How Student Loan Servicing Changes Will Impact Public Service Loan Forgiveness - Forbes

Last week, the Pennsylvania Higher Education Assistance Authority (PHEAA), whose federal Direct loan servicing wing operates as FedLoan Servicing, announced that it would not be renewing its contract with the U.S. Department of Education. FedLoan Servicing is one of the Department’s main contracted student loan servicers, handling over 8.5 million individual borrower accounts. FedLoan’s contract with the Department is scheduled to expire in December.

FedLoan Servicing’s abrupt departure from the Department of Education’s sprawling federal student loan system will likely be disruptive to millions of student loan borrowers, who will have their accounts transferred to a new loan servicer in the coming months (the specific servicer, or servicers, that will take over FedLoan’s accounts has not yet been determined). Servicing transfers by third parties contracted with the Department of Education have historically not gone particularly well.

Perhaps more concerning to borrowers, however, is that FedLoan Servicing has been the primary servicer tasked with administering the Public Service Loan Forgiveness (PSLF) program. Under FedLoan’s management, the PSLF program has been plagued by dismal approval rates and widespread irregularities, leading to Congressional inquiries and lawsuits.

Borrowers on track for PSLF may be understandably concerned about what lies ahead. Here’s what you need to know.

FedLoan Servicing Will Be Gone, But The Public Service Loan Forgiveness Program Will Still Be There

The fact that FedLoan Servicing is getting out of the student loan servicing business does not have any impact on the existence of the Public Service Loan Forgiveness (PSLF) program. PSLF is a program that was established by enabling legislation passed by Congress and signed by President Bush in 2007. Its existence is not tied to a specific student loan servicer, which is simply a contractor acting on behalf of the U.S. Department of Education. FedLoan Servicing does not actually own any of the student loans that it services — it is, effectively, just an agent of the federal government that was hired to handle billing operations and to administer federal loan programs on its behalf.

Transferring To A New Student Loan Servicer Could Get Messy

As FedLoan Servicing winds down operations later this year, the Department of Education will likely start the process of transferring borrower accounts to its other contracted loan servicing companies. Student loan borrowers on track for PSLF should be able to continue making progress towards eventual loan forgiveness even with the new loan servicer.

However, servicing transfers can be disruptive, since there often isn’t a clean or complete transfer of records from one student loan servicer to the next. Student loan borrowers on track for PSLF should take steps now to protect themselves from possible future disruptions by downloading and saving their payment histories and important correspondence, updating their contact information, and monitoring their accounts and credit reports.

The Dispute Process for Public Service Loan Forgiveness May Change

During its time managing the PSLF program, FedLoan Servicing was accused of widespread irregularities in its determinations about whether student loan borrowers had been making qualifying payments towards the student loan forgiveness program. Senator Elizabeth Warren (D-MA) recently alleged in a Senate committee hearing that FedLoan Servicing “systematically undercounts” PSLF payments, and that prior Department of Education audits had found that PHEAA’s automated system created errors and improperly disqualified PSLF payments.

Student loan borrowers have filed a multitude of disputes with FedLoan Servicing about qualifying PSLF payments, and some borrowers have been waiting months or longer for a resolution. FedLoan Servicing may not have much incentive to resolve these disputes before winding down its operations later this year, and its capacity to address these disputes may diminish as its employees gradually leave to find new employment.

Student loan borrowers thus may need to submit new disputes with their new student loan servicer after the transfer takes place. Alternatively, borrowers could escalate their existing disputes at any time with the U.S. Department of Education by submitting formal complaints to the Federal Student Aid Feedback System or the Department’s Ombudsman’s office.

Are Public Service Loan Forgiveness Reforms Coming?

Given the well-documented problems associated with the management of the PSLF program, FedLoan Servicing’s abrupt departure is likely to accelerate calls for widespread PSLF reform. Earlier this year, over 100 student loan borrower advocacy groups sent a letter to Secretary of Education Miguel Cardona, urging him to use emergency authority to conduct a 90-day audit of the PSLF program and automatically forgive the student loan debt for all borrowers who have completed ten or more years of public service, regardless of their specific compliance with the PSLF program’s complicated eligibility requirements.

Advocacy groups and congressional Democrats have also called on the Biden administration to extend the current pause on most federal student loan payments, which currently is scheduled to end on September 30, until programs such as PSLF can be fixed. With FedLoan Servicing’s recent announcement, such an extension appears to be more likely, but the Biden administration has not yet made any decisions.