The U.S. Department of Education has recently started a new program for borrowers applying for new Direct Consolidation loans, which allows the borrower to choose their consolidation loan servicer. This is a huge change, and one that I hope will really benefit borrowers.

By way of background, the Dept. of Ed used to service Direct Loans in-house, so to speak, using a single private contractor. Then, a few years ago, the Dept. of Ed brought on over a dozen different private contractors to take over loan servicing operations, which caused some disruption for many borrowers in repayment. That reshuffling has continued as the Dept. shifts around student loan accounts to its new contractors.

Up until now, borrowers had no choice at all in selecting their servicer. You were stuck with whatever company you got. Now, however, the Dept. of Ed has instituted a pilot program where borrowers who are consolidating their non-defaulted federal student loans can select from one of the four primary Direct loan consolidation servicers:

FedLoan Servicing is the Direct Loan servicing branch of the Pennsylvania Higher Education Assistance Association (PHEAA), a state agency. They have a special department for people who are on track for Public Service Loan Forgiveness.

Great Lakes Higher Education is a nonprofit organization based in Madison, Wisconsin. In addition to their servicing operations for the Direct Loan program, they also serve as a guaranty agency (with an internal collections department) for the FFEL federal loan program.

Nelnet is a for-profit company based in Nebraska. They have dozens of subsidiaries and they service student loans throughout the United States and Canada.

Sallie Mae likely needs no introduction. They are a for-profit company based in Pennsylvania. In addition to their Direct Loan servicing operations, they are the largest private student loan lender and servicer in the country, and they also service federal loans in the FFEL program.

I don’t really have particularly strong feelings about the specific companies above (borrowers have had both good and bad experiences with many servicers). However, I am encouraged that borrowers are being given a choice. My hope is that this limited program will be expanded to all borrowers in the Direct loan program so that someone who is dissatisfied with their current servicer can switch to a different company. In my opinion, this would encourage competition between the servicing companies and might help incentivize better customer service. There are no indications that such a change will happen anytime soon, but one can dream, and this is certainly a step in the right direction.