The new legislation (PDF, 36KB) would make some important enhancements to the Department of Education's student loan purchase program. Specifically the legislation includes a provision that would mandate that loans retain their original servicers if they are ultimately sold to the Department.

According to H.R. 5715, “The Secretary may, if agreed upon by an eligible lender selling loans under this section, contract with such lender for the servicing of the loans purchased.” The Department, however, has not outlined its complete plan regarding the servicing of loans that are sold to the government, prompting concern within the higher education community about the potential prospect of forcing students to deal with multiple loan servicers.

It is clear that split loan servicing does a disservice to students and schools. When the servicing of a student’s loans is split among multiple lenders, it is more difficult for the student to track their loans after they leave school. The added value that students receive from their lender’s default prevention activities is diluted and, ultimately, the student is more likely to default.

While the Department has made tremendous progress in implementing the new law in time to prevent loan access problems this year and beyond, insufficient focus has been paid to the implications from students being forced to accept a loan servicer without any choice or say in the matter. Congress, schools, lenders and leaders in the financial aid community strongly support continuity in loan servicing to avoid disruption and confusion for students.

According to NASFAA: “NASFAA supports H.R. 7072 as an important measure to ensure that all eligible students have access to federal student loans, including borrowers who have satisfied rehabilitation requirements. NASFAA supports two other measures in the bill as well. One provision would reduce borrower confusion by mandating that loans retain their original servicers even after they've been purchased by the Department. Another provision could bring more lenders back into the student loan program by allowing the Department to forward fund purchase agreements.”