One of the most important factors to your student loan experience—one which may not be immediately apparent until after you’ve signed your loan papers—is your student loan servicer. With federal student loans, you don’t have a choice of servicer, but with private student loans and student loan refinancing, you do have a choice, if you do your homework. In this article we will explore what a servicer is, why your servicer matters, and what to do if you get stuck with a bad servicer.
Loan originator vs. lender vs. loan servicer
Generally, there are three types of entities you might deal with when getting a student loan or a student loan refinance (or any loan, really):
- The Lender – This is who you are borrowing money from. With federal student loans, your lender is the U.S. Department of Education. With private student loans or refinance loans, your lender is usually a bank, credit union or other financial institution
- The loan originator – This is who takes your application, handles the approval process, presents you with your loan agreement, and disburses your funds.
- The loan servicer – This is who handles your monthly bills, receives payments, considers requests for deferment or forbearance, and does anything else related to the maintenance of your loan
Sometimes all three roles are supported by the lender itself but an increasing majority of programs contract with third party platforms to increase loan origination and servicing efficiency.
The student loan servicer is arguably the most important of these three entities, in terms of your long term experience. The loan originator is pivotal in helping set up your new loan, but you will only communicate with them for a short period of time (30 days or less). The loan obviously wouldn’t happen without a lender, but you probably won’t deal with them directly.
The loan servicer, on the other hand, is the company you will need to spend time with on the phone, if something goes wrong over the life of the loan.
How your student loan servicer is determined
With federal student loans, in most cases, you will be set up with one of nine servicers, and you don’t have any say in the matter. You might spend ten or more years dealing with one or more of these companies:
- Great Lakes Educational Loan Services, Inc.
- FedLoan Servicing (PHEAA)
- Granite State – GSMR
- OSLA Servicing
With private student loans or student loan refinancing, you (hopefully) will be comparison shopping a few different lenders. These lenders may indicate who services their loans on their website or in the initial documents you receive, but if not, you should ask before you apply. It’s just as important to look up online reviews or complaints about the servicer, as it is for the lender or originator.
Check the Better Business Bureau website and take a look at what types of complaints (if any) have been filed. Also, run a google search for the company’s name and —complaints.” The worst offenders will have a rap sheet a mile long with news articles about lawsuits and issues with the Consumer Financial Protection Bureau (CFPB).
What to watch out for with unscrupulous servicers
Some student loan servicers are great – they have helpful websites, they have good customer service, and most importantly, they don’t steer borrowers into financial pitfalls, either through incompetence or deceptive tactics (ok…maybe that’s a low bar for —greatness”).
But the worst student loan servicers are so bad that the CFPB, which is a government entity responsible for protecting the financial interests of consumers, routinely files lawsuits to keep this unscrupulous behavior in check.
Furthermore, the customer service of some of these companies is so bad that their phone representatives are required to give you their badge number at the beginning of each phone call, so that they can be held accountable for what they tell you. And based on my experience, it might take 45 minutes to resolve a servicing issue over the phone with certain companies.
Here are some of the worst things student loan servicers have been accused of, for example in this recent lawsuit by the CFPB, and how they might impact you.
Not applying loan payments correctly to loan accounts (—you had ONE job!”)
When you have student loans that haven’t been consolidated or refinanced, you generally will have multiple loan accounts—some people might even have 10 or more accounts with the same servicer. As such, it is critical that each payment you provide gets spread out among those accounts properly.
If the payments are misapplied, some of the accounts might fall into delinquency, and get reported as such to the credit bureaus. This could severely impact your credit score and ability to get approved for financial products like an auto loan or mortgage.
If this happens to you and it is the student loan servicer’s error, they should be able to reapply the funds and correct the credit bureau reporting. But at the end of the day, it shouldn’t be happening often enough that the government has to crack down on it with lawsuits. And you shouldn’t need to spend significant time on the phone to fix the error.
Steering federal loan borrowers into multiple forbearances rather than income-driven repayment plans
One of the benefits of federal student loans is the array of programs designed to help borrowers who are struggling to make payments, both short-term and long-term. One of these programs is forbearance, which allows you to take a short break from making payments should you experience temporary financial hardship. The long-term solutions are Income-Driven Repayment plans. These plans can help lower your monthly payment, and even offer loan forgiveness after an agreed-upon amount of time.
