FedLoan Servicing: Not a Scam, Just Bad at Its Job

FedLoan Servicing is one of a number of organizations that was created to help the U.S. Department of Education service student loans that the federal government owns. Due to its poor customer service history, some borrowers wonder, “Is FedLoan Servicing a scam?”

All federal student loans are overseen by a loan servicer, like FedLoan Servicing. The federal student loan servicer collects loan payments, answers customer questions and performs other tasks associated with maintaining the student loan.

Federal student loans offer benefits like access to student loan forgiveness and income-driven repayment plans. Plus, the most common types of federal student loan, Direct student loans, don’t require a credit check.

However, if you want a federal loan and the benefits that come with it, the catch is that you don’t get to pick your servicer. So, FedLoan Servicing might be your loan servicer whether you like it or not.

But it won't be for much longer because FedLoan is leaving the federal student loan system. You'll be assigned a new servicer in the near future if you haven't been already.

Let's take a closer look at what has led people to question whether FedLoan Servicing is a scam.

What is FedLoan Servicing?

The Pennsylvania Higher Education Assistance Agency (PHEAA) established FedLoan Servicing to support the U.S. Department of Education's ability to service federal government-owned student loans. The company employs loan counselors who are trained to answer borrowers’ questions about their federal student loans. FedLoan Servicing also provides resources to help borrowers manage their loans via Account Access, its online account management tool.

What services does FedLoan Servicing offer?

FedLoan Servicing services two main types of federal student loans:

• Federal Family Education Loan (FFEL) Program loans. The U.S Department of Education offers to purchase from third-party lenders. FedLoan Servicing is one of the few organizations that the U.S. Department of Education uses to service these loans.
• William D. Ford Federal Direct Loan Program (Direct) loans. These loans don't use third-party lenders. Instead, the U.S. Department of Education provides them directly.

If you have either type of these federal student loans, FedLoan Servicing might be handling them.

Who is FedLoan Servicing designed to help?

FedLoan Servicing offers resources for student loan borrowers as well as financial aid officers at colleges and universities. It educates borrowers on topics like Public Student Loan Forgiveness (PSLF), as well as its Federal Student Aid (FSA) partners.

Financial aid officers

FedLoan Servicing provides schools’ financial aid officers with student loan information and support. FedLoan Servicing offers a Public Service Loan Forgiveness Toolkit, for example, to help financial aid officers educate students and alumni about the program. It also developed the FiveStar Training program to meet financial aid officers’ needs.

Partners

FedLoan Serving’s Partner Portal is an online tool that comprises many services its partners need in one location. It includes loan servicing, imaging and call-monitoring systems. The portal is geared toward addressing FSA staff and vendors’ needs.

Students and alumni

In terms of handling your student loan, FedLoan Servicing’s main objective is to ease borrowers’ student loan repayment burden.

To do so, FedLoan Servicing provides borrowers with an introductory letter explaining how it will guide them through successful repayment. FedLoan Servicing also offers borrowers several payment options so they can pick the method that best suits their needs.

FedLoan Servicing counselors are available for phone support Monday through Friday or any time via email to answer questions about repayment. The organization’s website also offers resources to help borrowers:

• Enroll in an income-driven repayment plan
• Change their payment due date
• Change their payment plan
• Determine if they’re eligible for deferment or forbearance

Why some borrowers think FedLoan Servicing is a scam

Despite being created to provide federal loan processing and counseling services, the company has been plagued by customer complaints. Many complaints are related to FedLoan mishandling their qualifying student loan payments. Any payment miscalculations can cause significant problems for borrowers trying to qualify for PSLF.

Through PSLF, you may get your remaining Direct loan balance forgiven after making 120 qualifying monthly payments while working full-time for a qualifying employer (e.g. government or a nonprofit organization). If FedLoan Servicing loses track of how many qualifying payments you’ve made, you could be on the hook for the full balance.

