A student loan servicing company that handles accounts for millions of borrowers nationwide now stands accused of preying on people in a federal program that forgives the loans of borrowers who work in public service and education jobs.
A lawsuit [PDF] filed today by Massachusetts Attorney General Maura Healey accuses the Pennsylvania Higher Education Assistance Agency (PHEAA) — doing business as FedLoan Servicing — of harming borrowers by improperly servicing their accounts as part of the Public Service Loan Forgiveness Program and the Teacher Education Assistance for College and Higher Education (TEACH) Grant program.
The complaint claims that PHEAA’s actions put these borrowers at risk of losing their eligibility for having the loans forgiven. These borrowers also saw their repayment costs increase, says Healey, because PHEAA prevented them from making monthly payments that would have counted toward their obligations under the federal forgiveness programs.
The Programs
Since 2012, PHEAA has had the exclusive contract for servicing both the public service forgiveness and TEACH Grant programs.
For those unfamiliar with the public service forgiveness option, it was launched in 2007. That’s when the government began offering a public service loan forgiveness program that will forgive certain federal student loans for borrowers who work for government organizations and non-profit groups for 10 years and make 120 on-time monthly payments on their loans.
New Secretary of Education Betsy DeVos is currently calling for the elimination of this forgiveness program, though it’s believed that those currently enrolled will not be affected if it is cancelled.
Under the TEACH Grant program, students who wish to pursue teaching careers in low-income schools for at least four years in fields such as math, science, or foreign language are given financial grants. Students receive up to $4,000/year to help pay for the education required for their teaching career.
Processing Problems
According to the AG’s lawsuit, since that time PHEAA has failed to properly and timely process borrowers’ applications for the programs. This has caused many borrowers to miss deadlines required to either participate in the program or remain eligible for loan forgiveness.
Under its contract, PHEAA must guide borrowers through the process of both enrolling in and managing their monthly payments, ensuring they remain eligible for the programs. Healey claims that PHEAA has been unreasonably slow to perform these duties.
For instance, the lawsuit points to processing issues with the Dec. 2015 debut of the REPAYE plan, an income driven repayment plan for federal student loan borrowers who participate in the forgiveness plans.
“Its failure to process applications timely and properly resulted in a lengthy application processing backlog that delayed borrowers from staying on track with monthly payments that would count towards loan forgiveness,” Healey notes.
As a result, Healey notes that these borrowers — which include public service employees and low-income borrowers — lost months that would otherwise have counted toward achieving loan forgiveness.
Delayed Forgiveness
In some cases, PHEAA, in an effort to make up for processing delays, would place borrowers’ accounts in forbearance.
While this would relieve borrowers from having to pay their debts for a certain timeframe, it is not an approved payment plan under the loan forgiveness programs.
Months during which loans are in forbearance do not qualify toward loan forgiveness. As a result, the lawsuit claims that borrowers will have to make payments on loans for longer than required, eventually delaying the forgiveness of their loans.
Miscalculations
In addition to preventing borrowers from staying on track in their repayment plans under the program, the lawsuit contends that PHEAA also miscalculated borrowers’ monthly payments and sent erroneous or unnecessary bills to borrowers.
In some cases, the suit claims that PHEAA overcharged borrowers and collected tens of thousands of dollars in payments that were not due. These overcharges, according to the complaint, were the result of a defect in PHEAA’s servicing system and affected 1% of all borrowers nationally.
Healey claims that PHEAA knew of this issue, but failed to correct it for nearly a year. Since then, the company has allegedly failed to refund the overcharges or notify borrowers they were overcharged.
“This company’s actions have jeopardized the financial futures of teachers and public servants across the country,” AG Healey said in a statement.
The lawsuit seeks restitution, injunctive relief, civil penalties, and reimbursement of the costs and expenses related to PHEAA’s practices.
Past Issues
This isn’t the first time the servicing of the Public Service Loan Forgiveness program has come under fire.
Back in Dec. 2016, four borrowers who were previously qualified for the program sued the Dept. of Education to find out why they received letters from FedLoan that they were no longer eligible to have their loans forgiven. What’s more, the decision was retroactive, meaning none of the time they’d spent working toward the forgiveness goal would be counted.
The lawsuit [PDF] alleges that the Department acted “arbitrarily and capriciously” when it changed its interpretation eligibility requirements without explanation.
The Department responded to the lawsuit in March, noting in a filing that the FedLoan approval letter was never a reflection of a “final agency action on the borrower’s qualifications” for the program.
In the filing, the Dept. denies that its acts were arbitrary or that the plaintiffs are required to any relief as a result of being deemed ineligible for the forgiveness program.
More recently, the Consumer Financial Protection Bureau released a report highlighting borrower complaints about student loan servicers mishandling the Public Service Loan Forgiveness program.
According to the report — which analyzed complaints from March 1, 2016 through Feb. 28, 2017 — many borrowers aren’t receiving proper notification of this eligibility.
For instance, the CFPB found that borrowers experienced delays or denials of access to promised loan forgiveness, forcing some to forfeit months or years of qualifying service. This, the CFPB contends, can add hundreds or thousands of dollars to the total cost of borrowers’ student debt.
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