How to Switch Loan Servers For Federal Student Loans

Many borrowers experience issues with the lender’s customer service or lack thereof during the life of the loan. You can switch lenders/lenders before your federal or private student loans close. But before choosing this option, you should understand a few things.

How to switch loan servers for federal student loans

The Department of Education contracts with a few lenders to administer federal student loans on their behalf. When you first get federal student loans, you cannot choose to service the loan. Instead, you will automatically be assigned a loan service to manage your loans.

All federal student loans have the same interest rate and loan terms, regardless of the loan provider. These are set by the federal government. No lender can offer lower interest rates or better terms. They do not have the authority to change the terms of the loan. Therefore, switching loan services will not give you any financial benefit. The only reason for the replacement would be due to poor customer service.

There are two ways to change federal student loan services – consolidation and refinancing.

Consolidation is the process of consolidating two or more federal student loans into a single new loan. When you consolidate your federal student loans, you can choose a new loan service as well as a new payment plan. Your total loan will also have a new interest rate, which is calculated as a weighted balance of the old interest rate. The advantage of consolidation is that the new loan qualifies for all federal benefits and protections.

Refinancing is the process of consolidating two or more federal student loans into a single new loan via a private lender. The federal government does not offer a refinancing option, so the refinanced loan will now be a private loan. It automatically transfers your loan from a federal loan service to a private lender. The advantage of refinancing is that if you have good credit, your new loan may have lower interest rates and better terms. 

What happens when you switch before the Federal Loan Services closes?

When you switch loan services through consolidation, the terms of the loan such as interest rates and payment installments do not change. However, the terms of the loan remain the same, and there may be some changes in the repayment process. Two things that will change are the account number for the payment transfer and the auto-debit payment instructions. Both must be changed to reflect the new debt service. In most cases, the payment deadline may also change.

Everything changes when you change lenders through refinancing. Your federal student loan becomes a private student loan and you lose all benefits associated with the original loan. Irreversible. Once your federal student loans are refinanced, they remain private loans until they are paid off.

This option is only recommended if you think you won’t need any federal protections.

How to switch private student loan lenders

Private lenders finance and manage private student loans. Each lender sets its own interest rate and other loan terms. Unlike federal student loans, these can vary widely between lenders. The most common reason to switch between private lenders is to get better terms. However, you cannot keep switching lenders between loan terms. The only way to switch between private lenders is to refinance your loan.

Refinancing is a good idea to switch lenders if the new lender offers a lower interest rate. Even a small drop in interest rates can save you thousands of dollars in accrued interest over the life of the loan. In general, you can expect to get a lower interest rate if you have a good credit score.

What Happens When You Switch Private Lenders Before Closing?

When private loans are refinanced to change lenders, the refinanced loan is considered a new loan. The loan will be refinanced with a new interest rate, loan period, and terms and conditions. The interest rate and other terms will depend on many different factors and will vary from one lender to another.

Refinancing private student loans is only a good option if you have good credit and qualify for a low interest rate.

Is switching lenders the right choice for you?

Switching lenders is not the best option for everyone. Before making this choice, ask yourself this one question – why would I want to switch lenders before closing?

The only two reasons to switch is if you are unhappy with your current lender or if you are getting a lower interest rate with another lender. It’s not worth it if you’re happy with your current lender or if you don’t qualify for a lower interest rate.

If you decide to switch lenders, take the time to read customer reviews on sites like the Better Business Bureau (BBB) or Client Affairs. This will help you locate a reputable lender who will work with you to manage your loans.