Home > Student Loans > New Student Loan Servicers: A Better Deal for Borrowers?

Comments 2 Comments
Advertiser Disclosure


Last month, while the Senate and House were playing Texas Hold ‘Em with student loan interest rates (the college kids lost that hand), the Federal Student Aid office at the Department of Education was busy reshuffling the deck.

In a post dated July 26, an FSA operations director described how education loans that are currently being serviced by a company that will soon be departing the Direct Loan program are to be transitioned to other DOE subcontractors. Loan servicer replacements occur periodically, for all kinds of reasons, and certainly we don’t know why this particular change is happening at this particular time.

A quick search of the exiting company’s name revealed many complaints. But then I searched the ones that are still in the game and combined what I read online with the stories I’ve heard from borrowers who emailed and phoned. A number of those companies have problems too.

There are complaints about misapplications of principal payments, where extra remittances that were explicitly directed to be applied against unpaid loan balances were instead credited against future payments (which save borrowers nothing). And those who are struggling, and might otherwise have qualified for one of the government’s longer-term relief programs such as the Pay As You Earn and Public Service Loan Forgiveness plans were instead shunted into deferments and forbearances that amounted to little more than a negatively amortizing time-out.

Forbearance is not forgiveness. When the relief involves a reduction in payment — or even a suspension of all payments for a period of time — the unremitted interest is added to the unpaid loan balance, at which point more interest is assessed on the higher amount resulting in even higher payments for the remainder of the term.

What Are Student Loan Servicers?

Loan servicing companies are in many cases hired hands: intermediaries that stand in between the institutions that make the loans (or the investor groups to whom these loans were later sold) and the borrowers who make the payments. But they’re not doing this work out of the goodness of their hearts — they’re in it to make money. The question is whether their compensation-driven objectives are at cross-purposes with the legitimate interests of the borrowers they’ve been subcontracted to serve.

Good loan servicing helps stave off loan defaults, and staving off loan defaults saves consumer-taxpayers money. It doesn’t matter if the loans are government-guaranteed or privately financed — loan losses are ultimately passed on in the form of higher borrowing costs, which consume tax dollars.

Therefore, it stands to reason that the nation’s largest higher-education lender — the federal government — should lead the way by mandating a set of loan servicing standards that include:

  • Full disclosure of the longer-term implications for the various relief options that range from short-term forbearances to permanent modifications.
  • Requisite turnaround times that govern all aspects of the loan servicing cycle from first contact to problem resolution.
  • Delinquency-rate targets that should approximate similarly unsecured (uncollateralized) consumer debt such as credit cards.

Thereafter, each loan servicer’s performance could then be evaluated by monitoring:

  • Resolution rates (successes vs. failures) and turnaround times (from first inquiry to the implementation of the relief arrangement).
  • Post-resolution payment performance for all restructured loans, which serves to validate the appropriateness of the relief plans that are being put into place.
  • Delinquency rates for the aggregate loan portfolio that are tracked by category of severity (i.e. 30 days past due, 60 days past due, and so forth), to ensure that the servicer is doing all it should to avert worsening outcomes.

Contrary to what some may believe, the vast majority of borrowers — including those who are down on their luck — want to honor their financial obligations. One thing, though: What they need are for lenders, investors and their subcontractors to help them do just that when trouble hits. That means a fair deal — not a hand that’s dealt from the bottom of the deck.

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team