Student Loan Transfers: What to Know About Servicing Changes

About 16 million federal student loan borrowers will have new loan servicers by the end of the year.

The Education Department recently confirmed that it will not renew its contracts with the Pennsylvania Higher Education Assistance Agency (also known as FedLoan Servicing) and Granite State Management and Resources, which together manage nearly 10 million loans. And following approval this week from the Education Department, student loan servicer Navient will exit the loan servicing space and transfer its 5.6 million accounts to Maximus.

In theory, the process of changing servicers should be fairly seamless. However, a 2015 report from the Consumer Financial Protection Bureau acknowledged that servicing transfers can be disruptive for borrowers, causing confusion, lost payments, surprise fees and other costly issues. Plus, borrower advocates worry confusion may be more likely this year. The transition, which affects more than a third of Americans with student debt, is taking place shortly before federal student loan payments are set to resume following nearly two years of forbearance.

Student loan servicing gets an overhaul

There are a few reasons why student loan servicers seem to be making a mass exodus, according to Mark Kantrowitz, a student loan expert and author of the book, “How to Appeal for More College Aid.” For one, the Direct Loan program is more complex today, with several repayment plans, deferments and forbearance options, the pandemic-era payment pause and many change orders from the Education Department. “This increases the cost of servicing federal student loans, with all the various due diligence requirements,” he said.

Student loan servicers have also been under intense scrutiny from policymakers and the public in recent years, after widespread reports of errors and misinformation, some of which have resulted in lawsuits.

In fact, the cancellation of servicing contracts coincides with the department’s recent announcement that it will implement “stronger standards for performance, transparency, and accountability for its student loan servicers.” New contract terms for 2022 are supposed to help the department’s Federal Student Aid office (FSA) better monitor and address servicing issues. The terms outline four specific ways the department will measure how servicers interact with borrowers, as well as financial incentives for servicers who succeed at helping borrowers avoid falling behind on their payments.

Where borrowers’ accounts will be transferred

Navient has been in negotiations with Maximus to transfer its contract and exit the student loan servicing arena. Maximus, which already has a contract with the Education Department, manages the accounts of borrowers who’ve defaulted on their loans. Though the department technically extended Navient’s contract through December 2023, it also approved the company’s request to stop servicing loans and move its accounts to Maximus. The process, known as a contract “novation,” is expected to be completed before the end of this year.

FedLoan is currently in the process of transferring some of its loans to MOHELA, an existing servicer. Some accounts will also eventually go to Nelnet, Edfinancial and Navient/Maximus.

Borrowers whose loans are serviced by Granite State Management and Resources will have their loans transferred to Edfinancial Services.