The Department of Education issues Federal loans to students, but it doesn’t work with borrowers directly. Instead, it hires outside loan servicers to shoulder the administrative burden of educational debt.
The Federal Student Aid office currently works (or has worked) with eleven loan servicing companies. Borrowers typically work with one loan servicing company for the life of their loans. They receive their initial disbursement from the company. And 10 to 30 years later, they receive a celebratory letter from the same servicer when they pay off the loans.
But not every borrower has that experience. The U.S. Department of Education can transfer a loan to a different loan servicer at any time (and historically, they've done this about every 5-10 years for some borrowers). Here’s what you need to know if your student loan servicer changes.
What Does A Student Loan Servicer Do?
When borrowers take out Federal student loans for the first time, the Department of Education assigns the borrower to a loan servicer. From that point forward, borrowers access their loan account through the loan servicer’s website or app.
Loan servicing companies disburse payments, send out bills, and collect payments from borrowers. If you want to change your repayment plan or apply for deferment or forbearance, you'll need to work through your loan servicer as well.
Currently, one loan servicing company, FedLoan Servicing, tracks progress towards Public Service Loan Forgiveness (PSLF) and other loan forgiveness programs.
Why Do Student Loan Servicers Change?
There are various reasons that student loan servicer changes can happen. Sometimes the move is initiated by the borrower. In other cases, the Department of Education may force the change. We'll look at a few examples below.
The government doesn't allow borrowers to just switch federal loan servicers at any time. In other words, you can't just demand to be moved to a new company if you're unhappy with the service you're receiving.
But there are a few actions borrowers may take that will lead to a servicer change. First, borrowers that consolidate student loans may select their loan servicer during the consolidation. Following consolidation, the loans will be transferred to the loan servicer you chose.
Another example would be if you decide to pursue Public Service Loan Forgiveness (PSLF). Once you join the program, your loans will automatically be transferred to FedLoan Servicing.
A final example is applying for disability discharge. NelNet is the current loan servicer that handles all disability discharge requests, and your loans would be transferred to NelNet if you're pursuing this.
Department Of Education Actions
Sometimes loan servicers can change for reasons outside of the borrowers control. The Department of Education may simply decide not to renew your servicer's contract. And when the current contract expires, your account will need to be moved to a new company.
These types of changes don't happen often. But, in June 2020, the Department of Education announced that it had signed new servicer contracts with five companies:
- Edfinancial Services
- F.H. Cann & Associates
- MAXIMUS Federal Services
- Missouri Higher Education Loan Authority (MOHELA)
- Texas Guaranteed Student Loan Corporation (Trellis Company)
Only Edfinancial Services and MOHELA are currently servicing federal student loans. So unless your loans are with either of those companies, there's a strong chance that you will be changing servicers in the near future.
In a later announcement, the Department of Education promised that it wouldn't be moving any borrowers to new servicers in 2020. However, when these changes do kick in (likely throughout 2021), million of student loan borrowers could be forced to switch servicers.
This is due to many issues, but given the Covid-19 Student Loan Relief programs, this seems like a good idea to not confuse borrowers.
What Happens When A Student Loan Servicer Changes?
When your student loan servicer changes, you don’t have to worry about “starting over” with new loans. Student loans don't change payment terms when the servicer changes. And prior payments should all be accounted for.
Loan servicers are supposed to make the transition from one servicer to the next as seamless as possible. When student loan servicer changes happen, StudentAid.gov says these are the steps that should be taken:
- Current servicers send emails to borrowers informing them about the transfer.
- Current servicers transfer loans to the new servicer.
- Borrowers receive welcome letters from the new servicer.
- Borrowers account information will be transferred to the new servicer, so the new servicer’s website will accurately reflect payment history.
- During the transition, both servicers work together to make sure all payments are credited to the borrower’s loan account.
You may experience a few weeks of miscommunication or incomplete records with your new loan servicer. But everything should be sorted out as the transition comes to a close.
What Should I Do If My Student Loan Servicer Changes?
As a borrower, you don’t need to do too much if your loan servicer changes. You will simply create an online account with the new loan servicer. This will allow you to set up auto draft or bill pay with the new loan servicer. It will also allow you to keep track of your loans.
And, of course, you will need to send your monthly payment to the new loan servicer. The easiest way to do this will be through the loan servicer’s online portal. However, you can also send checks to the new loan servicer once it confirms your account.
However, we strongly recommend that you have accurate records of your loans prior to any switch. This means having copies of your statements and loan balances - just to make sure your records are accurate after the switch!
What Can I Do If I'm Unhappy With My New Servicer?
When your loan servicer switches, you may have the ability to change servicers on your own terms. A primary method for switching servicers is by consolidating federal loans. When borrowers consolidate their loans, they have the option to select any loan servicing company.
If consolidating isn’t an option for you, you can make a complaint about your servicer through the Department of Education’s Federal Student Aid Feedback System. You can also file a complaint with the Consumer Financial Protection Bureau (CFPB) or Better Business Bureau (BBB).
Depending on your state, you may also have the option of a state ombudsman to help you with your student loans. For example, as part of California's Student Loan Borrowers' Bill Of Rights, there will be a new ombudsman for borrowers in the state to contact for assistance.
Finally, you could consider refinancing your federal student loans with a private lender. You may be able to lower your interest rate during a student loan refinance. But you'll also lose out on benefits like Income-Driven Repayment (IDR) and federal forgiveness programs.
You shouldn't refinance federal student loans just to get better customer service. But if you're wanting to pay down your loans as fast as possible with the least interest, refinancing could help. And if your service improves too, that's just icing on the cake. These are our favorite student loan refinancing companies of 2020.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.