If you are habitually having trouble making payments, your servicer should be letting you know all of your options, not steering you into multiple forbearances. When you go into forbearance, your interest piles up, bigtime. With some income-driven plans like Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE), the government will actually pay some or even all of your unpaid interest, for certain loan types. Learn more about federal student loan repayment plans in our ultimate guide.
Failing to adequately inform federal loan borrowers about deadlines to re-certify their income-driven repayment plans
If you have federal student loans and are enrolled in an income-driven repayment plan, you are required to re-certify your personal, family, and financial information every year by submitting an application form. If you fail to do so, you may not be eligible to stay on the plan, or you may lose progress toward loan forgiveness programs. Your servicer is supposed to inform you of these deadlines, and if they don’t, the consequences may be dire.
Using a bogus —paid ahead status” to make it hard to pay off your loan early, achieve loan forgiveness, or get a cosigner release
One of the most powerful tools in your student loan payoff arsenal is prepayment. Prepayment is when you put extra money toward your loan principal, in addition to your normal monthly payment. This results in paying off your loans sooner and saving on lifetime interest costs.
Most private student loan or student loan refinance companies will advertise —no prepayment penalties,” but in fact they’re not even allowed to charge those penalties—according to the CFPB, you have the right to pay off your student loans as fast as you can, without a penalty.
Some unscrupulous servicers have schemed up a way to get around this, with something they call ”paid ahead status.” Say, for example, you go into your student loan servicer’s online portal and see your normal $500 student loan bill, but you’ve recently gotten some extra cash and can afford to pay $1,000 that month—and you do so.
You might imagine that the extra $500 you pay will go to your loan principal and reduce your interest costs, but some servicers will put you into something called —paid ahead status” and apply the extra $500 to your next month’s bill instead. This bogus status is designed to protect their bottom-line, and if you want the money to go toward your principal, you may have to contact your servicer to get around it.
The worst part is, if you are making progress toward loan forgiveness or a cosigner release, this could —reset the clock.” If you don’t make a $500 payment the next month (because you have a $0 —paid ahead” bill), it may not count as a qualifying payment toward your forgiveness goal.
How to dump a bad servicer, if you have one already
Student loan refinancing
When you refinance student loans, you are free to choose any private lender you want—and do your homework on who you’re refinancing with. This may be the best option if you are able to qualify for a lower rate through a refinance. But, it’s not the right option for everyone—you may not qualify for a lower rate, and on top of that, if you have federal student loans, you should think about whether you want to give up your federal student loan benefits.
That said, refinancing can be a great way to save money. You can compare rates from multiple lenders using Purefy’s free rate comparison tool to find the best deal.
Federal student loan consolidation
If you have federal student loans and you don’t want to refinance, you have another option. You can pursue a federal Direct Consolidation Loan, which combines all of your federal student loans into one new loan, with an interest rate that is based on the weighted average of your previous loans.
Your new loan will be assigned to one of the student loan servicers that the government uses. The best part is, on the Direct Consolidation Loan application, you can choose from any of the federal servicers offered. Make sure you do your homework by reading reviews and complaints, before deciding.
How to file complaints about your current servicer if you have trouble
If you are having an issue with your servicer and are not getting anywhere with their customer service, one recourse you have is to file a complaint with the CFPB through their website. When you file a complaint, you will need to include a description of the problem, as well as any documents you have relevant to the situation (loan statements, written correspondence, etc.).
The CFPB will not only contact the servicer and attempt to get a resolution, but the issues reported to them help identify problems in the financial services industry, and they will work to improve things for other people in the future.
You can also file a complaint with the Better Business Bureau. Similarly, they will forward your complaint to the company, who will hopefully resolve the issue. Your servicer will be motivated to respond to these complaints, in order to maintain their online reputation and Better Business Bureau rating.
If you have federal student loans, you can also report your issue directly to their U.S. Department of Education, through their feedback system.