More Student Loan Upheaval: What FedLoan Ending Its Contract Means for Borrowers

One of the government's largest student loan servicers announced Thursday that it will not seek to extend its contract at the end of this year, throwing millions of borrowers into the upheaval of seeing their accounts transferred to a new company.

The Pennsylvania Higher Education Assistance Agency (PHEAA), also known as FedLoan Servicing, manages more than $350 billion in federal student loans for nearly nine million borrowers throughout the country. The agency also has been responsible for running the government's Public Service Loan Forgiveness (PSLF) program.

Account transfers happen between servicers periodically, but a transfer of this scale will be complicated, says Sarah Sattelmeyer, who works on student loan issues in her role as a project director at the think tank New America.

"There’s a lot of uncertainty right now in the student loan system," Sattelmeyer says. "And this is adding to that uncertainty."

The Department of Education hasn't announced details about how the transition will work, so there's little information for affected borrowers right now. With six months to go before PHEAA's contract ends, Sattelmeyer says she hopes to see a detailed, borrower-centered transition plan from the department. That should not only clearly outline the process for borrowers, but also outline what oversight there will be "to make sure no one falls through the cracks."

In the meantime, borrowers concerned about the transition can download their history of payments with FedLoan and keep detailed records of any information they receive about the transition.

FedLoan is one of the largest student loan servicers, but it is also one of the more controversial. Borrowers and advocates have accused it of shoddy service, and earlier this year, PHEAA settled a lawsuit with Massachusetts Attorney General Maura Healey over allegations that the agency made errors and gave incorrect information to borrowers about PSLF eligibility.

When news broke that PHEAA will not continue working for the government, the Student Borrower Protection Center (SBPC) put out a press release saying it was "welcome news that the Department of Education will no longer rely on a company accused of widespread mismanagement and abuse to handle millions of borrowers’ student loans."

Still, the SBPC and other consumer advocates stressed the need to help borrowers through this change, pointing out how messy previous large scale transfers have been. An investigation last year by SBPC outlined extensive errors that affected more than a million borrowers when ACS, a former student loan servicer, transferred accounts back in 2013.

And a 2015 report from the Consumer Financial Protection Bureau noted that servicing transfers leave borrowers confused, saying that "when servicers change, payments may be lost, consumers may incur surprise late fees, and processing problems and missing account records can knock borrowers off track on repaying their loans."

In some cases, these errors can reverberate for years, particularly for borrowers pursuing Public Service Loan Forgiveness, where the precise count of a borrower's monthly payments is crucial. That program has already been plagued with complaints from borrowers about mismanagement, with regular stories about servicers miscounting or misallocating monthly payments and therefore delaying or blocking forgiveness.

The changes for borrowers will come at an already chaotic time. Federal student borrowers are scheduled to resume payments in October, after a 18-month-long interest-free forbearance period. Servicers, including PHEAA, already have the massive task of turning payments back on for more than 40 million borrowers at the same time.

Advocates and some Democratic lawmakers have pushed for an extension of the payment pause, and Sattelmeyer says this added uncertainty is an another reason the Education Department may want to consider that.

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