The federal student loan servicing industry has seen numerous complaints from borrowers in recent years. Loan servicers such as Navient are even facing lawsuits from those who say their loans were mishandled, and that borrowers were deceived about their repayment options.
On Friday, Secretary of Education Betsy DeVos announced that the Trump administration is looking to change the federal student loan servicing system dramatically. Find out what these changes mean and how it could affect you and your student loans.
Issues with the current federal student loan servicing system
Right now, there is $1.4 trillion in student loan debt spread across 44 million borrowers in the United States. Of that amount, the vast majority of student debt is comprised of federal student loans.
When former President Barack Obama was in office, he worked to transfer student loans away from private banks and consolidate them within the government.
- Granite State
- Nelnet, Inc.
- Great Lakes Educational Loan Services, Inc.
- FedLoan Servicing
- OSLA Servicing.
All nine are private institutions.
The Consumer Financial Protection Bureau (CFPB) also says they have received millions of complaints from borrowers about these federal loan servicers. They allege that these companies misled borrowers about their repayment options, made errors when recording payments, and wrongfully entered many people into default.
Trump administration to offer exclusive student loan servicing contract
In an op-ed for the Wall Street Journal, DeVos cited these issues with loan servicers as the rationale behind the major overhaul she and the rest of the Trump administration have planned.
“The existing student-loan servicing requirements, put in place by the Obama administration, created a chaotic system that has resulted in numerous consumer complaints,” said DeVos.
DeVos blamed consumer issues on an overly complex system.
“The federal student loan servicing solicitation we inherited was cumbersome and confusing—with shifting deadlines, changing requirements and de-facto regulations that at times contradicted themselves,” said DeVos in a press release.
“Internal and external stakeholders both agreed it was destined for a massive and unsustainable budget overrun,” she added.
To address this problem, DeVos said that the Department of Education would offer an exclusive contract to one company. The contract will give them the rights to servicing billions in federal loans, eliminating the other companies’ involvement.
Also, according to DeVos, the change could potentially save taxpayers $130 million over the next five years.
What the shift would mean for borrowers
DeVos stressed that having just one loan servicer would ensure a standardized approach to customer service and a more efficient user platform.
With just one servicer, the Department of Education could monitor the company more effectively. Plus, it may simplify managing federal student loans for borrowers.
Currently, you may have several loan servicers if you have federal loans. That means you have to sign into multiple sites to monitor your account and make payments. It can be complex and difficult to keep up.
Under the new plan you’d have just one account to track, as well as consistent customer support for any questions or issues, according to DeVos.
“Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes,” said DeVos.
For borrowers who have been frustrated by poor or misleading service in the past, the change could be a big improvement.
Potential drawbacks of one student loan servicer
While the new approach could be helpful to borrowers, some consumer advocates are expressing concern.
Rohit Chopra, senior fellow at the Consumer Federation of America, cautioned that the system overhaul could make the Department of Education overly reliant on one servicer.
“The changes may increase profits for the industry, but may do little to tame the high levels of default in the program,” said Chopra in an interview with the New York Times.
Four student loan servicers have submitted proposals for the open bidding process, according to the New York Times:
- Pennsylvania Higher Education Assistance Agency, which is listed as American Education Services and FedLoan Servicing when servicing loans
- Nelnet and Great Lakes Educational Loan Services (they submitted a joint proposal)
What you can do now to address student loan servicer issues
The Department of Education and Secretary DeVos have not announced a timeline for when they will award the contract.
Therefore, it’s unclear just when this change will take effect. So for now, your loans will remain with your current servicer.
However, if you’re currently having problems with your federal student loan servicer, you can take action before the changes go into effect. Here are a few options to keep in mind.
Know your student loan repayment options
Since loan servicers may not inform you of alternative repayment plans or deferment options, it’s important to ensure you’re informed.
If you’re not sure where to begin, you can sign up for the Student Loan Hero app and get customized guidance.
Consider student loan refinancing
If you’re really unhappy with your servicer, one way to get rid of them is to refinance your student loan with a private lender.
Refinancing can help you save money by providing a lower interest rate if you qualify. It can also potentially reduce your monthly payment.
However, keep in mind that you will lose out on federal benefits. But for some borrowers, it can be a smart way to take control of their debt.
Lodge a complaint
Let’s say you are having a problem with your current servicer and cannot reach a resolution.
You can escalate the issue by contacting a student loan ombudsman or the CFPB. Then, with either option, a neutral third-party can investigate the problem and come to a solution.
Where do borrowers go from here?
While the proposed changes to the federal loan system are a huge shift, they could be beneficial to borrowers. In the meantime, you can take steps now to protect yourself and manage your loans more effectively.
For more information about your student loan options, check out this article on what to consider before refinancing your loans.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|