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Massachusetts attorney general Maura Healey

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The loan servicer tasked with handling a federal loan forgiveness program agreed to review and in some cases pay off the loans of more than 200,000 Massachusetts borrowers to settle a lawsuit brought against it by the Massachusetts attorney general’s office.

The Pennsylvania Higher Education Assistance Agency, which operates under the name FedLoan Servicing, exclusively administers the Public Service Loan Forgiveness program and the TEACH Grant program nationally.

The company had been accused by Massachusetts attorney general Maura Healey in 2017 of “unfair and deceptive” acts, in which the company alleged errors and misinformation prevented people from making payments toward having their loans canceled under the national Public Service Loan Forgiveness program. Healey also accused the company of making processing errors that led to people getting off track on their income-driven repayment programs, and in some cases wrongly converting Teacher Education Assistance for College and Higher Education Grants into loans, which the teachers had to repay.

A company spokesman, Keith New, stressed that the settlement, which was announced Wednesday, “imposes no fines or civil monetary penalties on PHEAA and carries no admission of wrongdoing.”

He said, “The settlement agreement reaffirms our commitment to all student borrowers and to the high quality of customer service provided by PHEAA in managing their student loan debt. PHEAA strives to resolve servicing issues quickly and accurately for borrowers in Massachusetts and throughout the nation in compliance with federal program rules as set forth by Congress and the U.S. Department of Education.”

Still, the settlement could carry costs for the company. PHEAA, in part, agreed to review cases in which customers were denied the right to sign up for the loan forgiveness program.

To the extent the company made errors or misrepresented the eligibility requirements for the program, it agreed to credit customers for any money they lost as a result, and in some cases send the customers a check to reimburse them. In cases where grants were wrongly converted into loans, the company agreed to repay any money that was paid and to pay off the remaining loans.

“Public servants burdened with student loan debt are entitled to the relief that they were promised under these federal programs,” Healey said in announcing the settlement Wednesday.

The case only affects the loans serviced by the company in Massachusetts, but consumer advocates said the settlement is significant in illustrating the scrutiny servicers are coming under in states over administering the 2007 Public Service Loan Forgiveness program. The program allows those who work continuously for 10 years in the nonprofit or public sector and make payments for those 10 years to have their remaining student loan debt forgiven.

In 2019, New York attorney general Letitia James also sued the Pennsylvania Higher Education Assistance Agency, alleging that its failure to administer the loan forgiveness program led many who would have qualified to be rejected. The California Department of Business Oversight is also investigating whether the company improperly converted TEACH Grants into loans, and in April it sued the company to disclose documents related to the probe.

“The truth is that loan servicers have failed to inform borrowers of their rights, misguided them into disqualifying repayment programs, and ultimately prevented hundreds of thousands of teachers, social workers, nurses, firefighters, and other public service workers from receiving the loan forgiveness they earned,” said Cody Hounanian, program director for the advocacy group Student Debt Crisis.

“This action should be a wake-up call for the Department of Education -- every teacher and every public service worker across the country deserves to be made whole after a decade of industry abuses and government mismanagement. Today’s action is a critical step to rebuild our broken student loan system,” said Seth Frotman, executive director of the Student Borrower Protection Center and former assistant director and student loan ombudsman for the Consumer Financial Protection Bureau during the Obama administration.

The settlement is also significant in displaying the authority of states to regulate servicers, said Lisa Stifler, state policy director for the Center for Responsible Lending. “For a number of years, federal loan servicers like PHEAA and Navient claimed federal law pre-empted lawsuits brought by the states, including in Massachusetts, on the basis of violations of state consumer protection laws, especially unfair and deceptive practices laws. Courts roundly rejected those arguments. This settlement reflects the critical role that states play in ensuring that servicers do not engage in unfair or deceptive acts and practices, even if they are servicing federal loans,” she said.

Last week, the giant servicer Navient was ordered by the Education Department to repay $22 million to its former sister company Sallie Mae, as it had overcharged the agency for federal subsidies in the early 2000s.

On Monday, three student loan borrowers reportedly filed a petition in a New York bankruptcy court to force Navient’s servicing arm into bankruptcy, alleging they’re owed $45 million in money the company illegally collected.

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