Two non-profit student loan servicers have announced that they will not continue servicing federal student loans in the U.S. Department of Education’s Direct Loan program after the end of the year.
FedLoan Servicing is operated by the Pennsylvania Higher Education Assistance Agency (PHEAA). And Granite State is operated by the New Hampshire Higher Education Association Foundation (NHHEAF) Network.
Why are these student loan servicers dropping out? And what should you do if any of your loans are currently serviced by one of these companies? Here's what you need to know.
Why Are Student Loan Servicers Dropping Out?
Student loan servicers are dropping out of the Direct Loan program for several reasons, including cost, complexity and the current and future lack of support from the U.S. Department of Education.
Scott Buchanan, Executive Director of the Student Loan Servicing Alliance, described the government servicing partnership as challenging when servicers "can’t get guidance or decisions in a timely manner, don’t receive appropriate financial investment to drive service levels, and get wrongly blamed by politicians for the government’s own policy failures."
When the loan servicing contracts were first issued over a decade ago, they were only modestly profitable to the lenders servicing the loans. The 2014 loan servicing contracts, for example, pay the lenders $0.45 to $2.85 per borrower per month, depending on the repayment status of the loan. The loan servicers are paid more when a borrower is current than when a borrower is delinquent.
The average servicing fee was about $2.04 per borrower per month before the pandemic and is about $1.16 per borrower per month during the pandemic. The 2009 contracts averaged about $1.88 per borrower per month.
The cost of servicing a loan has increased since then, in part because of significantly increased training, legal and compliance costs. The Direct Loan program has also become more complicated. Here are three significant examples:
More Income-Driven Repayment Plans
- Percentage of discretionary income
- Definition of discretionary income
- Length of the repayment term
- Eligibility criteria
- Payment caps
- Marriage penalties
- Minimum payments
Finally, there are differences in whether and how much of the interest is paid by the federal government during the first three years and the remainder of the repayment term.
More Borrowers Applied For Public Service Loan Forgiveness (PSLF) Than Expected
PSLF has been far more sough-out than anticipated. And many applicants have been ineligible or not-yet-eligible borrowers.
Some borrowers were in the wrong repayment plans or the wrong loan programs. Others didn't work in a qualifying public service job or haven't made enough qualifying payments yet. In some cases, payment history information hasn't correctly transferred from previous loan servicers.
Past And (Proposed) Future Program Changes
Hundreds of “change requests” from the U.S. Department of Education have added to the cost of servicing federal student loans in the Direct Loan program. And the prospect of future servicing changes, such as the Next Gen student loan servicing platform, may increase loan servicing costs as the servicers are required to adapt their systems to interface with the new platform.
All of this has served as a distraction from the non-profit servicers’ core public service mission. Any business activity engaged in by the non-profit loan servicers must support their public service mission. Servicing loans in the Direct Loan program no longer contributes to that mission from a business or reputational perspective.
These non-profit servicers will continue servicing private student loans and continue to operate state grant, scholarship, college planning, college access, FAFSA preparation and financial literacy programs. They just won’t be servicing federal Direct Loans.
How Will These Servicer Drop-Outs Impact Borrowers?
The recent announcements affect more than 10 million borrowers. This means that more than a quarter of the borrowers in the Direct Loan program will need to be transferred to new student loan servicers.
There will be a total of eight student loan servicers remaining, including ECSI, Great Lakes Education Loan Services, Inc., HESC/Edfinancial, Maximus Federal Services, Inc., MOHELA, Navient, Nelnet and OSLA Servicing. Great Lakes, Nelnet and Navient service the most borrowers and may have the capacity to absorb a big increase in servicing volume.
The U.S. Department of Education may have to bring on additional servicers, such as Trellis Company (previously known as Texas Guaranteed Student Loans or TG) and other state guarantee agencies, especially if the trend of existing student loan servicers dropping out was to continue.
The increased servicing volume may subsequently be reduced if some loans are forgiven by the federal government. Forgiving $10,000 per borrower would erase the federal student loan debt of a third of Direct Loan borrowers. And forgiving $50,000 would cancel all the federal student debt of 80% of Direct Loan borrowers.
Transferring borrowers to new servicers can cause problems. In addition to borrower confusion, there's the potential for lost records, late fees and missed payments. Borrowers who signed up for autopay will also need to execute a new agreement with their new servicer.
What Should Borrowers Do?
Borrowers should confirm that the loan servicer has their current contact information. The current and new loan servicers will be sending important information to the borrower during the transition.
Borrowers should also save a copy of their payment history, correspondence and other student loan records. This provides protection in the event that some of records are lost when their loans are transferred to a new servicer. This is particularly important for borrowers in income-driven repayment plans and borrowers who will be seeking Public Service Loan Forgiveness. Borrowers can login to the loan servicer’s website to download their payment history.
If you're pursuing PSLF, you should should file your Employment Certification Form to get an up-to-date count of your qualifying payments now. You'll want to know this before the PSLF program is transferred to a new student loan servicer. Escalate any disputes concerning the number of qualifying payments by submitting an appeal for a recount.
Finally, borrowers should get a free copy of their credit reports from AnnualCreditReport.com before and after the servicing change. Incorrect information can sometimes be reported to credit bureaus during a servicing transition.
Servicers are dropping out of the Direct Loan program because they feel it's become more of a hassle or causing more harm to their reputations as non-profits than it's worth to their bottom lines. They're upset with the Department of Education for making its loan program so cumbersome. And they're voicing their displeasure in the most dramatic way they can -- by walking away.
Unfortunately, millions of borrowers are caught in the cross-hairs between the federal government and its servicers. And each of those borrowers will need to take extra steps to ensure they're records are accurately transferred during the transition.
It's also important to note that the risk of student loan scams increases when servicing contracts are changing hands. Student loan scams charge fees for services that the loan servicers provide for free. Borrowers should be wary of any information that does not come from the U.S. Department of Education, their current servicer or the new servicer, especially if they're asked to pay a fee.
Mark Kantrowitz is an expert on student financial aid, scholarships, 529 plans, and student loans. He has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, U.S. News & World Report, MarketWatch, Money Magazine, Forbes, Newsweek, and Time. You can find his work on Student Aid Policy here.
Mark is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. He previously served as a member of the board of directors of the National Scholarship Providers Association. Mark has two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU).