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Dept. Of Education Tells 10 Million Student Loan Borrowers To ‘Prepare For Servicer Change’ Now, But Misses Key Details

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The U.S. Department of Education has started notifying millions of student loan borrowers of major loan servicing changes that will be unfolding in the coming months, and is urging them to take steps now to prepare. But its advice is incomplete.

Last month, two of the Department’s major contracted student loan servicers — FedLoan Servicing (a branch of the Pennsylvania Higher Education Assistance Agency, or PHEAA), and Granite State Management & Resources — told the Department that they will not be renewing their contracts at the end of the year, effectively ending their student loan servicing operations on behalf of the federal government. As a result, the Department of Education will have to find new loan servicers for approximately 10 million borrowers, and will initiate transfers to those new servicers in the coming months.

The Department has started notifying borrowers of the upcoming changes. In emails sent to borrowers whose accounts are with FedLoan Servicing, the Department warned borrowers to “get ready for your loan servicer to change.” The Department explained, “FedLoan Servicing has announced that it will stop servicing federal student loans. Over the next year, your loans will be moved to a different servicer. Until this change happens, FedLoan will remain your loan servicer.” The Department noted that servicing changes do not impact the terms or conditions of the underlying loans, or a borrower’s eligibility for student loan forgiveness, discharge, and repayment programs.

The Department urged borrowers to update their contact information. “Wrong contact information could make you miss important updates about your new servicer and about how to prepare for payments to begin again,” said the emails. The emails also notified borrowers to prepare for repayment, but provided ambiguous information for borrowers who have been paying their student loans through automatic debit enrollment, saying only that borrowers should “watch for information from FedLoan Servicing and your new loan servicer to manage your auto-debit.” Typically, borrowers must re-enroll in auto-debit programs with a new servicer after a transfer occurs.

FedLoan Servicing has also put up a prominent message on its website, notifying borrowers of the upcoming changes. “In the coming months, we will be working with Federal Student Aid (FSA) to conduct a smooth transition of your loans to a different servicer,” said the message. “FedLoan Servicing will continue to service all loans until they are transferred to another FSA-designated servicer.” FedLoan directed borrowers to follow updates through a dedicated page of the Department of Education’s website.

Servicing transfers initiated by the Department of Education and other student loan lenders have historically been disruptive and, in some cases, harmful and costly to borrowers. The Consumer Financial Protection Bureau noted in a 2015 report that servicing transfers can result in lost or missed payments, surprise late fees, and lost records. Borrowers on track for Public Service Loan Forgiveness (PSLF) may be particularly at risk right now, given FedLoan Servicing’s unique role in administering the program; many such borrowers are embroiled in ongoing disputes with FedLoan about payments that are not being counted towards PSLF, in some cases due to previous loan servicing transfers that resulted in lost or scrambled records.

The Department’s recent communications about the upcoming servicing transfers failed to warn borrowers about the possibility of lost records or payment processing irregularities. Nevertheless, borrowers should protect themselves by downloading and retaining all of their student loan records (including payment histories and correspondence) and monitoring their credit reports. Borrowers on track for PSLF may want to take additional steps such as escalating disputes and re-certifying their employment if their loans are already serviced by FedLoan.

The Department of Education has not announced a specific timeline for servicing transfers, nor has it indicated which new student loan servicers will take over the accounts that are presently handled by FedLoan Servicing and Granite State Management. Meanwhile, the ongoing moratorium on student loan payments is scheduled to expire after September 30, forcing borrowers to resume payments in October. Advocates have warned that the confluence of the two events will be a disaster for borrowers. The Biden administration is reportedly still considering whether to further extend the student loan pause.

Further Reading

Student Loan Mess Looms: Borrowers, Do These 6 Things By September

Huge Student Loan Servicing Shakeup: This Major Loan Servicer Is Ending Its Contract

Did The Biden Administration Just Send A Big Signal On Student Loan Cancellation?

Student Loan Cancellation Debate Continues Amidst Servicer Disruption

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