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When navigating the confusing and often intimidating world of student loans, it’s important to understand the roles of various parties involved in the process.
One common point of confusion is the difference between a student loan lender and servicer. While both are important in the borrowing and repayment process, their responsibilities are quite different. Knowing who is responsible for each step in the process can be key to making sure everything runs smoothly along the way.
Let’s discuss the difference between lenders and servicers and their role in the student loan process.
A student loan lender is a financial institution that provides funds for education-related expenses. These expenses are most commonly associated with tuition, but can also include textbooks, living expenses, and other fees.
There are two types of student loan lenders—federal and private. Federal student loans are provided by the US Department of Education, while private student loans are offered by banks, credit unions, and other financial institutions.
Federal student loans typically have fixed interest rates and offer various repayment plan options, including income-driven repayment (IDR). Borrowers with federal student loans could also qualify for loan forgiveness through the Public Service Loan Forgiveness (PSLF) program. Some types of federal student loans are subsidized and based on financial need while others are not based on need, and Congress sets the interest rates annually.
Private student loans could have fixed or variable interest rates and offer various repayment terms. These types of loans are given based on creditworthiness, and their interest rates can vary depending on credit score, income, and other personal financial factors. Unlike federal loans, private student loan borrowers are not eligible for loan forgiveness programs.
A student loan servicer is a company that manages the loan repayment process on behalf of the lender. Student loan servicers will collect payments, monitor accounts, answer questions, and work with borrowers to ensure their loans are paid off on time. Loan servicers may also help borrowers apply for deferment or forbearance options, update their contact information, and review their repayment options.
Often, the lender and servicer may be separate entities. For example, a borrower may receive a loan from the US Department of Education, but the servicer could be a company such as MOHELA or Edfinancial. Both federal and private student loans may have the same servicers depending on the lender. Many federal student loans are currently serviced by the Missouri Higher Education Loan Authority (MOHELA), a shift in 2022 when the Department of Education ended its contract with previous servicers such as FedLoan. Private student loan servicers can vary, Nelnet is one example.
Depending on your loan, it may be possible to change your servicer. If you feel that your student loan servicer does not provide the best customer service experience or offer payment options that fit your financial needs, it may be possible to switch servicers.
Refinancing your loan can be an effective way to change your student loan servicer, but may result in other tradeoffs. For example, when you refinance federal student loans, you will no longer be eligible for federal benefits, such as loan forgiveness, forbearance, or IDR plans.
If you’re pursuing PSLF, you should familiarize yourself with MOHELA. As of July 2022, MOHELA has taken over as the student loan servicer for PSLF. This means that if you are carrying student loan debt and working in the public sector, MOHELA will be the company you’ll be dealing with when it comes to managing, tracking, and potentially forgiving your loans when it is time.
If MOHELA already services your loan, nothing will change. However, if you are working with a different servicer and seeking PSLF, you will need to transfer to MOHELA.
All in all, you need to remember that a lender is an entity that offers the loan, while a servicer handles the management and collection of your loan payments. Though most federal student loans are serviced automatically, changing the servicer of a private student loan is sometimes possible.
Understanding how these entities work together can make repayment more efficient and help you stay on track with your loan repayment and forgiveness goals.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.