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Senator Elizabeth Warren of Massachusetts, a Democrat, speaks to reporters on Capitol Hill on June 22, 2021, in Washington, DC, prior to a vote on an… [+] elections reform measure. Warren has been a vocal opponent of federal student loan servicers, particularly FedLoan Servicing. (AFP photo by Olivier DOULIERY) (Image courtesy of OLIVIER DOULIERY/AFP/Getty Images)
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As one of the Department of Education’s principal student loan servicers tries to quit the business, a major student loan servicing shakeup is in the works.
The Pennsylvania Higher Education Assistance Authority (PHEAA), which runs FedLoan Processing, has informed its staff that when its contract with the Department expires in December, it wants to stop servicing federal student loans. The deal was meant to conclude in 2019, but it was repeatedly extended. PennLive was the first to break the news.
PHEAA and FedLoan Servicing have been accused of mismanaging federal student loans on a large scale. The servicer has been examined for what critics claim are significant, chronic flaws as the sole servicer appointed by the Department of Education to oversee key federal student loan programs like Public Service Loan Forgiveness (PSLF) and TEACH Grants.
Massachusetts Attorney General Maura Healey filed a long-running litigation against PHEAA and FedLoan Servicing, which was finally settled. FedLoan Servicing allegedly created processing delays and made erroneous eligibility judgments, forcing customers into forbearance rather than a qualifying PSLF repayment plan, or it failed to properly tally qualifying PSLF payments, according to Healey’s office. Healey claimed that these actions resulted in thousands of PSLF-eligible borrowers being in debt for longer than they otherwise would have been. PHEAA, according to Healey, mismanaged the TEACH Grant program, causing awards to be incorrectly converted into loans for instructors working in impoverished regions. PHEAA made no admissions of misconduct. The TEACH Grant program will be reformed, according to the Department of Education.
The Consumer Financial Protection Bureau (CFPB) recently released a report confirming that severe flaws with the PSLF program’s management are still present. Although the CFPB did not name a specific student loan servicer in its report, it did emphasize that servicing companies frequently misled student loan borrowers about their rights and options, causing challenges for borrowers trying to confirm that their employment and prior payments qualify for PSLF. Many of these activities, according to the CFPB, “caused or was likely to cause severe injury” to borrowers.
During a Senate committee hearing in April, Senator Elizabeth Warren (D-MA) grilled PHEAA CEO James Steeley. “It is your obligation to make sure that folks who have followed the rules get relief,” Warren added, noting that 98 percent of PSLF applications were turned down. She noted that earlier Department of Education audits found that PHEAA’s automated system generated errors and wrongfully excluded PSLF payments, and that litigation against PHEAA claimed that FedLoan Servicing “systematically undercounts” PSLF payments. Mr. Steeley dismissed suggestions that student loan servicing corporations are to blame, instead focusing on the intricacies of government student loan systems.
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PHEAA’s statement follows the appointment of Richard Cordray as the new director of the federal student loan system by the US Department of Education. Cordray will be in charge of the Department’s contractual student loan servicers in this capacity. Cordray is the former director of the Consumer Financial Protection Bureau, and his appointment has sparked speculation that he could lead a crackdown on student loan servicers.
At this point, it is impossible to predict how the shakeup will affect student loan debtors. Borrowers’ student loan accounts will most likely be transferred to a new student loan servicer, which can be a time-consuming procedure. “Servicing transfers can generate confusion when organizations have various policies and processes relating to payment posting, allocation, and processing,” the CFPB warned in 2015, following the Department’s previous major servicing revamp.
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