Student Loan System Faces Two ‘Really Big’ Transitions

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Two companies hired by the federal government to manage student loans have called it quits, with the potential for more to follow, adding more confusion for borrowers already wondering when—or whether—they’ll need to start repaying their loans.

Key Takeaways

  • Almost 10 million federal student loan borrowers will be affected by the decision of two loan servicers to cut ties with the federal government. Never before have so many loans been transferred to new servicers simultaneously. 
  • The transition comes as relief programs expire, requiring 30 million borrowers to resume payment on their loans.
  • Borrowers have mostly been left in the dark as the deadline approaches, and they could face difficulties getting fast help from swamped servicers.
  • The Education Department says it might consider extending relief programs to smooth the transition, but no announcement has been made yet.

About 9.8 million of the 42.9 million borrowers in the federal student loan portfolio will be affected by the decision of two student loan servicers—Pennsylvania Higher Education Assistance Agency (also known as FedLoan) and New Hampshire Higher Education Assistance Foundation Network (operating as Granite State Management and Resources)—not to continue after their contracts expire in December. FedLoan is the sole servicer of the Public Service Loan Forgiveness program and, with around 8.5 million federal loans, one of the largest contractors in the system. Both FedLoan and Granite State have cited the increasing complexity of the student loan program and the cost of servicing those loans as reasons for their decision.

Any loans serviced by FedLoan or Granite State will automatically be transferred to another federal servicer in the coming months, likely one of the larger remaining firms, such as Navient or Nelnet.While student loans changing servicers isn’t all that uncommon, never before have so many loans been moved at one time, said Mark Kantrowitz, a student loan consultant and president of Cerebly, Inc.

The task comes as the expiration date approaches on a pandemic-era pause on student loan payments. After Sept. 30, about 30 million borrowers will have to resume payments on their loans, adding even more stress to servicers and the student loan system.

“That’s a really, really big transition in the middle of another big transition,” said Sarah Sattelmeyer, a project director in the higher education initiative at New America, a nonpartisan, Washington-based think tank.

Borrowers in the Dark

Borrowers have mostly been left in the dark as the deadline approaches and many servicers await guidance from the Education Department about when they should hire more workers and communicate with borrowers about resuming payments and interest. Once communication does go out, servicers are expecting a flood of calls from confused borrowers, said Scott Buchanan, executive director of Student Loan Servicing Alliance, a trade group. With only current staff, the result will be hours-long hold times for borrowers—imagine “airline during a thunderstorm” long, he said.

Borrowers affected by both the restart in payments and the servicer switch likely will receive notices about changes from both their current servicer and their new one. Borrowers will need to ensure that their records are transferred properly and that payments go to the correct entity. Borrowers who signed up for autopay will need to execute a new agreement with their new servicer, Kantrowitz said.

With so much going on, the Education Department needs to have a plan in place to make sure people don’t fall through the cracks, Sattelmeyer said.

“From a borrower perspective, this is all adding layers of complexity and the potential for confusion,” she said.

Communication Promised

The departing servicers have committed to staying on board until all their loans have successfully transitioned, even if that date goes beyond their current contracts. And Federal Student Aid, the Education Department’s student loan branch, has promised borrowers won’t be harmed, and said it will provide “early and frequent communications” about what affected borrowers should expect during the transition to a new servicer. 

But with only weeks left before a temporary freeze on loan payments and interest ends, the added stress of FedLoan and Granite State’s departure could make an extension of the pandemic-era pause more likely, Kantrowitz said. The Education Department already has been considering pushing the Sept. 30 deadline into 2022, with department secretary Miguel Cardona telling a group of education reporters in May that extending the pause was “not out of the question.” 

That time might be needed as more servicers consider whether to follow FedLoan and Granite State out the door. The contract for every federal servicer expires this year, and Kantrowitz said servicers are evaluating whether renewal is worth the trouble considering the cost of servicing loans, the amount of training staff needs to understand the complex student loan system, growing scrutiny from Congress and the Education Department, and uncertainty about the future of student loan servicing. 

Some Democrats have called for blanket loan cancellation, but that conversation hasn’t been a reason for servicers to pull out and is “not something we’re all that focused on,” said Buchanan.

Warren Urges Longer Pause

At a hearing last week, Sen. Elizabeth Warren (D-Mass.) urged the administration of President Joe Biden to use the transition from FedLoan and Granite State as an opportunity to extend the payment pause and forgive student loans, while asking the Education Department to consider bolstering borrower protections in future student loan servicing contracts.

As a hook, Warren specifically focused on FedLoan and its history as the servicer for the Public Student Loan Forgiveness, a program that allows people in certain jobs to have their federal student loan balances forgiven after making 120 payments. In 2019, the State of New York filed a lawsuit against FedLoan, alleging FedLoan rejected eligible borrowers for loan forgiveness, and the Education Department itself has reprimanded FedLoan on several occasions for alleged mismanagement of the forgiveness program. Pennsylvania Higher Education Assistance Agency CEO James Steeley denied any wrongdoing during a Senate subcommittee hearing in April.

To prevent future issues, servicer contracts need to include substantial penalties for poor performance and abusive practices, said Persis Yu, director of National Consumer Law Center’s Student Loan Borrower Assistance Project, during the hearing. During the current transition from FedLoan and Granite State, Yu said the government must be vigilant to ensure that vulnerable borrowers are identified ahead of time to ensure they aren’t lost in the shuffle.

But even the best efforts likely won’t be enough.

“We need to understand that inevitably some borrowers will get harmed in this transfer and we need to make sure we have adequate remedies available to those borrowers,” Yu said.

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