Editor’s note: On July 8, 2021, FedLoan Servicing notified the Department of Education that it no longer wished to service federal student loans beyond the expiration of its contract on December 2021. Since MOHELA uses the COMPASS™ system developed by FedLoan’s parent company PHEAA and also uses PHEAA subsidiary AES as a backup servicer, we anticipate that MOHELA could likely be the company that could take over management of the PSLF program from FedLoan Servicing. As of July 2021, no announcements have been made about firing other loan servicing companies.
Big student loan servicer changes are coming. The U.S. Department of Education’s Office of Federal Student Aid (FSA) announced it signed contracts with five companies to service federal student loans under the previous administration. Recently, Navient and FedLoan Servicing announced their pending departure. However, FedLoan Servicing will continue its contract through December 2022. This means your loans may change student loan servicers in the near future.
As the singer Jimmy Dean once said, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” Get ready to adjust your sails, but don’t break a sweat just yet, though. Let’s talk through it.
Transitioning loan servicers is currently the biggest student loan change
This upcoming change isn’t the first of attempted improvements to the federal student loan servicing system. Back in March 2019, there were updates to the FSA ID log-in system making it easier to access account information.
In late-February 2020, the new streamlined studentaid.gov website launched which consolidated all student loan and debt aid resources into a single, more user-friendly site.
Now, the Department of Education has set its sights on a BIG objective that borrowers have been longing for. This includes improved customer service, and holding servicers accountable for their performance in managing federal student loans. Former Education Secretary Betsy DeVos believes this goal starts with firing the old four major servicers and replacing them.
“A loan servicer is a company that we assign to handle the billing and other services on your federal student loan on our behalf, at no cost to you. Your loan servicer will work with you on repayment options (such as income-driven repayment plans and loan consolidation) and will assist you with other tasks related to your federal student loans.” – Federal Student Aid website
Unfortunately, many servicers have not handled their job very well, and we doubt this change will improve anything.
Who are the new student loan servicers?
The five new companies taking on this responsibility include:
- Edfinancial Services LLC
- F.H. Cann & Associates LLC
- MAXIMUS Federal Services Inc.
- Missouri Higher Education Loan Authority (MOHELA)
- Texas Guaranteed Student Loan Corporation (Trellis Company)
The only companies we’ve heard of before are MOHELA and EdFinancial.
MOHELA actually uses the COMPASS software developed by PHEAA to manage its student loan accounts. PHEAA is the parent company of the troubled FedLoan Servicing.
Rather than improving servicing for borrowers, we view this as giving the job to smaller and less experienced companies that would use similar software as the existing companies have used.
In fact, we expect pure chaos if the Department of Education goes through with its plans. That chaos doesn’t have to affect you though.
The difference between your loans being transferred vs. sold
Your student loans aren’t being sold with this impending servicer change. Instead, your federal loan servicer’s contract with the Department of Education may just be expiring. The Department hires a company and assigns them the duty of handling your billing and other services on your federal student loan(s) on its behalf through a servicing contract.
Many of our readers have experienced their loans being transferred to another servicer at some point and tell us that their loans were “sold”. Again, not the case, but that IS what it can feel like.
When your student loan servicer changes, there’s an unavoidable disruption. You have to create a new user/password for the new company’s online portal. You’ll need to update billing information. Your monthly due date may change. Everything is new and different.
Sometimes, these changes can result in lower income-driven repayment (IDR) enrollment success rates due to transition hiccups or processing delays. This generally translates into higher default rates.
The middle of a pandemic is a poor time to process a change of this magnitude.
What to expect if your student loans are transferred to a new servicer
According to studentaid.gov, if your loans are transferred to a new servicer, student loan borrowers can expect the following:
- You’ll receive an email or a letter from your assigned servicer to inform you about the transfer.
- You’ll receive a welcome letter from the new servicer after the new servicer receives your loans. This notice will provide you with the new servicer’s contact information and inform you of the actions you may need to take.
- All of your loan information will be transferred from your assigned servicer to your new servicer. But you may only be able to see online information that covers the period since your new servicer took your loans over.
- There’ll be no change in the terms of your loans.
- Your previous loan servicer and new loan servicer will work together to make sure all payments you make during the transfer process are credited to your loan account with the new servicer.
That’s nice language. But, in practice, we have seen very poor performance with accurate record-keeping whenever an old servicer sends loans to a new one. For example, when a borrower submits an ECF form for the PSLF program.
What to do after receiving a welcome letter from your new servicer
Student loans can bring with them a significant amount of anxiety on their own. Getting a welcome letter from a new servicer adds a new layer of stress. Here’s what to do to ensure a smooth transition:
- Begin sending your loan payments to your new servicer. If you use a bank or bill-pay service to make your loan payments, update the new servicer’s contact information with the bank or bill-pay service.
- Follow the new servicer’s instructions for creating an online account so that you can easily communicate with the new servicer and keep track of your loan account.
Again, I’ve only ever heard of MOHELA and EdFinancial out of the five new companies.
Your new servicer would have to perform a massive amount of work while Nelnet is suing the Department of Education to delay the transition, thus making the switchover more uncertain.
Student loan servicer chaos likely caused another extension of the pandemic student loan relief
We predicted the extension of the payment and interest pause due to the impending elimination of FedLoan Servicing. Otherwise, borrowers would have had to update their contact information twice. There could still well be chaos. But it reduces the risk to have borrowers know for sure when their payments begin again.
