Last week I logged on to my federal student loan website to pay my monthly bill and discovered that a mysterious benefactor had paid my student loans in full! Considering that the full amount of my loans, for undergrad and graduate school, would have had me paying a substantial amount for the next twenty years, this was very exciting. While certainly was not comparable to a half-billion dollar Mega Millions win, I was momentarily caught up in a euphoric state: no more monthly loan payments!
Alas, my innate skepticism kicked in, and I did some research. Within moments, I realized what had happened: my federal student loan had been turned over to the Missouri Higher Education Loan Authority (MOHELA) for administration.
This was news to me. I was not informed before the transfer, nor was I ever told that the loans I had consolidated under the William D. Ford Federal Direct Student Loan program could ever be transferred. That was, in fact, one of the chief attractions of federal loan consolidation. In addition to lowering my monthly payments and interest rates through consolidation, there was the comfort of knowing that my own tax dollars were paying for the administration of my loans, making sure that there was strong federal oversight.
How and Why Are Federal Student Loans Transferred?
However, in September 2009, the US Department of Education (USDOE) announced that it had “expanded its federal loan servicer team to provide additional servicing capacity for Title IV loans owned by the Department of Education” and in September 2011 it issued this announcement:
As our federally-owned loan portfolio continues to grow, we are ready to move to the next step in ensuring an efficient and effective multi-servicer, borrower-centric approach to servicing. We will further expand our federal loan servicer team through contracts awarded under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation. This solicitation offered NFP entities the opportunity to submit proposals individually or in teams for servicing borrower accounts on our behalf. Whether individual or team award, our customers will know and face one servicer. The Department will annually measure each servicer’s performance in the areas of borrower satisfaction and default management and use the results to assign additional volume when applicable.
These announcements were not sent to borrowers; rather, they were sent to loan management agencies. The result was that MOHELA was awarded a federal contract to administer several different kinds of student loan accounts. There was a big ribbon-cutting ceremony in Missouri, and MOHELA began the work of handling up to 10 million borrower accounts. Individual loans were transferred to MOHELA without prior explanation to borrowers like myself, who went to bed one night with the understanding that my loan was administered by one federal agency, and woke up to discover that it was now administered by a state agency I had never heard of.
This is similar to what happens when banks sell mortgages, which is completely legal though confusing and frightening to some, even though the new mortgage owner must honor the original terms of the mortgage.
According to Shannon Rasberry on the Student Loans Blog,
The U.S. Department of Education has approved the Missouri Higher Education Loan Authority (MOHELA) to service federal student loans beginning in late October. The Missouri agency is the first state-based nonprofit organization to be approved by the Education Department to service federally-backed student loans since a 2010 law cut out all banks and private lender middlemen from the federal student loans business. The law required all federal college loans to be originated directly by the government and designated only a handful of loan servicers.
This means that the loan transfers to MOHELA are part of a reform effort: by eliminating the private businesses from student loan management, the federal government hopes to decrease costs and have more oversight, hopefully to prevent fraud and error.
Problems with MOHELA
I have no problem with the federal reform goal. I do question the method. There was no opportunity for borrowers to weigh in on this decision, and certainly no informed consent—I was never informed, and only found out accidentally, when I tried to pay my loan.
And some people are reporting major problems, including higher interest rates and longer payment schedules, with the MOHELA takeover of federal student loans. Blogger Selena Deckelmann reports that when MOHELA took over her student loans, they changed the terms of the contract, extending her repayment period, which increased the total amount of interest she would pay. This has happened to others as well. Many borrowers also report significant problems with the website, which loses payments, is slow to process and therefore reports payments that were made on time as late, because they are processed late, and, most importantly, dramatic increases in the amount of monthly payments.
What to Do if Your Student Loan is Transferred
Here are some important steps to take if your loan is transferred to MOHELA or any other agency:
- Keep a log of all contacts with and communications from MOHELA. Specific dates are important.
- Find and hold onto the terms of your original federal student loan, so that you can track any changes.
- Maintain copies of cancelled checks, print out copies of screen shots from the MOHELA website that show payments that you have made, and copy bank statements that show direct payments.
- If you have any problems, call customer service and try to resolve them. If you get nowhere, call the USDE Ombudsman’s Office at 1-877-557-2575 and register a complaint. MOHELA works under a contract with the federal government, so their services are monitored for quality. The more complaints, the less chance there is that they will maintain the contract. This means that MOHELA will try hard to resolve issues and eliminate complaints.
I’ve never regretted taking out student loans, and happily pay my monthly loan bill. This was a debt I willingly incurred, fully aware that I would probably be paying these loans for the rest of my life. What I do not like, however, is the lack of control I and other borrowers have over decisions like loan management. While there is enthusiastic support for the student loan forgiveness movement, most borrowers understand that they must pay back their loans in full. It’s only fair that we be allowed to do so in a fair and informed manner.