Journalism in the Public Interest

Student Loan Borrowers Dazed and Confused by Servicer Shuffle

A little-known legal provision forces the federal government to award contracts to qualifying nonprofit student loan servicers, putting them in charge of managing millions of loans. The shuffle has thus far caused problems for some borrowers.


Graduate candidates watch from the stands during the New York University commencement at Yankee Stadium on May 13, 2009. A recent change to who services student loans has caused problems for some borrowers. (Chris Hondros/Getty Images)

The Department of Education has been transferring large batches of federal student loans to new loan-servicing companies — leaving in the lurch some borrowers who are suddenly encountering problems with their loans, such as payments that are mysteriously adjusted up or down.

The switch, which has been going on for months and will ultimately include millions of loans, is mandated by a little-known provision tucked into the 2010 healthcare overhaul. Pushed by a consortium of nonprofit student loan companies, the provision forces the DOE to use nonprofit loan servicers. But at least in the short run, the switch has caused problems.

Borrower Isabelle Baeck said that after a new servicer, Mohela, took over her loans in December, she received a letter saying that her monthly payments had been reduced to $50 — roughly a quarter of what they had been. The change meant Baeck would ultimately pay more in interest over a longer period of time. Concerned, she said she has made repeated calls to get the problem fixed, only to have the payments repeatedly readjusted.

A Mohela representative declined to comment on specific borrower situations but said that the company is working hard to minimize disruption and to resolve issues as they arise.

Baeck is not alone. Since last fall, one million borrowers have had their federal student loans randomly assigned to one of the new companies, all nonprofits or subsidiaries of nonprofit organizations. It is not known what proportion of borrowers has had problems during the switch.

Like their for-profit counterparts, many of these nonprofit student loan companies traditionally originated, bought and insured student loans, with the day-to-day servicing making up only a portion of their business. Several — including at least six that the department has transferred or is planning to transfer loans to — have been touched by scandal in those other capacities, with accusations ranging from bad lending practices to violating state law to overbilling the Education Department.

In all, the Department of Education expects to add more than a dozen new servicers to the mix, roughly tripling the total number of companies that were handling direct federal loans this time last year. The move would also mean that borrowers with such loans would eventually be using about a dozen separate servicer websites, whereas before there was a single website for all direct loans.

Some worry the addition of so many new servicers could make standardization and oversight more challenging.

"It's hard to know if having more servicers will help or hurt because it's so bad with just a few right now,” said Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. "Our fear is that the more you have, the less ability you have to oversee them.”

Ultimately, borrowers having their loans moved over to these new servicers have Congress to thank for it. Coupled with the passage of the health care reconciliation bill was an overhaul of federal student lending, which shifted the government away from backing loans by private lenders — what were known as federally guaranteed student loans — and toward loaning directly to students.

For-profit and nonprofit student loan companies alike lobbied over the change and shifted their business models accordingly. In particular, the nonprofit student loan companies won a carve-out to ensure they'd get in on the business of servicing the direct federal loans. The carve-out was crafted and lobbied for by the Education Finance Council, a trade group representing nonprofit student loan companies that spent more than $200,000 on lobbying that year. (The Education Finance Council did not respond to a request for comment.)

Now, two years later, borrowers are experiencing the effect of the law.

Borrower Karen Mahnk said she logged into the Department of Education's student loan website in October and saw that her loan balance — which typically hovered around $100,000 — was suddenly zero. When she called around, her servicer told her that she had been put in an administrative forbearance.

That didn't sit well with Mahnk, who said she didn't want to put off her payments and certainly didn't want to rack up additional interest. She said she called again and talked to someone else, who assured her the opposite — there was no record of forbearance.

While still confused about many details, Mahnk said she learned that her loan is being handled by a new servicer, a company called EdFinancial, which shows she's not due for a payment until June. Taking no chances, Mahnk said she has been forcing through monthly payments.

