Written By Travis Hornsby, CFA®, CFP®
Significant changes are coming to the student loan industry. Most of what I’m going to say in this article is purely speculation. Although, it’s based on my experience with student loans so it isn’t entirely off-base.
But just to be clear, I’ll tell you when I know something and I’ll let you know when I’m sharing my opinion. That way, you’ll see the difference between fact and speculation, and you can get an idea of what to expect in the coming months.
Student loan servicing: where we are now
Before I dive into what’s happening, here’s a little student loan history. Before 2010, the government didn’t issue student loans. Private lenders issued loans, and the loans were guaranteed by the government.
The direct student loans you see now are managed by the government. Because it doesn’t make sense for the federal government to hire thousands of people to service the loans, loan servicing, processing and customer service are outsourced to private companies.
Several servicers exist, but the big four that you’ll probably recognize are:
- FedLoan
- Great Lakes
- Nelnet
- Navient
The others are ECSI, Default Resolution Group (Maximus Federal Services), OSLA Servicing, Missouri Higher Education Loan Authority (MOHELA), EdFinancial, Granite State and CornerStone.
Who are the new servicers?
The Department of Education signs contracts with private companies to service federal student loans. The contracts are roughly ten years in length, and when the term is up, the U.S. Secretary of Education can negotiate the terms of a new agreement.
Betsy DeVos is the current Secretary of Education, and she already signed a contract that effectively fires the existing loan servicers starting December 14, 2020.
Because DeVos is a Trump-appointee, the question is whether or not this contract could be enforced if President Trump were to lose the election.
The five new companies are:
- Missouri Higher Education Loan Authority (MOHELA)
- EdFinancial
- Trellis Company (formerly Texas Guaranteed Student Loan Corporation)
- MAXIMUS Federal Services
- F.H. Cann
My guess is that the “big three” servicers who will manage the bulk of student loan accounts will be MOHELA, EdFinancial and Trellis Company.
MOHELA uses the same software as FedLoan, so I think they’ll take over PSLF servicing to minimize disruption.
MAXIMUS is already the servicer for defaulted student loans. The company will likely continue to do that under the new contract. I think F.H. Cann will also focus on defaulted student loans, although I don’t know for sure because I’ve never heard of them before and they have no track record for student loans.
The perfect storm in student loans
I foresee the transition to new servicers being a disaster. Here’s why.
Under the CARES Act, student loan payments are paused through September 30, 2020, and servicers will start collecting payments on October 30, 2020. The CARES Act requires the servicers, by law, to send out six separate communications to borrowers starting the beginning of August.
That will be an enormous undertaking to process all of the existing accounts and get them up and running again.
Then, barely six weeks later, on December 14, 2020, the new servicers are supposed to take over the processing of all 44 million student loan accounts.
Without industry experience, how knowledgable do you think the new servicers are going to be? I’m anticipating they’ll have very little competence based on the lack of experience they have. In fact, I wouldn’t be surprised to hear one of the companies claim that REPAYE is an exotic form of rattlesnake.
My prediction of the coming chaos
No one could have predicted where we’d be today with the economy and student loans, and there is no easy answer to any of this.
If they’re going to move forward with a servicer changeover, it makes the most sense to extend the student loan interest and payment freeze. Otherwise, it’s going to be absolute and disastrous chaos.
Think about what it might feel like to move an Amtrak train to a new rail line while going 80 m.p.h., and that’s what I foresee happening.
You’re starting up all the payments during the worst economic recession since the financial crisis in 2008, which means many people are eligible to recalculate their income-based payment to a lower number because they’ve lost their jobs or their incomes have fallen. And you have a handful of no-name companies without adequate staffing at the helm.
What to expect with changing servicers
It’s anyone’s guess what might happen when the CARES Act forbearance ends and the new student loan servicers take over.
Our suggestion is to send in your ECF form at the end of October or early November if you’re pursuing PSLF. That way, you’ll get an updated document to certify your months of credit. For everyone else, save a copy of your payment history by taking a picture of the screen with your phone or downloading your records.
If you have the right loan plan in place, you’re already a step ahead. For our clients that have done that with us, I’m not worried about that servicer switch at all. It will be annoying and probably frustrating, but it’s survivable.
If you’re struggling with knowing what to do if your servicer changes, I encourage you to get a plan in place now. And if you already had a student loan consult, we’re available for follow-up consults at a reduced rate to make sure you’re still on the right track.
One final word of advice: Just stay calm. There’s likely to be a lot of news around student loans in the coming months and chaos when the payment and interest freeze ends. But I’ll keep you updated and try to be an advocate for you in all this.
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