The exit of another company that services federal student loans leaves more borrowers in transition just as they get ready to deal with resuming payments in February.
- Navient, which manages payments on 5.5 million federal student loans, plans to transfer them to another servicer before the end of the year.
- Three big servicers have now bowed out of the business in recent months, affecting a total of almost 16 million borrowers.
- The upcoming transition adds another layer of uncertainty as borrowers get ready for the end of a 22-month freeze on student loan obligations in February.
- Servicers say it’s hard to make money in the federal student loan business, while some borrowers have complained their servicers are confusing and negligent.
Navient, which manages the accounts of 5.5 million federal student loan borrowers, said last week it would be transferring that part of its business to Maximus Federal Services, which also handles federal student loans that are in default. Navient, which also has a private student loan business, anticipates the deal going through before the end of the year, though it still has to be approved by the government. The servicer first indicated plans to stop working with the Department of Education in July 2020, but the timing of the transition was unclear.
Borrowers’ loan terms and monthly payments won’t change, nor will the contact information for the servicer, according to a Navient spokesman who promised that if and when borrowers need to be involved, they will be notified in “plenty of time.” Navient has proposed that many of its employees working on the federal loan accounts transfer to Maximus to help smooth the transition.
Navient, once part of Sallie Mae, is the third servicer of federal student loans to bow out in recent months, adding a layer of complication to an even bigger transition coming up in February. That’s when nearly 43 million borrowers, with $1.6 trillion in outstanding federal student loans, will have to start paying on them again.A pandemic provision that’s given borrowers forbearance since March 2020 is set to expire on Jan. 31.
“I am sort of anxious and nervous about how that’s all going to happen at the same time payments are supposed to resume in February of next year,” said Lindsay Clark, director of external affairs at Savi, a tech startup and online resource for student loan borrowers, who herself has $205,000 in loans being serviced by Navient. “You often feel in the dark as a borrower about what’s going on…There’s just so much up in the air.”
Third Servicer Exit
Loan servicers send bills, collect payments, and answer customer questions about outstanding loans. In July, the Pennsylvania Higher Education Assistance Agency, known as FedLoan Servicing, and New Hampshire Higher Education Assistance Foundation Network, known as Granite State Management & Resources, opted not to continue contracts that expire this December, affecting a total of 9.8 million borrowers whose loans are set to be transferred to other companies. (FedLoan loans are going to the Missouri Higher Education Loan Authority (MOHELA) and other servicers yet to be announced, and Granite State loans are being transferred to Edfinancial Services.)
These servicers are exiting the business amid a planned overhaul of the way the Department of Education outsources management of its giant student loan program. Last year, Navient’s chief executive officer said the proposed terms and conditions of the new system, called “Next Gen,” didn’t make financial sense for the company.
“They transferred too much risk to the servicer, and at rates and terms that we believe are effectively below cost for everybody,” Navient CEO John Remondi said on an earnings call in July 2020.
Meanwhile, those chosen to be Next Gen vendors—technically not servicers but operators of call centers—have yet to take on the new roles.
A Problematic System
Indeed, borrowers and servicers alike have reasons to be dissatisfied with the system, which the Department of Education admits lacks standardization, causing confusion, communication challenges, and inefficiencies.
“Everybody’s right,” said Mark Kantrowitz, a student loan expert who has written five books on financial aid and scholarships. “It’s a thankless job, and it’s frustrating for the borrowers.”
Borrowers, for their part, complain of abusive and negligent practices by servicers, not to mention a confusing churn of servicers. The Consumer Financial Protection Bureau and six state attorneys general sued Navient in 2017, accusing the company of cheating borrowers out of their rights to lower repayment amounts, giving bad information, and processing payments incorrectly. Navient continues to defend itself in the pending lawsuit, saying the allegations are demonstrably false.
Loan servicers, on the other hand, say they’re not just interested in profit margins. With the complex rules the government has created for them, and a steady stream of lawsuits and complaints, administering student loans is an expensive headache.
“The economics of servicing contracts today do not make sense,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit group representing the industry. A student loan can be in one of about 40 different types of payment status, including several income-based repayment plans and several types of deferment and forbearance, he said, making it costly to administer.
When a servicer hands loan accounts over to a new company, that’s one more complication for borrowers, Kantrowitz said, and the complexity of the program increases the chances of something getting bungled along the way.
Plus, borrowers are bombarded with spam communications from disreputable companies, making it harder for them to notice legitimate messages from their new servicer about things they need to do during the transition, Clark said.
The Next Gen transition is likely to cause more turmoil for borrowers if and when it goes through, Kantrowitz said. It’s been a bumpy road dating back at least as far as 2015, with reports of changes in direction, lawsuits, and canceled contracts. And website updates from the Department of Education, which didn’t respond to requests for comment, have been few and far between.
To protect themselves in case anything goes wrong, student loan expert Mark Kantrowitz recommends borrowers take several steps if they know their servicer is going to be replaced:
- Log in to the old loan servicer's website and save or print a copy of your loan information, including payment history, loan balances, and interest amount for all loans.
- Confirm that the old loan servicer has your current contact information.
- If you use autopay, don’t assume the information will automatically transfer. Once the transfer happens, check to see if the new servicer has the same information. If not, make sure to sign up for autopay again.
- Borrowers who are pursuing Public Service Loan Forgiveness should file an employment certification form now, to establish a record of the number of qualifying payments for PSLF. If the borrower has been denied PSLF, they should file an appeal before the servicer changes. Sometimes, payment history records get lost when loans are transferred to a new loan servicer.
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