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Loan Service Companies Leave Student Borrowers in the Lurch

One million borrowers have discovered their federal student loans randomly transferred to new loan-serving companies -- and little about the transition has been smooth.
 
 
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The Department of Education has been transferring large batches of federal student loans to new loan-servicing companies — leaving in the lurch some borrowers who are suddenly encountering problems with their loans, such as payments that are mysteriously adjusted up or down.

The switch, which has been going on for months and will ultimately include millions of loans, is mandated by a little-known provision tucked into the 2010 healthcare overhaul. Pushed by a consortium of nonprofit student loan companies, the provision forces the DOE to use nonprofit loan servicers. But at least in the short run, the switch has caused problems.

Borrower Isabelle Baeck said that after a new servicer, Mohela, took over her loans in December, she received a letter saying that her monthly payments had been reduced to $50 — roughly a quarter of what they had been. The change meant Baeck would ultimately pay more in interest over a longer period of time. Concerned, she said she has made repeated calls to get the problem fixed, only to have the payments repeatedly readjusted.

A Mohela representative declined to comment on specific borrower situations but said that the company is working hard to minimize disruption and to resolve issues as they arise.

Baeck is not alone. Since last fall, one million borrowers have had their federal student loans randomly assigned to one of the new companies, all nonprofits or subsidiaries of nonprofit organizations. It is not known what proportion of borrowers has had problems during the switch.

Like their for-profit counterparts, many of these nonprofit student loan companies traditionally originated, bought and insured student loans, with the day-to-day servicing making up only a portion of their business. Several — including at least six that the department has transferred or is planning to transfer loans to — have been touched by scandal in those other capacities, with accusations ranging from bad lending practices to violating state law to overbilling the Education Department.

In all, the Department of Education expects to add more than a dozen new servicers to the mix, roughly tripling the total number of companies that were handling direct federal loans this time last year. The move would also mean that borrowers with such loans would eventually be using about a dozen separate servicer websites, whereas before there was a single website for all direct loans.

Some worry the addition of so many new servicers could make standardization and oversight more challenging.

"It's hard to know if having more servicers will help or hurt because it's so bad with just a few right now,” said Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. "Our fear is that the more you have, the less ability you have to oversee them.”

Ultimately, borrowers having their loans moved over to these new servicers have Congress to thank for it. Coupled with the passage of the health care reconciliation bill was an overhaul of federal student lending, which shifted the government away from backing loans by private lenders — what were known as federally guaranteed student loans — and toward loaning directly to students.

For-profit and nonprofit student loan companies alike lobbied over the change and shifted their business models accordingly. In particular, the nonprofit student loan companies won a carve-out to ensure they'd get in on the business of servicing the direct federal loans. The carve-out was crafted and lobbied for by the Education Finance Council, a trade group representing nonprofit student loan companies that spent more than $200,000 on lobbying that year. (The Education Finance Council did not respond to a request for comment.)

 
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