Personal Finance

Financial aid agency will stop servicing federal student loans. Here's what you need to know

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Key Points
  • The Pennsylvania Higher Education Assistance Agency, which services federal student loans for the U.S. Department of Education, has announced that it will no longer do so.
  • Here's what borrowers need to know about the change.
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The Pennsylvania Higher Education Assistance Agency — which oversees loans of 8.5 million student borrowers — announced it would not renew its contract with the federal government when it ends later this year.

Consumer advocates applauded the news because PHEAA, a quasi-governmental student aid organization created in 1963 by the Pennsylvania General Assembly, has been accused of providing borrowers with misleading information and making it harder for them to access relief programs.

Just around 5% of borrowers who've applied for the national public service loan forgiveness program, which PHEAA administers, have been approved, according to recent data.

The agency, which is known to borrowers as FedLoan, is one of several companies the Education Department pays to manage the government's $1.59 trillion student loan portfolio.

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"Student loan borrowers across the country, including millions of teachers and other public service workers, received the welcome news that the Department of Education will no longer rely on a company accused of widespread mismanagement and abuse to handle millions of borrowers' student loans," said Seth Frotman, executive director of the Student Borrower Protection Center, in a statement.

PHEAA's contract with the government will end on Dec. 14, 2021.

"In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs, as managed by the U.S. Department of Education, have grown increasingly complex and challenging while the cost to service those programs increased dramatically," said Keith New, a spokesman for PHEAA.

What the change means for borrowers

If your federal student loans are currently serviced by PHEAA, you'll be matched with a new lender, said higher education expert Mark Kantrowitz.

You'll want to make sure the new servicer has all your correct information.

Most federal student loan borrowers don't have to make a payment on their student loans until October, thanks to a pandemic-era relief policy. But when you do resume payments, you'll want to continue making them to PHEAA until you learn of your new lender, experts say.

Doing so is particularly important for borrowers pursing public service loan forgiveness, since each payment brings them closer to the 120 payments required to get their debt forgiven. Maintaining a record of your payments can also protect you.

"Borrowers should keep a spreadsheet showing, for every payment, the date of the payment, the amount of the payment, the repayment plan and the eligible job," Kantrowitz said. "If there are ever any problems, this spreadsheet will be helpful in resolving those."

If you don't like your new servicer, you can switch by consolidating your federal loans. However, doing so can reset your repayment timeline," he said. "So if you're pursuing public service loan forgiveness, I don't recommend doing this."

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Also, most federal student loan servicers perform similarly, Kantrowitz said. "Switching servicers may amount to jumping from the frying pan into the fire, with no real improvement."

Still, borrowers who run into issues with their servicer should file a complaint with the Consumer Financial Protection Bureau.