Federal student loan servicing has been a major concern of borrowers for years.
Borrowers often complain that they are given incomplete, or even worse, wrong information from the company responsible for answering all of their student loan questions. Many attribute the high default rate on federal student loans to the servicers’ inability to explain the many options available to borrowers.
One of the big downsides to federal loans is dealing with these servicers. Unfortunately, the Department of Education makes it very clear that borrowers do not get to select their loan servicer.
The good news is that there are few tricks that are available to get loans transferred from one servicer to another.
Trick #1: Federal Loan Consolidation
Consolidating federal loans is a very important decision. Federal Direct Consolidation is not to be taken lightly. For some borrowers, the consolidation process for federal loans is essential. (One example: federal consolidation can actually help some federal loans become eligible for Public Service Student Loan Forgiveness). For others, federal consolidation would be a huge mistake.
Due to the many consequences of federal consolidation, borrowers should carefully investigate the process before using it as a tool to change servicers.
Setting aside the many issues that go with federal student loan consolidation, one of the perks of going through the process is that borrowers get their choice of new servicers. The downside is that they only have four options: Navient, MyFedLoan, Great Lakes, and Nelnet. As borrowers of federal loans, this is the most input we get on who services our loans.
For borrowers considering federal student loan consolidation, Student Loan Consolidation Guide explanation of the process, the pros and cons, and the various options.
Trick #2: Sign up for Public Service Loan Forgiveness
This option will only apply in a few circumstances, but it could potentially help many borrowers escape their current loan servicer. However, it only works for people who are currently working for the government or a not-for-profit charity.
The way it works is pretty simple: borrowers who certify public service employment authorize the government to transfer loan servicing to MyFedLoan. This is because MyFedLoan services the loans for all people who are working towards Public Service Student Loan Forgiveness.
Even if a borrower doesn’t plan on staying in public service for the required 10 years, there is nothing wrong with certifying past payments. Borrowers who fill out the form and start the review process get their loans transferred.
The only downside: PSLF borrowers must work with MyFedLoan, and MyFedLoan could be a downgrade for many borrowers.
Trick #3: Moving on to the private sector
A final desperate act to get away from federal loan servicing would be to consolidate or refinance with a private company.
Going this route has major consequences far beyond changing servicers. By refinancing in the private sector, borrowers lose all the perks of federal student loans. These perks include income-based repayment, loan deferments, and forgiveness programs.
Most people who go this option do so because they want lower interest rates and are certain that they will not need or qualify for any of the benefits that go with federal loans.
For borrowers thinking about going this route, there are a number of lenders offering refinancing services. It is critical to shop around and talk with the different companies to find the best rate and ensure better customer service.
Making a Change
Uncle Sam does not give any choice in the company that services federal student loans.
The good news is that a few tricks can be employed to give borrowers some say about who they deal with. The options are limited, but for a desperate borrower, it is possible to get away from their current servicer.