Student Loan System Faces Two ‘Really Big’ Transitions

Two companies hired by the federal government to administer student loans have closed the process, with the possibility of more news, adding more confusion to borrowers already wondering when, or if, they should start paying their loans.

Approximately 9.8 million of the 42.9 million borrowers in the federal student loan portfolio will be affected by the decision of two student loan officers: the Pennsylvania Higher Education Assistance Agency (also known as FedLoan) and The New Hampshire Higher Education Assistance Foundation Network (operating as Granite State Management and Resources): they do not continue after their contracts expire in December. FedLoan is the sole administrator of the public service loan forgiveness program and, with some 8.5 million federal loans, one of the largest contractors in the system. Both FedLoan and Granite State cited the increasing complexity of the student loan program and the cost of servicing these loans as reasons for their decision.

Any loans administered by FedLoan or Granite State will automatically be transferred to another federal servicer in the next few months, probably one of the remaining larger companies, such as Navient or Nelnet. While the change in student loan officers is not so uncommon, never before have so many loans been moved at the same time, said Mark Kantrowitz, student loan consultant and president of Cerebly, Inc.

The task comes as the due date approaches in a pandemic-era disruption in student loan payments. After September 30, some 30 million borrowers will have to resume repaying their loans, adding further stress to servicers and the student loan system.

"This is a really big transition in the middle of another great transition," said Sarah Sattelmeyer, project director for the Higher Education Initiative at New America, a nonpartisan think tank based in Washington.

Borrowers in the dark

Most borrowers have been left in the dark as the deadline approaches, and many administrators are awaiting guidance from the Department of Education on when to hire more workers and to contact borrowers to resume payments and interest.

After the communication ends, agents expect a wave of calls from confused borrowers, said Scott Buchanan, chief executive of the Student Loan Servicing Alliance, a trade group. With just the current equipment, the result will be hours of wait for borrowers: imagine "an airline during a storm," he said.

Borrowers affected by restarting payments and changing the servicer will likely receive change notices on both the current servicer and the new servicer. Borrowers will need to ensure that their records are transferred correctly and that payments are sent to the correct entity. Borrowers who have signed up for automatic payment will need to sign a new contract with their new service provider, Kantrowitz said.

With so much going on, the Department of Education needs to have a plan to make sure people don't fall into the cracks, Sattelmeyer said.

"From the borrower's perspective, all of this adds layers of complexity and the potential for confusion," he said.

Promised Communication

The outgoing servicers have vowed to stay on board until all of their loans have been successfully transferred, even if that date extends beyond their current contracts. And Federal Student Aid, the student loan arm of the Department of Education, has pledged that borrowers will not be harmed and said it will provide "early and frequent communications" on what affected borrowers should expect during the transition to a new administrator.

But with just a few weeks before the temporary freeze on loan and interest payments, the added stress of FedLoan and Granite State's departure could make an extension of the pandemic-era hiatus more likely, Kantrowitz said. The Education Department is already considering extending the September 30 deadline to 2022, and department secretary Miguel Cardona told a group of education reporters in May that extending the recess "was not out of the question."

That time may be needed as more administrators consider following FedLoan and Granite State to the end. Each federal servicer contract expires this year, and Kantrowitz said servicers are evaluating whether the renewal is worth it, considering the cost of servicing the loan, the number of training staff you need to understand the complex student loan system, growing scrutiny from Congress and the Department of Education and uncertainty about the future of the student loan service.

Some Democrats called for a blanket cancellation of the loan, but that conversation was not a reason for service agents to withdraw and "it's not something we focus on as much," Buchanan said.

Warren calls for a longer break

In a hearing last week, Sen. Elizabeth Warren (D-Mass.) Urged President Joe Biden's administration to use the FedLoan and Granite State transition as an opportunity to extend the payment gap and forgive student loans, while applying to the Department of Education considering strengthening the borrower. protections in future student loan service contracts.

As a hook, Warren specifically focused on FedLoan and his track record as an administrator of the Public Student Loan Forgiveness, a program that allows people in certain jobs to get their federal student loan balances forgiven after making 120 payments. .5 For 2019, the New York State City has filed a lawsuit against FedLoan, alleging that FedLoan turned down eligible borrowers for loan forgiveness, 6 and the Department of Education itself reprimanded FedLoan on several occasions for alleged mismanagement. of the forgiveness program.7 The agency's executive director, Pennsylvania Higher Education Assistance Officer James Steeley, denied any wrongdoing during a Senate Subcommittee Hearing in April.

To avoid future problems, servicer contracts should include substantial penalties for poor performance and abusive practices, Persis Yu, director of the Student Loan Borrower Assistance Project at the National Center for Consumer Law, said at the hearing. During the current transition from FedLoan and Granite State, Yu said the government must be vigilant to make sure vulnerable borrowers are identified in advance to make sure they don't get lost in the confusion.

But even the best efforts probably won't be enough.

"We need to understand that inevitably some borrowers will be hurt by this transfer and we must ensure that we have adequate resources available for these borrowers," Yu said.

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