Federal Loan Servicing: Student Loans with Serious Issues

Last updated on March 7th, 2019 at 10:33 am.

FedLoan handles federal loan servicing for millions of borrowers. This means that FedLoan does not actually lend the money; instead, they handle everything thereafter.

FedLoan collects payments, issues statements, works with borrowers on repayment plans, and so on. FedLoan is also related to AES in another key way: they have the same parent company, PHEAA.

What is Federal Loan Servicing?

The Department of Education disperses funds which are in turn managed by a student loan servicer. FedLoan is not the only provider for federal loan servicing, but together with AES, they are the largest.

Both FedLoan and AES are under the parent company of the Pennsylvania Higher Education Assistance Authority (PHEAA).

It’s important to note that FedLoan is the only servicer for the Public Student Loan Forgiveness (PSLF) program. This means that if you have a different loan servicer such as Navient and you apply for PSLF, your loans will be transferred to FedLoan if approved.

Some have lamented issues with such transfers which may be something to keep in mind.

Federal Student Loans “In Grace”

After you graduate, there is a six-month grace period when no payments are required. FedLoan eloquently deems this loans being “in grace.”

Keep in mind that while you are not required to make payments during this time, you can still pay if you so choose. While you may be looking for a job during this time, interest does still accrue. This is typical of federal loan servicing.

Thus, if it is at all possible for you to make payments while your loans are in grace, it’s not a bad idea. If you don’t, you’ll be even further in a financial hole when you start paying.

Federal Loan Servicing Pros

Based on many of the things that I’m reading, the reality is that there are not a ton of pros for FedLoan.

One of the main pros of this federal loan servicing provider is probably the federal protections. Because these loans are backed by the Department of Education, federal regulations do apply.

That is in contrast to a private lender which may have more discretion in how they can do business.

Making Payments with FedLoan

FedLoan has all of the standard options that come with federal loan servicing. In terms of monthly payments, the following options are available:

Direct Debit

Direct debit is always a nice option and my personal favorite. That’s because everything is handled online and is completely automatic. Not only that but with FedLoan in particular, you’ll get a 0.25% interest rate reduction with this option.

Visit MyFedLoan to sign up for direct debit.

Pay Online

This is your pretty standard manual repayment option online. However, one thing FedLoan calls out is the possibility of targeting payments.

What this means is that if you pay more than your monthly minimum, and have multiple loans, you’ll have the option to “target” specific loans with the rest of the payment amount. I would go with the highest interest rate personally, but that’s a call you’ll have to make.

Pay by Mobile App

FedLoan has apps for Android and iOS. You may want to take a look at the reviews before downloading though – they don’t look so good – on either platform.

Pay by Phone

There isn’t much to note here other than that the service is available 24/7. In addition, you can make payments for up to 60 days in the future.

Pay by Mail

Trusty ol’ snail mail. Once again, there isn’t much to note here, other than this is a thing you can still do. The only other callout is that if you choose this option, they recommend sending your payment 5-7 days before the due date.

Pay by Third-Party Bill-Pay Services

Per FedLoan, you won’t be eligible for the 0.25% interest rate deduction with this option, even if the payments are automatic.

Set Up Advance Payments

Once again, you can schedule payments as far as 60 days out.

Repayment Plans

FedLoan also offers all of the repayment plans typically seen with federal loan servicing:

PAYE

PAYE stands for pay as you earn, as that is what this repayment plan is all about.

Under this plan, payments are typically 10% of your income and last for up to 20 years. Payments also depend upon your family size.

After this 20-year period, loans in the PAYE plan are eligible for forgiveness.

Income-Based Repayment (IBR)

This plan is similar to PAYE, but your payments will be 15% of your discretionary income instead.

Additionally, payments will last for 25 years, or 20 years for new borrowers.

After this 20- or 25-year period, the loans will be eligible for forgiveness.

Income-Contingent Repayment (ICR)

While the previous two plans mentioned are similar, this one is a little different. According to MyFedLoan:

Reduced monthly payments are calculated using your discretionary income, family size, and total amount of eligible loan debt.

To add to this, payments are the lesser of 20% of your discretionary income and the amount you would pay on a fixed 12-year repayment plan.

Another slight variation is that payments are made for up to 25 years. After 25 years, loans under this plan will be eligible for forgiveness.

REPAYE

REPAYE stands for revised pay as you earn. Needless to say, this plan is similar to PAYE with a few slight differences.

