The U.S. Department of Education has been busy transferring large collections of federal Direct student loans to new nonprofit loan-servicing companies in an effort to streamline how education loans are serviced. However, the massive transition is causing some borrowers to suddenly encounter problems with their college loans.
The transition, which has been going on for months and will ultimately include millions of loans, was mandated by a little-known provision in the 2010 healthcare overhaul that ended federal student loan origination subsidies to private banks and other lenders and brought all federal loan origination under the government’s Direct Loan program.
Supporters of the law said that it would make federal student lending and servicing more efficient in the long term while saving taxpayers billions of dollars. But, at least in the short term, the transition is causing problems.
Although it’s not clear exactly how many borrowers have been affected by the transition, the stories of some of the one million borrowers who have had their loans transitioned to new servicers since last fall have been a growing cause for concern.
Some Borrowers: Adjusted Payments, Confusion, and Errors a Result of Loan-Servicing Transition
For example, Isabella Beck said that after her student loan had been transferred to loan servicer Mohela in December, she received a letter saying that her monthly payments had been reduced to $50, about a quarter of what they had been.
Concerned that the change would cause her to ultimately pay much more in interest over an extended repayment period, Beck said she called Mohela repeatedly to fix the problem, only to have the payments repeatedly adjusted.
Scott Trudeau, another borrower with a loan that was transferred to Mohela, said that he wasn’t notified of the switch until after the fact and that since then he’s had nothing but problems. Although Scott said he’s never fallen behind on his payments — or ever had an issue with the Education Department — he’s had constant problems correcting his bank account information with Mohela, which has led to regular delinquency notices and “nothing but constant confusion” with the servicer.
Karen Mahnk said that when she logged into the Education Department’s student loan website in October she saw that her loan balance, which had been around $100,000, was suddenly zero. After calling around, she eventually spoke with her servicer who told her that she had been placed in administrative forbearance.
But Mahnk hadn’t sought or applied for forbearance and she didn’t want to put off her loan payments or rack up additional interest. A second call to someone else with her servicer assured her that there was no record of forbearance.
Eventually, Mahnk learned that her loan had been transferred to a new servicer, EdFinancial, which told her she wasn’t due for a payment until June. But Mahnk, still confused about many details and wanting to take no chances, said she has been forcing through monthly payments anyway (“Student Loan Borrowers Dazed and Confused by Servicer Shuffle,” ProPublica, April 23, 2012).
Lobbyist Wrote Provision Designating New Loan Servicers
Will Shaffner, Mohela’s director of business development and government relations, seemed to place the onus for unresolved problems back on borrowers. “Anytime you change a servicing relationship, it can cause concern,” Shaffner said in an interview. “[Borrowers] need to pick up the phone and call us. If they’re not satisfied with our service or aren’t getting answers, they should ask to speak with a supervisor. They can even get in touch with our CEO if they need to.”
It’s worth noting that the Education Finance Council, a lobbyist for a consortium of nonprofit student loan companies that were being kicked out of the federal loan origination business during the move to direct lending, managed to secure language in the law that forces the Education Department to use companies such as Mohela and EdFinancial as loan servicers for the government’s Direct loan program.
According to the Education Department, the transition is still a work in progress. The department said it was pushing back its own implantation schedule with regard to the phasing in of new servicers.
“FSA has been working aggressively to implement the new not-for-profit servicers,” the Education Department’s schedule states. “Our original schedule did not fully accommodate the level of effort required to bring up servicers in a way that minimizes risks for borrowers, FSA, and the not-for-profits themselves.”