"I wanted to continue making payments regardless of what their problem was,” Mahnk explained. But she's still concerned about how things will shake out. "I'm only taking their word on it that my payment is fine, and that EdFinancial is going to do everything they're supposed to do.”

EdFinancial did not respond to a request for comment.

Some borrowers were notified of the switch only after the fact. "There was really no prior warning,” said Scott Trudeau, a borrower whose loans were transferred to Mohela in late January. Trudeau, who said he's never fallen behind on his loans, has had recurring problems since the switchover trying to correct his bank account information with Mohela.

"I get delinquency notices regularly, I get letters in the mail, but every time I try to give them money, the system breaks down,” he said. "I've had no trouble with the Department of Education all these years, but it's been nothing but confusion with Mohela.”

"Anytime you change a servicing relationship, it can cause concern,” said Will Shaffner, Mohela's director of business development and government relations. "They need to pick up the phone and call us. If they're not satisfied with our service or aren't getting answers, they should ask to speak with a supervisor. They can even get in touch with our CEO if they need to.”

The Department of Education's own implementation schedule shows that the transition is still a work in progress and the phasing in of new servicers is being pushed back.

"FSA has been working aggressively to implement the new not-for-profit servicers,” the document reads. "Our original schedule did not fully accommodate the level of effort required to bring up servicers in a way that minimizes risks for borrowers, FSA, and the not-for-profits themselves.”

So, is this just graft?

I contacted Senator Patty Murray on this issue back in October when the website I managed my student loan through switched from a .gov to a horribly broken .com.  While her staff were kind and responsive, even they weren’t able to tell me the reason for the switch.

I shouldn’t have a loan. I paid one off to the Department of Education years ago that should have represented monies owed for the 4 months I was there between 1987-88.

The “school” in question had fled that state (AZ) after the State AG had instigated an investigation for Criminal Fraud. According to the Chief Admin, Thomas Mathews of the school, I owed then $1750 net after three students failed to pay rents at our house where the school housed them.

Yet, somehow, in succeeding months after leaving for failure to have the materials or staff to complete the advertised course, the debt increased to over $6800. My ongoing efforts to resolve only got a restraining order against me, which was in effect until they fled with the records and monies.

I was contacted by the DOE, settled on the $1750, which I paid, thinking the debt was cleared. The DOE couldn’t find any additional records, but a year later began collection efforts for over $7000 which has now grown to over $22K. The EOCCA, or whatever it’s decided to call itself is the new collector. Those monies were never authorized by me, as I was withdrawn and working full time. The only paperwork I ever saw looked like poor copies of poor copies. The several Collection Agencies I spoke with went away after I mentioned they needed to come where I live if they intended to garnish-plus they needed to either provide original docs to be examined by a Forensic Graphologist, or the person(s) that signed off on the original verified copy stamp to have THAT signature verified. They usually disappear for a while, but a new C.A. always surfaces.

I need someone to have the “stones” to go get the money from the criminals that stole it in the first place. I’m not the only one preyed upon by the Government on behalf of criminals they seem to ignore. Isn’t it about time this process AND these types of “schools” be brought under control.

It seems our Government aids and abets criminals more and more, these days, while preying on the those already victimized.


Just for reference (specifically to Baeck’s case), if your monthly payment is lowered, it doesn’t mean you need to limit your payment to that unless your loan contract explicitly forbids it.

As a matter of fact, unless they saddled you with an early termination fee (which would be a disgusting even for this business), if you insist that overage is applied to the principle (a checkbox on the bill, back when I was paying off my thankfully-small loan) instead of future payments, that should mean less interest.  You’ll only pay the lower interest for the lower monthly payment and pay your bill in about the same amount of time (and probably less).

So before any of you recent graduates tries to fix the situation, get a good look at what you’re up against and see if there’s actually a benefit buried in your situation.

