In a NutshellStaying on top of your student loans can help you avoid getting caught off guard and keep you from worrying that they'll be transferred without warning.
According to the Consumer Financial Protection Bureau, there are over 40 million student loan borrowers and over $1.2 trillion in outstanding student loan debt.
But here’s a number you don’t hear about as often: About 10 million of those borrowers had their federal student loans transferred from one servicer to another between 2010 and 2013.
While this typically won’t affect the terms of your loan, it can be a shock when it happens — and in some cases, you may receive notification after the transfer has occurred.
That’s what happened to Shelby* in August 2013, about a year after she started repaying her student loans. Shelby is a graduate of Mills College in Oakland, California and has a Bachelor of Arts in English Literature — and about $20,000 in federal student loan debt.
That August, Shelby logged in to check on her loans and almost had a pleasant surprise. “They were all gone. For a second, I thought maybe I didn’t owe anything anymore.” Unfortunately, that wasn’t the case.
Federal student loans may be transferred to a new servicer
What actually happened was that Shelby’s loans were transferred from one servicer to another. In this instance, her loans were transferred from Direct Loan Servicing Center to FedLoan Servicing (PHEAA). She received an email notifying her of this change after the transfer.
Loan servicers are third-party middlemen that are responsible for sending bills, collecting and processing payments, helping borrowers manage their loans and providing customer service. You can find a list of federal servicers on StudentAid.ed.gov.
Shelby felt that she deserved more warning than an email after the fact and she wanted to know what happened with her loans. “I expected to have some control over the situation,” Shelby says, “but you don’t.” “The new servicer has been fine so far; nothing bad has happened,” Shelby says. But that doesn’t mean she was happy. “Actually, I was furious. I sent angry emails to both of them. Direct Loan told me to talk to FedLoan, and FedLoan never responded.”
The StudentAid.gov website says that servicers transfer loans to help borrowers get better customer service and repayment support. Shelby received an email from her new servicer with a similar explanation.
You can’t choose your new servicer
You don’t have a say in the matter if or when your loans are transferred, and you can’t choose the new service when they’re transferred. This is unfortunate if you, like Shelby, are happy with the servicer you have.
One exception to this is that if you combine your loans with a Federal Direct Consolidation Loan, you get to pick from four servicers: Navient, Nelnet, FedLoan Servicing or Great Lakes Educational Loan Services. However, your consolidated loan may be transferred at any time after your initial selection.
Many of the loan protections stay put after a transfer
Jan Miller, a student loan expert and president of Miller Student Loan Consulting, LLC, says that unfortunately, there’s no way to know whether or not your loans will be transferred. However, even after a transfer, the loans are still owned by the Department of Education (ED), and borrowers are still eligible for federal programs, such as the Public Service Loan Forgiveness Program.
Borrowers are also still eligible for federal repayment plans, and the terms of the loan and monthly payments should remain about the same. However, you may need to reapply for a repayment program, as loans sometimes revert to the standard payment plan after a transfer.
Due dates, forbearance and payment arrangements may change
Shelby has a mix of eight subsidized and unsubsidized Stafford Loans and makes a single payment, which the servicer divides between the loans, on the 21st of each month. All her loans were transferred to the new servicer, but for some borrowers who have not yet consolidated or who have chosen not to consolidate, only a portion of their loans are transferred.
Jan says it’s also common for borrowers’ due dates to change, although that wasn’t the case for Shelby. In addition, borrowers may need to reapply for auto-payment (which allows the servicer to pull the money from your bank account) or bill pay (where your bank sends the money to the servicer) programs, which can be a nuisance. More serious issues can also arise because of a transfer.
In one case, Jan said her client had an arrangement for a reduced payment and interest rate and was signed up for auto-pay. The borrower’s loan was transferred to a new servicer, and he didn’t realize he had to set up auto-pay again until after a payment was past due.
He contacted the new servicer to reestablish auto-pay, and that’s when he found out that the new servicer didn’t offer, and wouldn’t honor, the previous payment agreement. Now he has to make a larger monthly payment at a higher interest rate.
To avoid similar difficulties, always read notices from your loan servicer and keep your contact information up to date.
Shelby was fortunate because she keeps on eye on her loans and caught when they were transferred. She didn’t miss a payment and overall has had a good, albeit slightly frustrating, experience. Now that you know what can happen to your loans, you can avoid getting caught off guard or worrying if they’re transferred without warning.
*Shelby’s last name is withheld to maintain privacy.