By causing an error that could ultimately benefit the company’s bottom line, FedLoan Servicing has been suspected of being negligent on purpose. When that happens, borrowers are delayed in getting or unable to get loan forgiveness due to eligibility missteps.

Multiple borrower complaints to CFPB

The Consumer Financial Protection Bureau (CFPB) received numerous complaints about the PHEAA (2,190) and FedLoan Servicing specifically (290) in 2019 alone. Multiple borrowers said they received bad information about their loans.

For example, one borrower explained that FedLoan incorrectly calculated the number of “qualifying payments” to their account. Per FedLoan’s request, the borrower made a formal complaint for a recount, which ended up being well short of the seven to eight years of payments that had been made. The borrower called FedLoan every three to four weeks to complain only to be told the organization was understaffed and didn’t have a timeline of when the recount request would be fulfilled.

According to another CFPB complaint, FedLoan customer representatives incorrectly told a borrower who was eligible for PSLF that they should consolidate their student loans, which canceled out the years of PSLF-qualifying payments made prior to the loan consolidation.

Top complaints about FedLoan Servicing lead to low rating

Many of these complaints against FedLoan Servicing were mirrored in Student Loan Planner®’s student loan servicer survey. In September 2019, we surveyed hundreds of our readers and asked about their experience with their student loan servicers. About half of the respondents worked with FedLoan Servicing and gave the organization an average of 2.8 out of 5 stars.

The respondents’ top complaints revolved around the tools and services FedLoan touts on its site, like:

• Incorrect payments counted for borrowers under the PSLF program
• Incorrect information given to borrowers regarding income-driven repayment options
• Mishandled requests for income-driven repayment plans, leading borrowers to make larger payments
• Incorrect payment processing on outstanding loans

FedLoan Servicing is being sued — again

Recently, New York Attorney General Letitia James filed a lawsuit against FedLoan Servicing in October 2019 that alleged mismanaging the Public Service Loan Forgiveness program.

AG James alleged that FedLoan miscounted borrowers’ payments, gave them inconsistent information and did not inform borrowers that they could appeal mistakes. Her official complaint stated that FedLoan’s errors have led to rejected loan forgiveness applications — less than 900 of the 90,000 applicants had their discharges approved and processed as of June 2019, according to the Education Department.

FedLoan Servicing has been in this situation before. Massachusetts filed a similar lawsuit against FedLoan Servicing in 2017. The suit resulted in the Education Department’s unsuccessful attempt to stop the case on the grounds that its federal oversight of FedLoan superseded state regulation. The case ended in a settlement in 2021 that secured individualized account reviews for thousands of Massachusetts student loan borrowers.

Is FedLoan Servicing a scam? No, but watch out for these real scams

It’s easy to see why borrowers might wonder if FedLoan Servicing is legit. Incorrect qualifying payment calculations have led borrowers to think that FedLoan is trying to scam borrowers out of PSLF benefits.

The fact is, however, that FedLoan Servicing is a legitimate organization under the U.S. Department of Education umbrella — it simply hasn’t managed the program well. This is one of the reasons MOHELA will be taking over PSLF and TEACH Grant accounts from FedLoan.

Federal student loan scams, however, do exist. In July 2019, the Federal Trade Commission (FTC) announced it shut down the operators of Mission Hills Federal and Federal Direct Group. The FTC alleged these operators stole more than $23 million from borrowers by offering to pay down their student loans and lower their monthly payments. The companies tricked borrowers into submitting their loan payments directly to them, and then they diverted those payments to themselves.

Although FedLoan Servicing isn’t a scam, if you think FedLoan Servicing made a mistake with your account information or payments, you can keep diligently reaching out to them to correct their error. It’s a fix that could be worth thousands of dollars in forgiven student loan debt.

Instead of accepting FedLoan Servicing’s information at face value, do your own research to help you understand your loans and your options. If you need additional assistance, a Student Loan Planner® consultant can help you decide what to do with your student loans.