As the future of student loan forgiveness remains uncertain, borrowers may face additional challenges and changes in their journey to repay student loan debt. The U.S. Education Department (ED) has issued new servicing contracts for existing student loans as part of the Biden administration’s alterations to the student loan system.
Education Department officials stated in a release that the new contracts would ultimately benefit borrowers by encouraging improved customer service and enhancing accountability. With the restructuring, five companies will assume responsibility for student loan servicing. Four of these companies already have contracts with the Education Department, while Central Research, Inc is a newcomer to government collaboration. Some borrowers may see their loans transferred to Central Research, while others may experience transfers to different servicers.
The other companies involved are:
- MOHELA, which took over loans from FedLoan Servicing last year.
- Maximus Education, operating Aidvantage, and assumed some Direct student loans from Navient.
- Nelnet, which acquired loans from Great Lakes Higher Education.
Although the ED suggests these changes could eventually be advantageous for borrowers, experts predict some obstacles during the transition. For example, payments might be processed late as contracts change hands, potentially leading to unexpected late fees.
In 2015, the Consumer Financial Protection Bureau discovered that modifications in loan ownership resulted in lost payments, paperwork processing issues, missing records, and even late fees for borrowers. Similar problems persisted in 2022 when MOHELA took over servicing many public service loans.
When MOHELA began acquiring contracts from FedLoan Servicing last year, the Washington Post reported over 500 complaints about incorrect payment counts and difficulties contacting customer service. MOHELA had previously acknowledged being “inundated with applications” and “trying to resolve lag times,” according to the Washington Post. Additionally, the organization faced complaints about phone wait times up to four hours and six-month processing delays on Public Service Loan Forgiveness applications, as reported by The Washington Post.
Stay Alert to Safeguard Your Credit
Student loan borrowers may find servicer changes for their loans frustrating, and these changes could continue until 2024. The Education Department has indicated that ongoing contract transitions will proceed, but new contracts will not be effective until 2025.
Thankfully, there are measures you can take to protect yourself and your credit score. Firstly, verify where to send your payments or ensure the new loan servicer has your information for direct payments. Be prepared to see a new company name associated with your loan payment. Examine your bank records to confirm that payments to your new servicer are processed promptly.
It is also wise to check your credit report in case the transition caused any alterations. Your new loan servicer’s name may appear on your credit report, and you can verify whether payments were processed on time.
You might also see your previous loan servicer and an account with a zero balance, indicating the account as “closed.” This could lower your credit score by a few points, especially if the loan has been part of your credit history for many years, as it reduces the average length of your credit history by substituting an older loan with a new one.
Nevertheless, these changes should be short-lived. By continuing to make timely payments on your other debt and maintaining your debt-to-available credit ratio below 30%, your score should recover quickly.