and make changes to
processes, procedures, or technology.
INFORMATION 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. On March 20 — in the earlier days of self-isolation and work-from-home
mandates in the US — the FBI had already issued an alert, saying they are seeing a rise in
fraudulent pandemic-related schemes. Such ploys are expected to continue and increase as the
effects of the pandemic continue.
In the context of the CARES Act, fraudsters might carry out phishing attacks impersonating loan
servicers and tricking borrowers into paying a fee in exchange for assistance securing loan relief.
Criminals can also attack and steal personal information through similar schemes.
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 encounter, highlighting
common characteristics of scams (for example, “As your servicer, we will never charge you a
fee for any assistance related to the CARES Act”), and set up a hotline or mailbox for customers
where they can report scams. Existing controls against unauthorized account access (such as
strong customer authentication, including multi-factor authentication) should be reviewed and
strengthened if appropriate.
In addition to protecting customers against scams, servicers need to take steps to protect
themselves against heightened cyber risk and information loss. For Oliver Wyman’s views on how
cyber risk is growing in the pandemic era and what institutions should be doing, visit our latest
publication on the topic here.
© Oliver Wyman 3How student loan servicers can contain pandemic risk
CUSTOMER 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.
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. As part of their
communications, servicers should follow a standard set of procedures and ensure they treat all
customers compliantly and consistently.
HUMAN 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. To manage this tsunami effectively, servicers are likely to need to hire and ramp up
customer support professionals remotely.
This may create not only logistical challenges (for example, shipping telephony 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. The outbound
communications efforts will also put additional pressure on customer-support professional
onboarding and training.
© Oliver Wyman 4How student loan servicers can contain pandemic risk
FINANCIAL PLANNING AND ANALYSIS
Plan for different scenarios and outcomes
The outcomes of the COVID-19 pandemic are uncertain, especially as to how long social-
distancing and stay-at-home mandates remain in place, which will have a significant impact
on employment and borrower ability to pay. Servicers should plan for multiple scenarios —
including different durations of forbearance — so they are prepared financially and operationally.
For Oliver Wyman’s thinking on scenarios, visit our latest materials the topic here.
The situation is bound to have both revenue and cost impacts, particularly as the pandemic
spreads and its effects are prolonged. Institutions should conduct a driver-based revenue and
cost analysis and evaluate how the income statement might evolve under different scenarios
and plan accordingly.
Given its scope, servicers of covered federal student loans will be most directly impacted by
the CARES Act and have to address the related challenges. However, 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. Such institutions should
consider the challenges we have pointed out and take appropriate action. 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.
CONCLUSION
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. Please visit and continue to monitor
the Responding To Coronavirus Hub for latest materials and updates.
© Oliver Wyman 5Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. For more information please contact the marketing department by email at info-FS@oliverwyman.com or by phone at one of the following locations: Americas EMEA Asia Pacific +1 212 541 8100 +44 20 7333 8333 +65 6510 9700 Copyright © 2020 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman. Oliver Wyman – A Marsh & McLennan Company www.oliverwyman.com
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