Ric, since you’re not complaining about a tax hit (“income” from not paying the full amount in the settlement), it sounds like the DoE or whoever contracted for them took the money and ran, or at least lost your paperwork.  I don’t know how they work, but you might want to go back to them with any documentation you have about the settlement.

Why do the American people continue to allow lobyist to run the country?

American Education Services (a/k/a AES) is just as horrible and has been causing similar nightmares since @ 2007 for student loan borrowers.  I never missed any payment, ever, and yet every month they call multiple times 7 days a week, send dunning letters, and, have reported to credit bureaus ... all because of their shoddy record-keeping.  I regularly call, show them irrefutable proof of my payments, they apologize, say they’ll correct their records, and yet continue to grossly mismanage their accounts to my extreme detriment month after month, year after year.  If misery loves company, you are not alone.  These “loan servicers” are despicable.

In response to John:

To take advantage of the .25% interest break, enrolling in DoE Direct Deposit was required. This is not a set fee being sent by my bank/me, but a fee automatically withdrawn by the DoE from my account on a monthly basis.

When my loan transferred to Mohela they began only pulling $50/ month without notifying me or getting my approval. I called and had it returned to the correct amount. Six weeks later I notice that only $50 had been pulled again. So I called again, rallied up the phone chain to a manager, made a stink and got the repayment plan locked back to my previous amount. Two weeks ago the same thing happened, again.

In the 10+ years I had my loan with the DoE, I only had to contact them once (to change my name when I got married). My Direct Deposit managed itself, just as it’s meant to.

Each time I called Mohela I was given a different reason for my repayment plan being adjusted. None of them being adequate. None of them explaining how and why these changes were being made without my approval - my understanding is that this is not legal.

If that wasn’t enough trouble, consider that these students are on the hook for these loans until the day they die and that 1 out of 2 of them are unemployed or working a part-time low wage job after they graduate in today’s dismal domestic labor market:

Economy In Crisis

William C Crain

April 24, 2012, 12:31 a.m.

Hard to imagine the pressure of repaying student loans at today’s wages. I’m working to help a couple in just this situation. In a country that should support a Free College Education for everyone or equivalent… and I don’t mean the Military.

Wow…so many ways to pay for someone else’s Criminal Activity-even EBT-how nice. Just one little thing though, I didn’t incur the debt, the criminals that fled prosecution did. For all of you who think rolling over and dealing with it is the answer, you ARE as complicit in this kind of crime as the DoE and the “School” who took the money and ran. “If you’re not part of the solution, you’re part of the problem.”

Isabelle, that makes more sense.  More sense that you have problems, I mean, not that the system makes more sense.  Once a computer’s involved, all bets are off.

Personally, I’m very paranoid about letting someone’s computer automatically withdraw money from my account.  Things like this happen, and you only need one glitch for it to empty your account by “forgetting” that the transaction succeeded.  And nobody’s responsible for it.  Not that this ranting helps you, of course.

Ric, I hope you don’t think I was accusing you of anything.  I’m hoping what little I know about these situations might be of use, actually.  My point is that, when you settle a debt with a bank, the part of what you’re claimed to owe that you didn’t pay is reported as income.

If the IRS isn’t coming after you for the tax on five thousand extra dollars, then your settlement wasn’t reported.  If it wasn’t reported, then your account was never marked as paid.  If you paid and nobody marked it down, you should chase that to the alleged creditor (the DoE) and have them call off the dogs.

A copy of the cashed check to the collection agency within the right timeframe should make it stop and point them at the vanished collectors.  In theory, at least.


April 24, 2012, 10:47 a.m.

There should be a law stating that no loans are due nor accrue interest until whomever services the loan can produce a complete account of every interest _amount_ [not percentage rate] charged to the account at every date, whether that company owned the loan then or not.

In response to Ric:  have you tried to get your loan discharged?  As I understand it, if a school closes, you can not only get the loan discharged, but get a refund of any monies paid on that loan.  See for details. Could be worth a shot.

