As the Biden administration seeks to reform the troubled student loan industry, FedLoan’s portfolio of 8.5 million loans will be carved up and dispersed over the coming year to four other servicers: Mohela, Navient, Nelnet, and Edfinancial Services.
FedLoan, the target of thousands of customer complaints by student borrowers, said this summer that it would stop servicing loans next month but that some of its servicing activity could spill into 2022.
The servicer, part of the Pennsylvania Higher Education Assistance Agency (PHEAA), now expects to cease servicing federal student loans by December 2022, PHEAA spokesman Keith New said Thursday. “We are receiving directions to transfer certain batches [of loans] to other servicers,” New said. There have been some small transfers of loans out of the FedLoan portfolio and bigger transfers “should be seamless.”
Tens of millions of borrowers are scheduled to resume their loan payments on Feb. 1 after a prolonged, pandemic-induced pause. Experts fear turmoil as borrowers — who owe more than $1 trillion in federal student loans — may not be prepared and two of the biggest servicers, FedLoan and Navient, have said they would get out of the servicing business.
Mike Pierce, executive director of the Student Borrower Protection Center, a nonprofit advocacy group, said the Education Department is “jammed” with both the payment-resumption deadline and the need for new servicers for the FedLoan and Navient portfolios. “They are trying to figure out whether these borrowers have a place to go,” Pierce said.
The state agency agreed to the one-year federal extension for an orderly transition of borrowers to new servicers, PHEAA’s New said. Its Wednesday statement identified the servicers that would take parts of FedLoan’s portfolio. Edfinancial Services is based in Knoxville, Tenn.; Mohela in St. Louis, Mo.; and Nelnet in Lincoln, Neb.
PHEAA also said that Navient, with headquarters in Wilmington, would be part of the group. Navient, though, has said it will exit the business. On Oct. 20, Navient’s contract with the Education Department was taken over by Maximus, a Reston, Va., federal contractor. Navient referred questions on Thursday to Maximus. Maximus referred questions to the Education Department, which could not be reached for comment on the Veterans Day holiday.
Public Service Loan Forgiveness
Still unresolved is what firms will take over servicing borrowers in the oft-criticized Public Service Loan Forgiveness program, which is being revamped and is part of the FedLoan portfolio. Student borrowers with jobs in government or nonprofits can qualify for loan forgiveness after 120 payments. But critics say few people qualify for loan forgiveness.
In April, James Steeley, the chief executive officer at PHEAA, faced a grilling by U.S. Sen. Elizabeth Warren (D., Mass.) during a hearing on federal loan servicers.
Warren, who chairs the subcommittee, claimed that attorneys general lawsuits and investigations showed that PHEAA “systematically undercounts” borrower payments, leading to rejection rates for those attempting to qualify for the loan forgiveness program. Of 225,000 borrowers who have applied to have their loans forgiven at that time, only 2% have had their loans forgiven, Warren said.
PHEAA doesn’t undercount payments, Steeley told Warren. The high rejection rate was because people hadn’t made sufficient payments to qualify for forgiveness. “We strive day in and day out to do our best for the people of Pennsylvania, for the customers we service,” he told Warren.
Richard Cordray, a top official at the Education Department, who runs the student loan operation, said in a letter to borrowers Nov. 8 that the government would make it easier to qualify for forgiveness.
“Our new approach will add months or years of service credit for huge numbers of student loan borrowers by counting certain payments that had been ineligible. In some cases, borrowers will earn full loan forgiveness based on the changes,” Cordray said in the letter.
“Please understand that complex changes of this magnitude are hard to process and execute. They require large-scale data and processing work, which takes time,” Cordray added. “FSA does much of this work with FedLoan Servicing. We are jointly responsible for making sure the work is done right.”
The PHEAA/FedLoan contract extension was necessary for continuity and changes to the forgiveness program, said Anna Helhoski, student loan expert at NerdWallet, a personal finance blog.
Under the public service revision, “borrowers who didn’t qualify before or weren’t in the right payment plan should resubmit right away,” Helhoski said.
“As long as you certify your employment, you can take advantage of the waiver. But you have to submit the forms between now and October 2022,” she said.