Some borrowers don’t like their current lender or servicer. There are several options for moving their student loans to a different lender or servicer, depending on whether the loans are federal student loans or private student loans.
Lenders and servicers are sometimes different organizations. The lender or holder of a loan is the financial institution that owns the loan. The lender may have originated the loan, or it may have bought the loan from another lender. A servicer is an organization that manages customer service functions, such as billing, collecting payments and answering borrower questions on behalf of the lender. Some lenders service their own loans. Some lenders have multiple servicers.
How to Change the Servicer on a Federal Student Loan
When a borrower obtains a Federal Direct Student Loan, the initial servicer is assigned by the U.S. Department of Education. The U.S. Department of Education may also change a borrower’s servicer occasionally, but the borrower does not get to choose the new servicer.
The assignment of borrowers to servicers is random, to permit comparison of servicer performance. For this reason, the U.S. Department of Education does not let borrowers choose their servicer or switch servicers.
However, there are three ways a borrower can transfer their loans to a different servicer.
- Choose Public Service Loan Forgiveness (PSLF). If a borrower files an employer certification form or applies for public service loan forgiveness, their loans will be transferred to FedLoan Servicing (PHEAA), the servicer that specializes in public service loan forgiveness.
- Apply for Total and Permanent Disability (TPD) Discharge. If a borrower applies for a disability discharge, their loans will be transferred to Nelnet, the servicer that specializes in disability discharge.
- Obtain a Federal Direct Consolidation Loan. If aborrower applies for a Federal Direct Consolidation Loan online at StudentLoans.gov, they can choose the servicer.
Borrowers can also change the lender or servicer on a federal student loan by refinancing the loans into a private student loan.
Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
The final option for getting away from a bad servicer is to pay off the loans in full.
How to Change the Lender of a Private Student Loan
You can’t change the servicers on a private student loan, but you can refinance them (sometimes called a private consolidation) with another lender.
This does not transfer the loan. Instead, the new loan pays off the balance on the old loan.
What Happens When You Change Servicers?
When you change loan servicers, the terms of the student loan do not change. However, the payment process may change:
- The due date may change
- The payment address may change
- The auto-debit payment instructions may need to change
There are also a few pitfalls when you change servicers by obtaining a Federal Direct Consolidation Loan.
- Accrued but unpaid interest is capitalized at loan status changes, including consolidation
- Consolidation resets the clock to zero on loan forgiveness, since loan forgiveness is provided on a per-loan basis, not a per-borrower basis, and consolidation results in a new loan
- Other borrower benefits may be lost when a loan is consolidated, especially when a FFEL program loan is consolidated into a Federal Direct Consolidation Loan
What Happens When You Change Lenders?
When you change lenders by refinancing your student loans into a private consolidation loan, the private consolidation loan is a new loan.
The terms of this loan may be different than the terms of the loans that were refinanced. There may be a new interest rate, a new repayment term and a new monthly payment.
In particular, if you refinance a federal student loan into a private consolidation loan, you will lose the superior repayment benefits of the federal student loans.
If a private student loan is refinanced without a cosigner, it may effectively release a cosigner on the original loan from their obligation to repay the debt.
Warning about Changing Servicers
Sometimes, borrowers seek to change their servicer because of perceived problems with the servicer. However, borrowers should confirm that the problem is a problem with the servicer and not the loan program. Otherwise, a change of servicer will not fix the problem.
For example, servicers of Federal Direct Student Loans do not have the authority to change the interest rate. They also do not have the authority to cancel all or part of the borrower’s debt, except in limited circumstances specified by law (e.g., death and disability discharges, closed school discharges, identity theft, etc.). So, a servicer may be unable to negotiate the terms of the loan or provide financial relief because they are unable to do so, as opposed to unwilling to do so.
There are several alternatives to changing the servicer or lender of a loan.
- Call the lender to ask about other solutions, such as changing the repayment plan, changing the due date, or obtaining a deferment or forbearance.
- Apply for student loan forgiveness, such as Teacher Loan Forgiveness or Public Service Loan Forgiveness. If this pays off the debt, the borrower is free from the servicer and lender.
- Pay off the debt early, if you can afford to do so.
- Use a balance transfer check to transfer the loan to a credit card. Usually this is not a good idea, since the interest rates on credit cards are higher than the interest rates on private student loans. Even if you get a 0% introductory rate, the introductory rate will not last. But, perhaps you can afford to pay off the remaining balance before the introductory rate expires.
- Obtain a personal loan from a local bank or credit union. Sometimes these loans may offer a lower interest rate than a private student loan.