Trends and Issues

Understanding the roles of lenders, servicers, and secondary markets

Have you ever wondered what happens to a loan after it is disbursed? Borrowers and schools alike may be surprised to discover that a loan may be originated and disbursed by one entity, and then be sold to or serviced by another entity.

FFELP post-disbursement activities will vary depending on the policies and philosophy of the original lender. In this article we hope to provide a high-level overview of the system and process so that the next time a student comes into your office with a student loan-related letter or statement from an unfamiliar organization, you'll be prepared to answer his or her questions.

What is a lender?
The Common Manual says that for purposes of the FFELP, a lender may be a national or state chartered bank, a mutual savings bank, a savings and loan association, a stock savings bank, a credit union, a pension fund, an insurance company, a single state agency, the Student Loan Marketing Association (SLMA), a Rural Rehabilitation Corporation, a nonprofit private agency functioning in a state as a secondary market, a consumer finance company subsidiary of a national bank, a guarantor, or a school.

Many times we think of a FFELP lender as a traditional banking institution, but as this definition makes clear, a FFELP lender may wear many different "hats" in the program — it may function not only as a lender, but also as a servicer, a secondary market, a guarantor, or a school. To add to the confusion, sometimes each of the different "hats" functions under a different business name.

What is a secondary market?
The Common Manual defines a secondary market as follows:

"An entity that purchases education loans from eligible lenders in order to increase the amount of funds available for education loans. The secondary market obtains funds from investors and uses those funds to purchase existing education loans from lenders. The lenders then use the proceeds of those sales to make new education loans."

Due to the long-term nature of FFELP repayment terms (generally, at least 10 years), it is sometimes not financially viable for a lender to keep a loan in its portfolio for the life of the loan. Secondary markets provide a solution to this situation: When the funds that a lender has dedicated to the FFELP are expended, it may sell a portion of its FFELP loan portfolio to a secondary market in order to obtain new capital to continue making loans through the FFELP. Note that this practice is not unique to the student loan industry; it commonly occurs in other lending markets as well, such as home mortgages and auto loans.

Upon purchasing a FFELP loan, the secondary market is entitled to the same benefits as the lender, such as the ability to file a claim and receive interest and special allowance benefits. While some states have only one secondary market and others have none at all, Texas is unique in having multiple secondary markets.

What is a servicer?
The Common Manual defines a servicer as "[a]n entity that enters into a contract with a program participant to administer any aspect of its participation in a Title IV program." Servicers may be for-profit, nonprofit, or public servicers, as described in Subsection 3.6.B of the Common Manual.

Just as a school may contract with a third-party servicer to handle some of its administrative duties, a FFELP lender or secondary market may contract with one or more third-party servicers to perform certain loan servicing and administrative duties. These duties include any activities required under the Higher Education Act (HEA) or FFELP regulations, including originating, monitoring, processing, servicing, and collecting loans, and billing for interest benefits and special allowance.

Borrower notification
How does a student find out if and when his or her loan is sold or transferred? The loan holder is required to notify the borrower in accordance with the following conditions and timelines (described in Subsection 3.4.B of the Common Manual):

A borrower must be notified if his or her loan is assigned, sold, or transferred — if the loan is in a grace or repayment status — and the transaction causes a change in the party to whom the borrower must send future payments and communications.

• Assignment or sale: If the assignment or sale of the loan changes the identity of the party to whom payments must be made, the loan may be assigned or sold only if it is fully disbursed. If the loan assignment or sale does not change the identity of the party to whom payments are made, the lender may assign or sell the loan any time after making the first disbursement.
• Transfer: In some cases — such as a servicer transfer or branch transfer — a FFELP loan that is in grace or in repayment may not be assigned or sold, but the identity of the party to whom the borrower must send subsequent payments or communications may change. If this occurs, the loan holder must notify the borrower that the loan has been transferred and must provide the following information:
  • the name of the new servicer, if applicable.
  • the telephone number and address of the servicer or branch to which the borrower's subsequent payments or communications should be sent.

Often it is this notification that prompts the borrower to visit his or her school and ask for more information.

Of course, if the borrower is unsure of the status of his or her loans, he or she may log into the NSLDS Web site at www.nslds.ed.gov/nslds_SA/. For information on loans that were guaranteed by TG, borrowers may also log into TG's Student Loan Inquiry system at https://login.tgslc.org/signon/TGSignOn/login.jsp.

More information
The Common Manual, available for download from TG's Web site at www.tgslc.org/policy/integrated_online_manual.cfm, provides the most comprehensive explanation of the roles of the lender, servicer, and secondary market in the FFELP. If you have any questions, please contact TG customer assistance at (800) 845-6267, or send an e-mail message to cust.assist@tgslc.org.

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Question of the week

Q.: Can a student be granted more than one leave of absence in a single academic year?

A.: Yes. According to the 2007-08 Federal Student Aid Handbook, page 5-31:

"Institutions, at their discretion, may grant a student multiple leaves of absence as long as the total number of days for all leaves does not exceed 180 days within a 12-month period. This 12-month period begins on the first day of the student's initial LOA."

Do you have a question?
If you have a question that needs an answer, feel free to Ask TG™. Ask TG is TG's online query tool for borrowers, schools, and lenders. It includes a database of frequently asked questions about financial aid, student loan processing, and TG's products and services. To submit a question to Ask TG, visit tgslc.custhelp.com.

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