Student Loans

Nearly 10 Million Borrowers Are About to See a Change in Student Loan Service — Here's What That Means, the Good and Bad

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On Friday, the Department of Education's Federal Student Aid office announced a stricter set of standards for student loan servicers, the companies the government pays to oversee the billing and collection of student loan payments. 

"FSA is raising the bar for the level of service student loan borrowers will receive," said FSA Chief Operating Officer Richard Cordray in a statement. "Our actions come at a critical time as we help borrowers prepare for loan payments to resume early next year. The great work done by our negotiating team here enables us to ensure that loan servicers meet the tougher standards or face consequences."

In the past, servicers have been accused of harassing borrowers, misleading borrowers about their options, mismanaging the public service loan forgiveness program and poor customer service.

The new changes are intended to "ensure a smooth transition for borrowers out of the student loan pause ending on Jan. 31, 2022" and also come during a significant re-shuffling among servicers. 

By the end of the year, nearly 10 million borrowers will have their student loans switched from one servicer to another. Millions more could face the same fate over the next several years. 

"In a perfect world, these transitions would be seamless to the borrower, but it may not be," says Kevin Walker, publisher of CollegeFinance.com. "And so borrowers have to pay attention to make sure that, for no fault of their own, they don't miss payments."

Servicer shuffling

On July 8, The Pennsylvania Higher Education Assistance Agency (often referred to as FedLoan) announced that it would not renew its contract with the federal government. FedLoan oversees the loans of 8.5 million student borrowers, which have been or will be transferred to a different servicer by the end of the year. 

Jason DiLorenzo, founder and CEO of PSLFJobs, an employer consultant and jobs platform, says the announcement is "good news."

"FedLoan has been a notoriously error-filled experience for a lot of people: bad customer service and errors made regularly," he tells CNBC Make It. "The folks that we talked to at FedLoan are committed to making [the transition] happen smoothly. But they're the ones leaving, so I'm more worried about them doing it right than I am the new servicers taking over."

Less than two weeks after FedLoan's announcement, another student loan servicer, Granite State Management & Resources, also announced that it would not extend its contract with the Department of Education when it expires Dec. 31. The servicer handles roughly 1.3 million borrower accounts that will be transferred. 

The announcements mean some 9.8 million student loan borrowers — nearly 23% of the country's 42.9 million total borrowers — will have their loans change hands. 

And millions more borrowers may be in a similar boat in the near future. 

In September, Navient, the second-largest student loan servicer in the country, asked the Department of Education to transfer the accounts of the 6 million borrowers it oversees to another servicer called Maximus. 

However, in FSA's Friday announcement it was revealed that the Department of Education extended an offer to Navient to continue servicing loans through 2023 and is "currently reviewing" Navient's request. If approved, Navient's borrowers may also be transferred, albeit on a less-rushed timeline, which DiLorenzo says "alleviates concerns around an abrupt transfer which could result in administrative problems."

The new servicer standards

The FSA's new standards indicate that in the new year, federal loan servicers will be assessed by how effective a servicer is at keeping borrowers from falling behind on their payments and across measures of customer service including the percentage of borrowers who end a call before reaching a customer service representative by phone and whether servicers process borrower requests accurately the first time. 

"Student loan servicers will now have strong financial incentives to provide quality service to their customers," reads the announcement, referencing contract renewals. "When the new contract terms go into effect, FSA will also require servicers to maintain core call center hours, including Saturdays, to make customer service representatives more accessible for borrowers. Further, FSA is requiring loan servicers to increase the number of Spanish-speaking customer service representatives."

Going forward, student loan servicer contracts will "expressly prohibit loan servicers from shielding themselves from lawsuits brought to hold the companies accountable in court for poor servicing practices."

"There will certainly be some bumps with a big service or change like this," says DiLorenzo. "But I think at the end of the day, people are going to be in a better situation."

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