Shocking Truth: The Insane Amount Federal Student Loan Servicers Make on Every Loan

Student loan borrowers often believe that the interest on their loans goes straight to the loan servicers. However, the reality is quite different. Servicing companies like A model and Aidvantage are actually responsible for collecting payments on behalf of the loan holder (usually the Department of Education for federal loans). In return, they receive a monthly fee for each loan they service. This fee system can have implications on customer service and advice provided to borrowers.

How Loan Servicing Fees Are Determined

1. Percentage basis — This method involves a small percentage of the outstanding loan balance being paid to the loan servicer.
2. Unit cost basis — This method entails a fixed dollar amount being paid for each loan serviced.

In the past, federal loan servicers like Fedloan and Nelnet were paid based on a fixed percentage of the outstanding loan balance. Nowadays, servicers receive a fixed dollar amount per loan each month, regardless of the loan balance. This shift in the fee structure impacts how loan servicers interact with borrowers and provide assistance.

Consequences Of The Fee Schedule

If a borrower manages to stay current throughout a 10-year repayment plan, the loan servicer can potentially earn $342 over the repayment term. However, if the borrower falls behind on payments, the servicing fees reduce significantly, highlighting the importance of staying current on payments.

Repayment Recommendations

Some borrower advocates have raised concerns about loan servicers favoring forbearances over Income-Driven Repayment (IDR) plans due to the simplicity of explaining forbearances. However, the current fee structure actually pays loan servicers more for borrowers in IDR plans compared to forbearances. This financial incentive encourages servicers to assist delinquent borrowers in returning to good standing.

In conclusion, loan servicers are incentivized to keep borrowers current and streamline communication to maximize profits. Borrowers should be aware of the fee structures and choose repayment plans that work best for their financial circumstances. Making informed decisions can aid in efficiently managing student loan debt.