college

Government buys student loan: What to do?

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Highlights
  • The majority of student loan dollars are made with government money.
  • ECASLA program put end to discounts and incentives from lenders.
  • Borrowers need to check payment address or automatic payment info.

In addition to receiving housing information and their class schedules, students heading back to campus this fall should look out for one more crucial piece of mail this summer.

Beginning July 1, the majority of families who hold federal Stafford, Grad PLUS or Parent PLUS loans will receive notices that their loans have been bought by the Department of Education, says Sam Nelson, director of client relations for the Illinois Student Assistance Commission.

"To help lenders stay in the student loan market, the federal government is buying on the secondary market and servicing the loans themselves," says Nelson. "Six out of every 10 student loan dollars are now made with federal money instead of with private capital."

Although the change is no cause for alarm, students should be aware that the switch in loan servicers could affect certain borrower incentives and will affect where payments should be sent. Here's what to do if the federal government scoops up your student loan.

Consider your incentives

"Having your student loan purchased by the Department of Education doesn't really change much for the student borrower," says Jason Delisle, director of the federal education budget project at the New America Foundation, a think tank in Washington, D.C. "The terms and conditions of the loan are already spelled out by the federal government. They won't change at all. The only thing that changes is who's servicing the loan."

Delisle adds that while interest rates, loan limits, fees, repayment conditions and default options will stay the same for new loans and old ones currently in repayment, borrowers who took out student loans before the Department of Education started purchasing them in 2007 could lose certain borrower incentives.

"Before 2007, when the Department of Education started buying loans under ECASLA (Ensuring Continued Access to Student Loans Act), lenders offered certain discounts. For example, you might get a fee waiver before you start payments, or you might get 2 percent off of your remaining principal after making two years of consecutive payments," says Mark Kantrowitz, publisher of the financial aid Web site Finaid.org. "When ECASLA took effect, lenders who wanted their loans to be purchased by the Department of Education had to stop offering almost all of those incentives."

Most large student lenders -- including Wachovia, JPMorgan Chase, KeyBank, Edamerica and the National Education Loan Network, or Nelnet -- switched to the ECASLA program and dropped all borrower incentives except one: ECASLA gives borrowers who set up automatic payments on their accounts a 0.25 percent interest rate reduction.

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A few lenders, such as Wells Fargo, service loans outside the ECASLA program and still offer a broad range of incentives. Although students who took out loans before 2007 with lenders who switched to ECASLA have already lost their incentives, those who have stuck with non-ECASLA lenders could lose their current incentives if they consolidate non-ECASLA loans with those sold to the Department of Education.

"That means that if you received any front-end discounts, like a cash principal reduction after you graduated, you could get a letter saying, 'Please pay that back,'" says Kantrowitz. "It may be worthwhile to keep a loan out of consolidation just to keep the discounts."

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