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Major Student Loan Servicer Leaving Federal Loan Program

July 9, 2021
 
 

The Pennsylvania Higher Education Assistance Agency said Thursday that it would not be extending its federal student loan servicing contract with the Department of Education once it expires in December. It agreed to continue working with the Office of Federal Student Aid until all its borrowers are transitioned to a different servicer.

PHEAA, which operates as FedLoan Servicing, currently manages loans for 8.5 million borrowers and services the Public Service Loan Forgiveness and Teacher Education Assistance for College and Higher Education Grant programs. Richard Cordray, chief operation officer of Federal Student Aid, said the office will work with PHEAA to develop a wind-down plan to facilitate a smooth transition for both borrowers and the programs.

"This plan will feature early and frequent communications and clear guidance on what borrowers should expect, as well as strong oversight from FSA during this transition," Cordray said. "The U.S. Department of Education is committed to using all of the tools in our toolbox to make sure borrowers are supported and not negatively impacted during this transition."

PHEAA became a federal servicer in 2009 to diversify its business operations following the Great Recession. The agency says it now wants to refocus on "its core mission for the Commonwealth of Pennsylvania."

"In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs, as managed by the U.S. Department of Education, have grown increasingly complex and challenging while the cost to service those programs increased dramatically," PHEAA said in a release.

The agency has come under fire in recent years for its management of the PSLF and TEACH Grant programs. Massachusetts and New York both sued PHEAA for mismanaging the federal loan forgiveness programs and allegedly preventing borrowers from having their loans forgiven or reduced. It has also been accused of improperly converting TEACH Grants into loans that teachers had to repay.

The Massachusetts lawsuit was settled earlier this year, but a company spokesperson said the settlement "carries no admission of wrongdoing."

Massachusetts senator Elizabeth Warren, a Democrat who has been critical of administration of the student loan program, cheered PHEAA's exit from federal student loan servicing.

"Millions of loan borrowers can breathe a sigh of relief today knowing that their loans will no longer be managed by PHEAA, an organization that has robbed untold numbers of public servants of debt relief and was recently caught lying to Congress about its atrocious record of fines and penalties," Warren said in a statement.

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