Repayment will begin after January 31, 2022. Secretary of Education Cardona dubbed this as the “final extension.”
For PSLF borrowers: Download your payment history
Currently, PSLF is the responsibility of FedLoan Servicing, a branch of the Pennsylvania Higher Education Assistance Agency (PHEAA). But it’s unknown long term who’ll be responsible for the Public Service Loan Forgiveness program.
FedLoan Servicing will retain the role of exclusive PSLF servicer through 2022. Potentially, there could be some re-branded version of the company under PHEAA beyond that.
PHEAA uses the loan servicing software known as COMPASS. MOHELA, one of the five companies awarded a new servicing agreement, uses COMPASS as well. Long term, MOHELA might become a FedLoan replacement candidate.
Before the end of the year, save a PDF or take pictures of your payment history to-date and save to the cloud. Don’t stress about this proof though. A servicer change won’t affect your NSLDS record. It shows your PSLF payment count up until the last time you submitted an Employer Certification Form (ECF). To be safe, go ahead and submit a new ECF form by November 1 to get your PSLF payments counted to-date as well.
You can also download up-to-date information on all of your federal loans on studentaid.gov through the “My Aid” page. Click on “My Aid Data.” This information is what we typically ask our clients to reference to verify information on their loan types, loan origination dates, interest rates and other information.
If your PSLF payment history is under review for whatever reason by FedLoan, ideally that review needs to be completed before any servicer changes. The good news is it doesn’t seem like FedLoan’s borrowers will be affected right now.
For non-PSLF borrowers
We have historically recommended using Great Lakes as a servicer if you’re not pursuing PSLF, because our surveys found that Great Lakes has much higher satisfaction scores at 3.8 out of 5 stars. Even Nelnet scored a respectable 3.3 out of 5 stars on our surveys.
Navient and FedLoan both scored much lower at around 2.2 out of 5.
Truthfully, we don’t understand the rationale behind getting rid of Great Lakes and Nelnet when they are likely far more capable and competent than the proposed replacement servicers.
So what happens if your new servicer is a lot more like Navient and FedLoan, and less like Great Lakes or Nelnet??
Answer: Don’t panic.
Navient and FedLoan are fine as long as you don’t have problems or lots of questions. In other words, if you don’t call them, you’re in good shape.
Otherwise, you’ll get really confused, like when a client told us they talked to FedLoan’s PAYE department (which doesn’t exist). Or when a Navient representative told our client that they didn’t need to submit an ECF form for PSLF until after working in public service for five years.
Whomever your servicer becomes, keep in mind that they exist to collect on your student loans and handle simple stuff. Advanced repayment strategies will be outside of any of these new companies’ wheelhouses.
They’re not obligated to help you find the best student loan repayment options for you. That’s why it can be really helpful to hire a third-party expert like Student Loan Planner. We can help you navigate through your options and find the best student loan payoff plan for your individual situation. You don’t have to do this alone and there is an optimal solution to your problem. We’re here to help.
Borrowers with FFEL or private loans likely unaffected
These servicer changes won’t affect you if you have FFEL or private student loans.
Your FFEL loans might continue to be bought and sold. But most FFEL borrowers are better off consolidating their loans into Direct Loans. If you do that anytime in the next few months, your new consolidation loans would probably move over to a new servicer.
Private student loans generally don’t change servicers like federal ones seem to do.
Refinancing student loans to avoid a servicer change
If you don’t want to deal with this servicer switch and there’s little to no benefit in keeping your loans federal (i.e. no forgiveness opportunity available to you and you don’t rely on the flexibility of IDR plans), refinancing might make sense to simplify your situation.
Check out our cash-back refinancing offers for favorable interest rates and terms that can work for you.
Just wait to do this until the payment and interest freeze ends.
Obviously, don’t even consider this option if taxable or PSLF forgiveness is a better long term strategy.
You’d much rather have a lousy servicer and get to pay 10% of your income on a debt that’s much larger than your income, than pay thousands of dollars a month to a competent student loan servicer.
Why you don’t need to worry about your servicer changing
Great Lakes and Nelnet are part of the same company and neither have been extended the opportunity to continue servicing federal student loans. Nelnet was awarded a servicing contract by the Department of Education in June of 2009 and as of March 31, 2020, they were servicing $185.5 billion of student loans for 5.5 million borrowers. Great Lakes was servicing $243.2 billion for 7.3 million borrowers under its own contract.
Nelnet is likely going to sue. Nelnet CEO Jeff Noordhoek expressed, “We are frustrated and disappointed by this decision and the lack of transparency in the process and will pursue every legal avenue available to ensure that students have the high-quality service they’ve come to expect from us.”
Their goal in doing this is to get the Department of Education to extend their contract until maybe Biden wins the Presidency.
I think it’s more likely than not that we’ll see this contract get aggressively challenged in court and in the political realm.
If your servicer changes, you don’t need to panic or worry. Your forgiveness credit gets tracked in the NSLDS files found on studentaid.gov.
Your servicer actually pulls data from the federal database. Sometimes it makes mistakes, which can be corrected with a complaint to the CFPB or an email to your Senator or Congressperson.
I’m confident we’ll see a ton of questions about this servicer change from clients and readers. That’s because I’m confident that the Department of Education will manage this changeover very poorly, if history is any guide.