Update: What the Federal Student Loan Servicing Shake-Up Means for Borrowers

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In 2010, the federal government eliminated the bank-based student loan program (formerly the Federal Family Education Loan Program, or FFELP) in favor of originating loans directly from the Department of Education). The move saved the federal government more than $10 billion in payments to banks—funding that has since been used to increase student aid. While the department serves as the loan originator, the role of servicing student loans was left to external entities.

Over the past decade, student loan servicers have come under scrutiny for engaging in practices that run counter to borrower interests. For instance, student loan servicers overcharged 78,000 service members, cost students more than $4 billion in avoidable interest charges, and steered borrowers into higher-cost repayment plans. These instances drew the interest of federal regulators, prompting the Department of Education and Congress to begin tightening the rules about student loan servicing. In addition, state regulators have begun implementing regulations to protect students from unscrupulous servicing behavior.

As a result, some companies have decided not to continue serving as student loan servicers. Advocates for student and borrower interests have praised these moves as a positive step for borrowers.

But how do these changes affect the process for repaying student loans? Given the back-end nature of student loan servicing, the effects for borrowers will be limited—students whose loan servicers no longer work with the department could expect to receive communication indicating their loan will be served by a new entity. Loan servicing should not be disrupted unless the Department of Education cannot find other servicers to accommodate the work. And that could conceivably happen if loan servicers don’t see a cost-benefit analysis that results in enough profit for them to be interested, in which case the federal government would likely have to build its own capacity to service their loans or come up with some other mechanism for doing so.

As always, the go-to source of information for federal student loan information is the US Department of Education’s Federal Student Aid (FSA) office. In specific, FSA offers a section on studentaid.gov that provides information specifically about student loan servicing. Beyond FSA’s resources, check out NACAC’s Trusted Sources webpage, which contains links to NACAC-vetted organizations and resources about paying for college.

David Hawkins is NACAC’s chief education and policy officer. You can reach him at dhawkins@nacacnet.org.

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