FedLoan, a Federal Student Loan Handler, Won’t Renew Its Contract

The oft-maligned loan servicer’s decision will increase pressure to extend the pause on student loan payments, perhaps into next year.

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FedLoan, a handler of millions of federal student loans, won’t renew its contract.

July 8, 2021, 2:03 p.m. ET

One of the federal government’s largest student loan servicers just called it quits.

The Pennsylvania Higher Education Assistance Agency — which oversees the loans of 8.5 million student borrowers — said Thursday that it would not renew its contract with the federal government when it ends later this year.

The agency, which is known to most borrowers as FedLoan, is one of several companies the Education Department pays to manage the government’s $1.59 trillion student loan portfolio. About 23 million borrowers aren’t making payments right now because of the temporary pause put in place because of the pandemic — and FedLoan’s announcement will only increase the pressure to extend the moratorium.

The pause on payments and interest could expire in less than three months — as soon as Sept. 30. The millions of borrowers whose loans are overseen by FedLoan, including those in the Public Service Loan Forgiveness program, will have to be moved to a new servicer at the same time the machinery of payment processing is getting back up to speed.

Turning the switch back on for tens of millions of borrowers was already going to be a monumental task, so consumer advocates and some legislators have been calling for the payment pause to be extended. They argue that the economic recovery has been uneven and that loan payments would have to resume just as other pieces of the pandemic safety net — including eviction moratoriums and enhanced unemployment benefits — are being dismantled. Democrats from both chambers of Congress wrote a letter to President Biden last month urging him to push payments off until at least March 31.

The Education Department declined to comment on whether the situation would delay the resumption of payments. But advocates for student borrowers said it was crucial that the system have more time.

“This ups the ante on the need to extend the payment pause,” said Persis Yu, a staff attorney at the National Consumer Law Center and the director of its Student Loan Borrower Assistance Project. “That was always a really tall order, and to try to do that while simultaneously transferring borrowers from one servicer to the next just compounds the amount of things that can go wrong.”

Ms. Yu also said she wondered whether other servicers would have the capacity to take on all the borrowers FedLoan now handles.

The Pennsylvania Higher Education Assistance Agency, a quasi-state agency, conducts its student-loan servicing operations for federally owned loans as FedLoan. It said in a statement that it planned instead to focus on its “core public service mission in Pennsylvania,” which includes helping students there pay for college. The agency said that it entered the contract with the Education Department in 2009 to support that mission, but that the federal programs “have grown increasingly complex and challenging while the cost to service those programs increased dramatically.”

The contract for FedLoan, which has been frequently criticized for deceptive practices and poor service, expires on Dec. 14. The agency said in a statement that it notified the Education Department on Thursday that it would not extend its contract “beyond what is needed to ensure a smooth transition for borrowers.”

Rich Cordray, the chief operating officer at the Federal Student Aid office at the Education Department, said in a statement that both sides had agreed to work together on a wind-down plan, which will “feature early and frequent communications and clear guidance on what borrowers should expect, as well as strong oversight” from his agency during the transition.

Such transitions haven’t always gone smoothly. Another servicer switch — involving 35 million loans in 2013 — created issues that have lingered for nearly a decade, according to an analysis released in October by the Student Borrower Protection Center and the American Federation of Teachers. The report found millions of errors, which were especially problematic for borrowers using the Public Service Loan Forgiveness program.

Though the disruption will complicate an already cumbersome process, consumer advocates and some legislators were pleased that borrowers would no longer have to work with FedLoan. This year, it reached a settlement with the Massachusetts attorney general, resolving claims of unfair and deceptive practices that deprived teachers and other public servants of relief promised under the public service forgiveness programs. The New York’s attorney general sued FedLoan in 2019 for similar reasons, also claiming it had failed to deliver on its most basic tasks.

Seth Frotman, executive director of the Student Borrower Protection Center, called it “welcome news that the Department of Education will no longer rely on a company accused of widespread mismanagement.”

FedLoan’s original loan-servicing contract expired in June 2019, but it had continued working with the department through a series of extensions.

The decision was first reported by Penn Live.

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