Student loans confuse a lot of people.
On the surface, they're relatively simple: tuition costs X, food and rent costs Y, so the office of financial aid "awards" you X + Y. After graduation, you get pre-formatted letters showing how much of that total comes due every month.
Still, in a relationship that lasts longer than many marriages, it's probably worth scratching below the surface a little bit. Students take out multiple tiers of loans at several different interest rates, some public and some private, some through the government and some not… the entire system has grown remarkably Byzantine.
One of the keys to understanding all of it is knowing about student loan servicers. These are the back-end systems through which loans run, and they're not just an arbitrary banking quirk. Student loan servicers have a lot to do with interest rates, deadlines and consumer protection.
You may not have much of a choice in who services your loan, but it's important to know a little more about servicers.
What is a loan servicer?
"We're the Uber of private student loans," said Mike VanErdewyk., CEO of ReliaMax, a private student loan solutions provider. "What I mean by that is that, in a similar way that Uber connects people who need rides with people that can provide rides, we connect people that need loans with people that can provide loans. We connect borrowers with lenders."
As he explains it, the role of his company is to act as the intermediary between financial institutions who provide loans and the borrowers themselves.
Servicers are, essentially, infrastructure. Student loan servicers provide the intermediary between borrowers and lenders. They're the ones who work with borrowers themselves, arranging payment schedules, dealing with deferments and delinquencies and (of course) collecting the money.
The servicer provides the service and legal expertise, and the customer interface. The financial institution provides the money.
Point of Contact
So what does this mean for borrowers?
A surprising amount.
A student loan servicer is the borrower's point of contact with her loan, so the professionalism and expertise involved makes a huge amount of difference. A good servicer can work with the borrower, even going so far as to help with financial planning and educating the borrower about government programs to make the debt more manageable. Bad ones… well, they're the ones plastered all over the news.
"We have single point of contact," VanErdewyk said. "If Johnny the borrower has contact with Julie, then Julie remains the single point of contact for that borrower over the life of the loan. They build that relationship so it's more of a financial advisor than a call center or collections center call."
For example, he said, a good agent can help a borrower analyze their current debts to figure out how a person should balance something like car payments or medical bills against their student loans. An agent will understand programs like income based repayment and can steer qualified borrowers in that direction instead of recommending a knee-jerk forbearance (which, given the effect of compound interest, generally sets borrowers back by 2-3 years for each one year in forbearance).
"Generally it's things like a life event loss of a job or illness, or a divorce, that causes somebody to get off track," VanErdewyk said. "We've got a lot of tools to help them."
Then there are the servicers that go in the different direction. Navient, for example, is currently the target of numerous lawsuits for its collection tactics and allegedly giving students bad financial advice during the life of the loan.
The quality of your lending servicer can make a very personal difference. Good ones can help make loans a little more manageable, especially during the tough times. Bad ones can make the situation a whole lot worse.
Servicers also have a lot to do with interest rates.
Now, when it comes to interest, it's very important to note the difference between federal and private student loans. The multi-tiered approach of federal loan interest rates is set by the government and fixed for the life of the loan. Private loans, on the other hand, have far more latitude when it comes to interest.
That's where a company like ReliaMax comes in.
As the interface between borrowers and the banks, a student solutions provider can help create the network of potential lenders available for either an in-school borrower or a graduate looking to refinance. The increasing number of lenders who join the fold creates competition that can heavily influence the interest rates and terms of private student loans.
A large number of lenders can make "a very competitive market," explained VanErdewyk. For example, he said, bringing in more local banks and credit unions can help keep rates low and terms better, because those lenders often don't have the same profit benchmarks as a large-scale institution.
"It means more choices," he said. "It means, from the borrower's perspective, maybe working with a local lender vs. a national lender."
And with choices comes competition, and that's almost always good for the end consumer.
End of the Day
Loan servicers matter a lot, and not just in terms of the services they provide. When a servicer screws up, it has a huge impact on the borrower.
According to a report by the Consumer Financial Protection Bureau, many student loan servicers do make errors. They misplace paperwork, mishandle accounts, fail to tell borrowers about their options, pressure people into making higher payments and far more. When this goes wrong, it can have a huge impact on the borrower's life, anywhere from a few extra hours on the phone to a credit score catastrophe (or worse).
These companies also handle the communication and payment end of student loans, though, and a good loan servicer can provide financial advice and real help for borrowers as they repay one of the largest debts most Americans will ever have. Between acting as a point of contact, and potentially even building a more competitive credit market, these companies have a substantial impact on student loans.
Even if, to most borrowers, they're just a name on a letterhead.