Student loan borrowers often find the world of student loans and loan servicing confusing, especially when it comes to the differences between federal student loans and private student loans. Understanding how these loan types differ, especially in the context of loan servicing, is crucial for borrowers to successfully navigate repayment and protect their credit.
Key differences between federal and private student loan servicing include:
Servicer Assignment
- Federal student loans: The Department of Education assigns your loan to one of several contracted loan servicers, such as Nelnet, Navient, or Great Lakes. You do not get to choose your servicer.
- Private student loans: The lender you borrowed from, such as a bank or credit union, either services the loan themselves or chooses a loan servicer.
Repayment Plans
- Federal student loans: Offer several repayment plans, including standard, graduated, extended, and income-driven repayment plans. Servicers are required to inform borrowers of these options.
- Private student loans: Repayment plan options are at the discretion of the lender. Plans are usually limited to standard repayment terms of 5-20 years. Servicers are not required to offer alternative repayment plans.
Hardship Options
- Federal student loans: Borrowers experiencing financial hardship can request deferment or forbearance to temporarily pause or reduce payments. Servicers must grant these if borrowers meet eligibility requirements.
- Private student loans: Hardship options like deferment and forbearance are at the discretion of the lender. Not all lenders offer these options and servicers are not required to grant them.
Default Timeline
- Federal student loans: Default after 270 days of non-payment. Servicers must notify borrowers of potential default and options to avoid default.
- Private student loans: Can default as soon as you miss a payment, though many lenders wait 120 days. Servicers may not be required to notify you before default.
Consumer Protections
- Federal student loans: Serviced under Department of Education regulations requiring proper payment application, timely credit reporting, response to borrower requests, and provision of repayment information.
- Private student loans: Fewer servicing regulations. Consumer protection laws like the Fair Debt Collection Practices Act and Fair Credit Reporting Act apply. Servicers must properly apply payments and accurately report to credit bureaus.
It’s important for borrowers with both federal and private student loans to monitor their loan servicers’ activities. Review loan statements and your free credit reports regularly. If you suspect your servicer has violated your rights under consumer protection laws, consider contacting a consumer protection attorney to discuss your situation and potential legal options. Servicing violations can result in damaged credit, so prompt action is crucial.