Student Loan Errors Prompt $7.2M Penalty

Millions of borrowers didn’t receive their student loan bills on time, a mistake that led thousands of borrowers to miss their payments, the Education Department said Monday.

Because of that error, the department won’t pay the Missouri Higher Education Loan Authority, known as MOHELA, all of the money it’s due for the month of October. Withholding the $7.2 million is a significant step for the agency, which is grappling with a rocky restart of student loan payments following a three-year pandemic pause.

Since the restart of payments, borrowers have reported a range of issues with MOHELA and other companies that manage or service federal student loans. Some said they received inaccurate information about payments; others noted long wait times to get ahold of their loan servicer. Officials are hoping that withholding payment for MOHELA will prevent future errors.

“Our oversight efforts have uncovered errors from loan servicers that will not be tolerated,” Education Secretary Miguel Cardona said in a statement. “The actions we’ve taken send a strong message to all student loan servicers that we will not allow borrowers to suffer the consequences of gross servicing failures.”

The Education Department said MOHELA failed to meet “basic contractual obligations.” Servicers are supposed to send bills to borrowers at least 21 days before the payment due date. About 2.5 million borrowers didn’t get their bills on time, with some receiving only seven days’ notice. More than 800,000 of those borrowers became delinquent on their loans as a result, according to the department.

Withholding payment to a servicer in this way and making the decision public is a first for the Education Department, advocates and experts said. Advocates praised the decision but want federal and state regulators to investigate the servicers’ actions. They say errors are widespread across the four companies that manage federal student loans for the department. The Wall Street Journal reported last week that the Biden administration is investigating how the services have dealt with the restart.

“It is shocking the scale of the failures that they found,” said Persis Yu, deputy executive director of the Student Borrower Protection Center, an advocacy group. “But on the other hand, if you talk to any borrower, it completely is consistent with the experiences they are facing right now. I wonder if this is just the beginning, because we know that this is not the entire universe of problems that borrowers are facing.”

Yu and other advocates have warned for months that the servicers were not prepared to restart payments. The department’s findings show that “the servicers are not ready or up to the task for the return to repayment,” she said.

‘Making Things Right for Borrowers’

MOHELA is one of the largest federal student loan servicers, with more than $663 billion in its portfolio as of June 30, according to federal data. It was at the center of the Supreme Court case that challenged the legality of President Biden’s student loan cancellation plan. The company has not responded to media requests for comment.

“The transition of millions of student loan borrowers entering into repayment simultaneously is something unique in history, and as a nonprofit state instrumentality, MOHELA is keenly aware of our mission to assist student loan borrowers, particularly during this difficult time,” MOHELA officials wrote in August to U.S. senators who sought details on its plans to support borrowers.

Servicers said that budget cuts from the Education Department and the agency’s lack of planning would hamper the restart. The last few years have been chaotic for servicers and borrowers, with several false starts at resuming student loan payments and significant changes to a number of debt relief programs. That includes the rollout of a new income-driven repayment plan less than three months before payments were due. Additionally, several servicers have left the federal student loan system, and the department has moved borrowers’ accounts to different loan companies.

“We don’t have money to add new IT people and the ones we have are running ragged trying to Band-Aid all these problems,” Scott Buchanan, executive director of the Student Loan Servicing Alliance, told The Washington Post. “I’m not making excuses. I’m just saying we need to figure out a solution. And the solution is for the government to make clear decisions, give enough time that’s reasonable for a partner to implement things, and also for Congress to give us enough staff and resources to do it.”

The department has identified other errors made by the servicers, though it’s only penalized MOHELA thus far. Other loan servicers sent bills with incorrect payment amounts and sought to collect money from borrowers who have pending borrower defense to repayment claims, according to the news release. When a borrower files a claim, their payments are supposed to be paused.

Affected borrowers will have their accounts placed in an interest-free forbearance, so they won’t have to make payments until the issue is resolved, according to the news release. The months spent in forbearance also will count as credit toward loan forgiveness under Public Service Loan Forgiveness and income driven-repayment plans.

Yu said those measures to help borrowers are “meaningful steps” to address the harm caused by the errors. “It’s important to know that the department is actually going to hold its contractors to their contract,” she said. “We hear the servicers complain that they’re not getting paid enough to do the contract. But, at the end of the day, they agreed to do a job right, and it’s not getting done.”

The department acknowledged earlier this month that MOHELA and other servicers have also miscalculated payments for more than 300,0000 borrowers who enrolled in the agency’s new income-driven repayment plan.

The Project on Predatory Student Lending, a nonprofit that represented borrowers in Sweet v. Cardona, a class action lawsuit focused on the agency’s handling of borrower-defense claims, has alleged that MOHELA was trying to collect student loans that are supposed to be discharged under a settlement agreement.

“The law is clear: no borrowers with pending borrower defense claims should enter repayment, and no Sweet class member should receive a bill,” said Eileen Connor, the project’s president, in a statement. “MOHELA’s failure has caused significant stress and financial harm for borrowers. We are pleased to see that the Department of Education is holding MOHELA accountable by withholding payment, demonstrating that there are consequences for servicers who cannot fulfill their basic obligations.”

Richard Cordray, the chief operating officer for Federal Student Aid, the arm of the Education Department that runs the student loan program, said in a statement that the office detected the mistakes “through vigorous monitoring of borrower accounts.”

“We are committed to making things right for borrowers and holding our contractors accountable for errors when they do occur,” he said.

The department could take additional actions if the companies fail to meet their “basic contractual obligations,” according to the news release.

North Carolina representative Virginia Foxx, the top Republican on the House education committee, said in a statement that the department is at fault for the servicing errors and should focus on bringing borrowers back to repayment instead of providing debt relief.

“Constantly changing deadlines, providing faulty or incomplete data, and failing to give timely communication are some of the hallmarks of this administration’s incompetence,” Foxx said. “But this shouldn’t be surprising since the Department is hellbent on unilaterally ruining the federal student loan program, turning a blind eye to responsibility, and ignoring the intent of Congress.”