PHEAA, Philadelphia Higher Education Assistance Agency, commonly known as FedLoan Servicing, has announced their decision not to seek renewal of their loan servicing contract with The U.S. Department of Education. FedLoan is the nation’s largest servicer of federal student loans, both in terms of the amount of student debt managed ($411 billion) and the number of borrowers (9.2 million).

Most notably, FedLoan has been the sole loan servicer tasked with tracking the progress and administration of the Public Service Loan Forgiveness (PSLF) program.

The PSLF program and its administration have come under immense scrutiny over the past few years, as 98% of borrowers who have applied for forgiveness have been denied.

Potential student loan payment tracking issues

While the departure will be a welcome sight for many, presently, there is no other federal loan servicer equipped with technology or processes to report qualifying payments borrowers have made.

Over the past 14 years since the passage of the College Cost Reduction and Access Act, the creator of the PSLF program, FedLoan developed essential processes to make tracking PSLF eligibility easier for borrowers. While far from sufficient, borrowers pursuing PSLF have many more tools and resources available from FedLoan than those trying to navigate the program ten years ago.

PHEAA spokesman Keith New said in a statement that “In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs, as managed by the U.S. Department of Education, have grown increasingly complex and challenging while the cost to service those programs increased dramatically.”

With the decision to exit the student loan servicing business, FedLoan will leave a hole that the Department of Education’s contractors are currently unable to fill. The concern for borrowers is that the progress made by Fed Loans providing greater transparency to borrowers monitoring their PSLF progress will be lost.

9.2 million borrowers are currently serviced by FedLoan and will have their loan transferred to other servicers by year’s end.

Historically, the transfer of loans from one servicer to another has increased the default and delinquency rates of borrowers who experience the change in loan servicing. At this time, it is unknown how the transfer of loans will take place, but if history is any indicator, borrowers need to be on the lookout.

It would be wise for borrowers to obtain as many records as possible regarding their past payment history and qualifying payment count. Likewise, professional financial advisors should work with clients and advise careful documentation of payments, particularly those on a PSLF track.