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: Student-loan giant that manages Public Service Loan Forgiveness will stop servicing federal loans

July 09
12:52 2021

The controversial organization that for years has been public servants’ main point of contact in accessing student-loan forgiveness will no longer be servicing federal student loans at the end of this year. 

The Pennsylvania Higher Education Assistance Agency informed the Department of Education’s Office of Federal Student Aid Thursday that it would not accept an extension of its student loan servicing contract, “in an effort to more appropriately focus on its core public service mission in Pennsylvania,” Keith New, a PHEAA spokesman, wrote in an email.

The contract is scheduled to expire on December 14, 2021. 

Moving millions of borrowers’ accounts to a new company can be operationally complex and create problems for borrowers. 

Though a seemingly wonky federal contracting announcement, the news could impact millions of borrowers. The sources of our nation’s student-loan problems are many — stagnant wages, high college costs, government disinvestment in higher education, — but advocates and regulators have pointed to student-loan servicers’ behavior for years as exacerbating borrowers’ challenges repaying their debt. PHEAA is one of three large organizations serving the government’s student loan portfolio.   

The announcement comes after years of scrutiny over PHEAA’s management of the Public Service Loan Forgiveness Program, an initiative that allows public servants to have their federal student loans discharged after 120 monthly on-time payments. Borrowers who are on track to have their loans forgiven under the program make payments through FedLoan servicing, PHEAA’s servicing arm, and rely on the organization to track their progress towards cancellation. 

Maura Healey, the attorney general of Massachusetts, settled a lawsuit with PHEAA earlier this year, accusing the organization of giving public servants wrong information about PSLF that delayed their progress towards forgiveness, among other allegations. Letitia James, the New York attorney general, sued PHEAA in 2019, alleging the company failed to accurately count the number of payments borrowers had made towards forgiveness. At the time, the organization said James’ allegations had no merit. 

Senator Elizabeth Warren, a Massachusetts Democrat, who has been critical of the organization and accused James Steeley, the CEO of PHEAA, of lying to Congress earlier this year, cheered the news.  New wrote in an email that PHEAA respects the Senate’s interest in in ensuring truthful and accurate testimony, but “categorically denies,” that the Steeley’s testimony at an April hearing was “anything other than a truthful and good-faith effort to answer the multipart questions posed by Senator Warren.”

“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,” she said in a statement. 

Smooth transition

What’s next for borrowers whose loans are serviced by PHEAA wasn’t immediately clear. Richard Cordray, the chief operating officer of the Department of Education’s Office of Federal Student Aid, said in a statement, that PHEAA and the agency will work together “to develop and implement a wind-down plan focused on ensuring borrowers transition smoothly to a different loan servicer.” 

The two organizations agreed to keep working together until all PHEAA borrowers have been successfully transitioned to another servicer, Cordray said. 

‘Prepare for the worst, hope for the best, don’t panic.’

— Betsy Mayotte, the president of The Institute of Student Loan Advisors

It’s not uncommon for student-loan servicers to end their involvement with the program and for borrowers to have their loans transferred, but moving millions of borrowers’ accounts to a new company can be operationally complex and create problems for borrowers. 

For example, when American Computer Services ceased servicing student loans in 2012 and its portfolio was transferred to other servicers, the loans came to new servicers with incorrect loan-payment amounts and missing records that may have derailed some borrowers’ plans for student-loan forgiveness, according to a report released last year by the Student Borrower Protection Center, an advocacy group, and the American Federation of Teachers. 

“What we have seen in the past when the Department has undertaken these large transfers is that the company will get off scot-free while borrowers will bear the brunt of the months and years of mistakes that led up to the company walking away or being fired,” said Seth Frotman, the executive director of the Student Borrower Protection Center. “That just can’t be the case this time.” 

Cordray said in the statement the plan for winding down PHEAA’s servicing contract will feature “strong oversight from FSA.” 

Frotman said ensuring a smooth transition will also require oversight from the Consumer Financial Protection Bureau and state law enforcement officials. In the past, PHEAA has pushed back on state efforts to monitor the organization.

High stakes

Transitioning from one servicer to another can be particularly high stakes for borrowers in a program like PSLF, which requires borrowers make 120 monthly on-time payments before accessing forgiveness. Any records of payments lost in the transition could delay borrowers’ progress towards relief. 

Though the promise of PSLF is relatively simple — work in public service, repay your federal student loans for 10 years and have them forgiven — borrowers have struggled to access the program. Advocates have pointed to servicers, including PHEAA, as a major source of borrowers’ challenges, saying they haven’t provided borrowers with enough or the right information to get the forgiveness they’re entitled to. 

Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group, said the challenges with PSLF are related to the complexity of the program. For example, not all federal student loans qualify. 

“Fix the programming requirements, fix the law, make it easier for borrowers to access programs they are expecting to access,” he said. 

New, the PHEAA spokesperson, pointed to the complicated nature of the student-loan program as part of the reason the organization planned to stop servicing federal loans. In the 12 years since the organization first began servicing federal student loans, the programs “have grown increasingly complex and challenging while the cost to service those programs increased dramatically,” New wrote in the email. 

PHEAA’s announcement comes just a few months before federal student loan payments are set to resume on October 1. Advocates, borrowers and servicers were already concerned about the challenges of transitioning tens of millions of borrowers into repayment after more than a year-long pause as part of coronavirus-related relief. 

“This whole issue adds to that tidal wave,” said Betsy Mayotte, the president of The Institute of Student Loan Advisors. “I think borrowers should expect delays, it might be hard to get someone on the phone, it might be harder for your paperwork to get processed.” 

Mayotte suggested that public servants concerned about how the PHEAA transition will impact their progress towards forgiveness should download and keep a copy of their payment history as well as copies of their employment certification forms — the document borrowers use to ensure they’re on track towards forgiveness.  

“Prepare for the worst, hope for the best, don’t panic,” Mayotte said.  

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