Two nonprofit student loan service providers have announced that they will stop servicing government student loans under the US Department of Education’s direct loan program after the end of the year.
FedLoan Servicing announced its announcement on July 8, 2021. And Granite State Management and Resources (GSMR) made its announcement on July 20, 2021.
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 service providers dropping out? And what should you do if one of your loans is currently being serviced by one of these companies? Here’s what you need to know.
Why do student loan providers drop out?
Student loan service providers are dropping out of the direct lending program for a number of 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 partnering with the government as challenging when providing service providers “Cannot receive timely guidance or decisions, cannot receive adequate financial investments to improve service levels, and be wrongly blamed by politicians for the government’s own political failures.”
When the loan service contracts were first issued over a decade ago, they were only modestly profitable for the lenders servicing the loans. For example, the 2014 loan service agreements pay lenders $ 0.45 to $ 2.85 per borrower per month, depending on the repayment status of the loan. The loan service providers are paid more when a borrower is current than when a borrower is in default.
The average service fee was around $ 2.04 per borrower per month before the pandemic and around $ 1.16 per borrower per month during the pandemic. The 2009 contracts averaged approximately $ 1.88 per borrower per month.
The cost of servicing a loan has risen since then, in part due to significantly increased training, legal, and compliance costs. The direct lending program has also become more complicated. Here are three significant examples:
More income-oriented repayment plans
PAYE and REPAYE were both added as IDR plan options over the past decade. There are many differences between the various income-based repayment plans. These include differences in:
- Percentage of Disposable Income
- Definition of discretionary income
- Duration of the repayment period
- Eligibility criteria
- Payment limits
- Marriage punishments
- Minimum payments
Finally, there are differences as to whether and to what extent the interest is paid by the federal government during the first three years and the remaining term.
More borrowers filed for public service loan waiver (PSLF) applications than expected
PSLF was in much greater demand than expected. And many applicants were not or not yet eligible borrowers.
Some borrowers had the wrong amortization plans or the wrong loan programs. Others did not work in a qualifying public service or have not yet made sufficient qualifying payments. In some cases, payment history information from previous credit service providers was not transmitted correctly.
Related: How to Avoid the Biggest PSLF Errors That cause Rejection
Past and (proposed) future program changes
Hundreds of “amendments” from the US Department of Education have increased the cost of servicing federal student loans in the direct loan program. And the prospect of future service changes, such as the next-generation student loan service platform, may add to loan service costs as servicers have to adapt their systems to interface with the new platform.
All of this has served as a distraction from the core task of non-profit public service providers. Every business activity of the non-profit loan service providers must support their public service. The servicing of loans under the direct loan program no longer contributes to this mission from a business or reputation point of view.
These nonprofit service providers will continue to service private student loans and will continue to operate government grants, scholarships, college planning, college admission, FAFSA prep and financial education programs. They just won’t service federal direct loans.
How will these servicer failures affect borrowers?
The latest announcements affect more than 10 million borrowers. This means that more than a quarter of the borrowers in the direct loan program will have to be transferred to new student loan service providers.
This leaves a total of eight student loan service providers, 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 serve most borrowers and may have the capacity to absorb a large surge in service volume.
The U.S. Department of Education may need to hire additional service providers like the Trellis Company (formerly known as Texas Guaranteed Student Loans or TG) and other state guarantee agencies, especially if the trend of exiting existing student loan service providers continues.
The increased servicing volume can subsequently be reduced if some loans are canceled by the federal government. The $ 10,000 forgiveness per borrower would pay off the federal student loan debt of one-third of direct borrowers. And the $ 50,000 forgiveness would cancel all state student debt for 80% of direct borrowers.
Transferring borrowers to new service providers can create problems. In addition to confusing the borrower, there is the potential for lost records, late fees, and missed payments. Borrowers who have signed up for Autopay will also need to sign a new contract with their new servicer.
What Should Borrowers Do?
Borrowers should confirm that the loan service provider has their current contact details. The current and new loan service providers will send important information to the borrower during the transition.
Borrowers should also keep a copy of their payment history, correspondence, and other student loan records. This provides protection in the event that some records are lost when their credits are transferred to a new service provider. This is especially important for borrowers with income-oriented amortization plans and borrowers seeking public service lending. Borrowers can log into the loan service provider’s website to download their payment history.
If you are tracking PSLF, this is the time to submit your Employment Certificate form for an up-to-date count of your qualifying payments. You should know this before transferring the PSLF program to a new student loan service provider. Escalate any disputes related to the number of eligible payments by filing a recount appeal.
Finally, before and after the servicing change, borrowers should receive a free copy of their credit reports from AnnualCreditReport.com. Incorrect information can sometimes be reported to credit reporting agencies during a service transition.
Service providers are stepping out of the direct lending program because they feel it has gotten tougher or is causing more damage to their reputations as nonprofits than is worth their profits. You are upset with the Department of Education for making its loan program so cumbersome. And they express their displeasure in the most dramatic way they can – by walking away.
Unfortunately, millions of borrowers are in the crosshairs between the federal government and its service providers. And each of these borrowers must take additional steps to ensure that their records are correctly transmitted during the transition.
It’s also important to note that the risk of student loan fraud increases when maintenance contracts change hands. Student loan scams are charged for services that the loan service providers offer free of charge. Borrowers should be wary of any information that is not provided by the Department of Education, their current or new service provider, especially if they are asked to pay a fee.