One of the key differences is the fact that REPAYE can be calculated using a spouse’s income.

To determine which option is better for you, you can use FedLoan’s repayment calculator.

Recertifying Your Loans

This is a very important thing to do. So much so that FedLoan has it called out with an alert box and a caution sign.

All borrowers under an income-driven repayment (IDR) plan must do this every 12 months. Not that all four of the above plans fit that description.

The reason this is so important, per FedLoan:

Your monthly installment amount will most likely increase
Your interest may be added to your principal balance

So, if you choose to enroll in any of their income-driven repayment plans, it is very important to be sure you recertify every 12 months.

This can be done online by logging in using your FSA ID.

Deferment and Forbearance

FedLoan student loans may be eligible for deferment or forbearance. The two are similar; in both cases, your monthly payments will be pushed back.

The biggest difference comes down to one word: interest.

Deferment

While in deferment, certain loans will not accrue interest. Some examples include Direct Subsidized Loans and portions of Direct Consolidation Loans that have not lost their subsidy.

Needless to say, this is going to be your best option if you need to push back your payments.

Forbearance

You may also enter forbearance on your FedLoan student loans. Unlike loans in deferment, those in forbearance will still accrue interest.

Having your loans incur interest while you aren’t paying can be very costly. This is especially true if the remaining principle is high. Per MyFedLoan, interest is charged daily, which can really wreak havoc on your finances.

Compounding also applies. Because you aren’t paying, the interest charged will increase at an accelerating rate.

I would recommend avoiding this option if at all possible.

TEACH Grant Fiasco

I have seen others cover this controversy in similar posts, but it seems few cover the intricacies of just how bad things have been for some teachers.

NPR covered this story extensively, and I listen to NPR more days than not. So I heard input from several teachers during these segments on the radio.

FedLoan services TEACH Grants. In order to maintain eligibility, teachers must be able to prove they worked qualifying hours. This means submitting paperwork as proof.

The problems arose when numerous teachers did submit the paperwork but missed the deadline for submission. At first, it may sound like that is justifiable on FedLoan’s part.

The real problem is how the late submissions were handled, for several reasons:

While it’s true the paperwork was late, it wasn’t that late. According to some teachers, their paperwork was as little as one or two days late.
Grants for any teachers whose paperwork was late were automatically converted to loans. Affected teachers were not notified this was happening; one day they had grants and the next, they had loans for the same amount.

I understand you have to draw the line somewhere; we can’t expect FedLoan to let the paperwork be months late. Still, I feel there should be a grace period of three to five business days – especially if the grants will automatically be converted to loans.

FedLoan to Right the Wrong?

Although the issues with TEACH Grants are disconcerting, FedLoan is making an effort to fix them. NPR reported on this in December of 2018. FedLoan is now offering to convert grants that were turned into loans back into grants.

This is still a developing story, so it will be interesting to see whether teachers’ grants are converted back into grants.

What People Are Saying About Federal Loan Servicing

Complaints about FedLoan abound. And no, it’s not just teachers. At the time of this writing, FedLoan has 661 complaints with the Better Business Bureau.

Problems include:

Payment processing issues
Inability to make extra payments
Reporting delinquency to credit reporting agencies without contacting borrowers first
Various billing errors
Incorrect information being given regarding PSLF eligibility

These are just a few highlights. Overall, it’s clear that there are many issues that have plagued student loan borrowers.

Worse still is the fact that if FedLoan is assigned as your servicer, you won’t be able to change unless you refinance with a private lender. That means potentially giving up federal protections on your loans. You might even get a higher interest rate, so refinancing may still not be ideal.

TFF’s Take

It would appear that federal loan servicing through FedLoan has numerous problems.

That said, they are still a servicer of federal student loans. That means they often have better interest rates and more favorable refinancing and forgiveness options than private student loans.

Unfortunately, you don’t have a say in who your federal loan servicer is. That means that even if you have significant issues with FedLoan, you won’t be able to opt for a different servicer.

Federal loan servicing only has a few service providers, which could be part of the issue at hand. Regardless, refinancing through a private lender is one of the only ways to change your servicer.

If you are considering this option, be sure to do ample research and call the private lender if necessary. It’s important to understand all of your options and whether a private lender will be better than federal loan servicing.

In some cases it may be; in others, it might be better to ride out the storm.