How Federal Loans Are Administered and Repaid Shapes Borrower Outcomes

Student loan servicing—the process that guides borrowers through repayment—is one of the most influential forces in the federal repayment system, yet it’s rarely part of public conversation. These behind-the-scenes operations help implement policy changes and manage over a trillion dollars in outstanding federal debt. When servicing works well, borrowers can stay on track with payments . When it doesn’t, the consequences can have lasting effects on borrowers.

This challenge is especially urgent today as federal student loan payments have fully resumed after a years-long pause. This means the ability of servicers to effectively adapt, communicate, and manage borrower accounts will help determine whether millions of borrowers succeed or fall into default. But the systems supporting this work were never built for the scale or complexity they now face. 

Scott Miller is a veteran of student aid policy and loan servicing operations who retired after more than 40 years of experience. His career spanned federal policy development, private-sector servicing operations, and senior leadership at the Pennsylvania Higher Education Assistance Agency (PHEAA), where he advised on the day-to-day operations of loan servicing. Miller offers a technical look under the hood at the infrastructure, regulatory constraints, and institutional decisions that continue to shape borrowers’ experiences.

This interview has been edited for clarity and length.

What are some of the biggest structural or technological hurdles shaping how borrowers experience repayment?

The biggest and most obvious challenge has been the rapid growth in the volume of student loans. In 1992, there was $147 billion in outstanding federal loans that needed to be serviced. That figure has since grown to over $1.6 trillion, more than 42% higher than just a decade ago. Expanding operations, systems, and policies to keep pace with that kind of exponential growth has been difficult and has led to a wide range of operational challenges.

When automated student loan servicing systems were first implemented on a large scale in the 1980s, they were often built on platforms originally designed for auto or other consumer loans. But student loans are unique. Features that can pause payments for a period of time, such as deferments and forbearances; rules around interest accrual and capitalization; and the specific rules and consequences around missed payments aren’t typical in other forms of consumer lending.

What are these automated systems like?

Most IT systems built specifically for student loan servicing—such as those developed by PHEAA and Sallie Mae—were written in the COBOL programming language, which is notoriously difficult to update and maintain. Changes require significant effort, and even minor programming errors can have unintended consequences for large numbers of borrowers. These systems also demand extensive testing to ensure accuracy, making routine updates complex.

Student loans are also subject to far more frequent statutory, regulatory, and sub-regulatory changes than most other consumer lending products. The system’s architecture simply wasn’t designed to accommodate that level of rapid change. Implementing new program rules, especially under tight deadlines set by Congress or the Department of Education, can lead to programming errors and problems for borrowers.

How much did that legacy infrastructure limit the government’s ability to reform the servicing system?

For years, most federal student loans were made through the Federal Family Education Loan Program (FFELP), where private lenders issued government-backed loans and servicers worked on behalf of those lenders.

Then, in 2010, in a major policy shift, Congress approved a shift to 100% direct lending, which began July 1 of that year. The Direct Loan program lets the federal government issue loans directly to students and manages the repayment process through contracted servicers. The timeline left little room for planning or system overhauls.

The shift to a 100% Direct Loan system happened so quickly that servicers had little choice but to modify their existing systems, which had been built for an entirely different program. Because of how the new contracts were structured, servicers were limited in their ability to invest in modern systems or improve the borrower experience. Instead, their primary focus became retooling their FFELP platforms as quickly as possible to meet Direct Loan requirements, including strict federal reporting and data security standards, without the time or funding to build something better from the ground up.

Did the age or design of servicing platforms affect how quickly and accurately borrower questions were handled? 

Yes. Because servicing systems were built on outdated technology dating to the 1980s, this made it difficult to quickly adapt to new requirements imposed by Congress or the Department of Education. When new laws or rules were introduced with tight deadlines, servicers often had to rush to make changes to their systems, sometimes without time for thorough testing. This led to two main issues: One, servicers would have to perform tasks manually, including calculating payments under new income-driven repayment plans, posting payments, or determining interest, which increased the risk of errors. And two, in some cases, changes were incorrectly programmed into the system, leading to loan processing mistakes. These errors sometimes could go unnoticed for months or years, only coming to light during audits or reconciliations, or when borrowers flagged them.

How did the Department of Education’s Office of Federal Student Aid (FSA) typically coordinate with and oversee student loan servicers?

In the early years of federal loan servicing, the FSA focused more on financial oversight and contract compliance than on how servicers supported borrowers or managed their systems. Meaningful oversight of servicing problems didn’t begin until the Consumer Financial Protection Bureau (CFPB) publicly highlighted serious issues.

The FSA eventually added more monitoring tools, like tracking call wait time and service levels and conducting regular reviews. But much of their oversight has remained reactive, rather than proactively preventing problems or verifying system changes.

One challenge is that the FSA’s Contract Office controls the funding and must approve any operational changes. These changes are formalized through “change requests” (CRs), which outline the work required and how much the servicer will be reimbursed. This process can delay needed improvements, especially under tight budgets.

How are best practices identified? Are CRs catalogued or shared in a common manual or registry?

Unfortunately, there’s no central, searchable database of CRs, even though they alter contract terms and could benefit from transparency. There’s also no common manual for Direct Loan servicing, despite past efforts to create one, including congressional direction. In contrast, the old FFELP had a common manual that promoted consistent interpretations and fair borrower treatment across servicers.

The FSA doesn’t operate in a shared or collaborative environment with servicers, and there’s been no serious effort to document or share best practices across the system. In fact, the Government Accountability Office has found that the FSA hasn’t always shared policy guidance consistently with all servicers. One reason may be the FSA’s emphasis on competition between servicers, which is central to its contract model. However, this approach limits collaboration and contributes to inconsistent servicing practices, meaning borrowers may be treated differently depending on who services their loans.

What overlooked lessons from the legacy servicing system should policymakers focus on today?

One major lesson is the missed opportunity to create a more collaborative, consistent system—like a common manual or shared best practices—to ensure that borrowers are treated equitably across servicers. Instead, competition was prioritized over coordination, often to the detriment of borrowers. The FSA also underestimated the true cost of quality servicing. Contracts were underfunded, limiting servicers’ ability to invest in modern systems or customer support. More funding and smarter incentives could have attracted tech innovators and improved service.

What would an ideal servicing experience look like for borrowers? 

An ideal system would be modern, consistent, and truly borrower-focused, offering tools like chat, push notifications, mobile access, QR codes for accessing forms or information, and 24/7 help. Borrowers shouldn’t have to struggle to get answers or navigate confusing systems. Centralized training, real-time support, and more flexible communication would go a long way. It’s time to move past outdated structures and build a system that actually meets the needs of today’s borrowers.