Jennifer Catherine

April 25, 2012, 10:46 a.m.

My loans switched from Great Lakes to Nelnet last November and since that time I have had extreme difficulty in getting their Quikpay system to deduct my payments.  They have sent me “zero sum” due statements each month, with a $600 amount in the “payments” column—that was just a repeat of a Dec. 2011 payment I made before the Quikpay system was engaged.  But I thought the monthly deductions were being made for three months, and approximately $656.00 in interest accrued.  They will not waive this amount.  I would not have even understood that Quikpay wasn’t working if I hadn’t caught the small print that interest was suddenly accruing on a loan that I have been timely repaying for nine years.  They wouldn’t engage Quikpay because on the phone I requested that my payment be about $200 above the minimum.  I was expecting about $600 to be deducted each month (hence the confusion over the “zero” due statements).  But I needed to create an online account and check off an “override” box to pay more than the minimum due.  No one told me this.  I have requested copies of all correspondence from them and transcripts of my telephone calls.  They have not provided them. I am paying the accrued interest with a seperate check with the words “under protest-all rights reserved.”  And I am going to file a complaint with the New York Attorney General and am in the process of contacting class action attorneys.  Had I not noticed the accruing interest, Nelnet would have continued sending me “zero due” statements with “$600.00” listed in the “payments made” line until my loan balance was no longer “paid ahead.”  And interest would have continued to accrue the entire time.

I have worked at Sallie Mae and DoED.  Centralizing loans to the Government make all taxpayers the Guarantors for those loans.  When the students default the taxpayers are the ones who eat the BAD DEBT.  It is simple as that.  Centralized government means all loans are then treated as high risk (all loans are made regardless of possibilities of being paid back – it is not part of the loan origination process).  The Federal Student Loan System (FSA) is will fail before SSA does!

From The Desk of Dr.Brian Moynihan

May 13, 2012, 6:41 p.m.

From The Desk of Dr.Brian Moynihan
Bank of America New York
Branch offices New York,
1680 Broadway, New York,
N.Y 10019, USA
Director,Credit Control / Telex Dept.
Email ID .(JavaScript must be enabled to view this email address)

Our Ref: BOA/NY-USA/TTD/998/12

Attn: The Beneficiary,


We are hereby officially notify you concerning your fund Telegraphic Transfer through our bank, Bank of America, New York, to your bank account, which has been officially approved by the management of World Bank Swiss (WBS) to credit the sum of US$18.500,000 Dollars into your bank account. 

Note that I have started processing your payment and every thing concerning the immediate remittance of your funds will be carried out within the shortest possible time from the time we received your? Below needed information.

Also be informed that the Governor of Bank in London (BL) will sign on your payment advice and a copy of the advice will be sent to the World Bank in Swiss for some record purposes. Meanwhile your information and your full contact details were received from our research manager, Barr. Paul Peterson on your behalf to FRB for immediate release of your fund.

This fund was part of the lodged Late President Saddam Hussein of Iraq discovery fund with Wo rld Bank of Switzerland, which the Swiss Bank has decided to distribute it generously to help few lucky individuals and the American Government is in agreement with the Swiss Bank to distribute the fund to 700 hundred thousand people in America, Europe & Asia in other to help improve their businesses.

Therefore, reconfirm the the below information accurately, because this office cannot afford to be held liable for any wrong transfer of funds or liable of any fund credited into an unknown account.

These are the information we needed to be reconfirmed by you.

1.Your Full Bank Account Details:
2.Your Direct Cell or office phone to reach you:
3.Your address of locations:
4.Your full name:

Finally, you are required to reconfirm directly to me the above information to enable me use it to process your bill of payment. 

Your quick response shall be mostly appreciated; all your response should be directed through our alternative email address for the immediate attention of the credit control department.

Yours Faithfully,

Dr. Brian Moynihan
Director, Credit / Telex Dept.
Bank of America , NY. USA.

This article is part of an ongoing investigation:
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