Nelnet Inc., a student loan servicer, plans to buy its competitor, Great Lakes Higher Education Corp., for $150 million — and the move will make the Nebraska-based company the largest servicing company for federal student loans.
Enacted under the Obama administration, the U.S. Department of Education assigns a federal student loan to a servicer such as Nelnet or Navient Inc. after the loan is disbursed. These companies collect payments, respond to customer service inquiries and perform other administrative tasks associated with maintaining loans on behalf of the Department of Education.
“Although there are many servicers, it’s concentrated at the top end,” says Stephen Dash, founder and CEO of Credible.com, on the few number of student loan servicers that manage the majority of federal student loans.
The merger shakes up the student loan industry and would consolidate two of the four largest federal student loan servicers, he notes.
As of June 2017, Great Lakes managed $230.2 billion in federal loans — 23 percent of Department of Education loans — and Nelnet serviced $176.9 billion — an 18 percent share, according to the Department of Education.
Other loan servicers such as MOHELA, OLSA or Granite State have fewer borrowers and a smaller number of federal student loan dollars. For example, MOHELA serviced 33.6 billion in June.
The deal between Nelnet and Great Lakes is expected to close in January 2018. If the acquisition is approved, both companies will continue to operate as separate servicers until their contracts with the Department of Education expire in 2019, according to Nelnet’s October press release.
[Check out this guide to understanding student loan servicer changes.]
Ben Kiser, a spokesman for Nelnet, told U.S. News via email: “Great Lakes and Nelnet will continue operating under their own names and distinct brands, servicing their portfolios of government-owned loans on behalf of the Department with their own servicing operations and operational teams. Borrowers will experience little to no change as a result of this announcement.”
Borrowers with federal student loans that Great Lakes services can still expect to see the brand in the company’s communications, he said.
Here are a couple of takeaways for borrowers in a climate ripe for student loan company consolidations.
— Anticipate more student servicer consolidations. Student loan experts say to expect more student loan servicer merges since the Department of Education has signaled a desire to move to either an internal servicing platform or a one-servicer solution.
[Discover how to cope with a change in student loan servicers.]
“This merger of Nelnet and Great Lakes is an example of companies preparing to handle large volumes,” says Heather Jarvis, an attorney and student loan expert.
Student loan experts note that more consolidations will mean fewer options for federal student loan borrowers. While competition is usually a key driver for quality customer service, experts cast doubt that consolidation will improve customer service because it’s not a completely free market since the Department of Education sets terms, they say.
In fact, Navient — one of the largest servicers for federal student loans — has been called out several times for ineffective customer service, according to complaints filed with the Consumer Financial Protection Bureau. At the end of September, Navient serviced $296 billion of federal student loans for 6.1 million borrowers, according to the company’s most recent earnings report.
Based on the Department of Education’s most recent metric reporting, smaller servicer companies have borrowers with more on-time monthly payments.
[Read tips for borrowers to ensure student loans are serviced correctly.]
Dash from Credible.com says the industry is ripe for consolidation — in part — because the Trump administration has scrapped the previous bidding process for the Department of Education to award these servicer contracts. “There’s bipartisan support for having fewer loan servicers.”
In October for $155 million, Navient purchased Earnest, a financial technology company that offers private student loan refinancing. So Nelnet isn’t the only loan servicer making acquisitions to increase its scale of operations, Dash says.
When a servicer or loan company is acquired, Jarvis says, “all you can do as a borrower is pay attention and be prepared to advocate for what you need if it’s no longer available.”
— Understand that federal student loan borrowers can’t pick their servicer. The Department of Education assigns each servicer with an allotment of student loan borrowers.
While borrowers can’t choose their student loan servicer at the start of repayment — except when they pursue direct loan consolidation — they do have the option to transfer their balance to a private lender. But experts say that comes with a double-edge sword, since borrowers may lose many of the protections provided under a government-backed loan.
But despite some uniformity that the Department of Education directed, Jarvis says each servicer has its own procedures for administrating loans. “They have different communications and different way of notifying borrowers of information.”
For borrowers who are trying to choose between different servicers for a direct consolidation, she says, “There really isn’t any good information on how to make that choice.”
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How Nelnet’s Purchase Affects Student Loan Borrowers originally appeared on usnews.com
