More than 830,000 people missed their first student loan payment in three years after one servicer, Missouri Higher Education Loan Authority, commonly known as MOHELA, failed to send timely statements to 2.5 million borrowers.
In response, the Biden administration will punish MOHELA by withholding $7.2 million from its contract — the first time it has refused to pay a loan servicer — it announced Monday. The company did not respond to requests for comment.
“We will not allow borrowers to suffer the consequences of gross servicing failures,” Education Secretary Miguel Cardona said in a statement to The Washington Post.
MOHELA’s error is among the many servicing mishaps adding to a tumultuous restart of federal student loan payments this month. After a pandemic pause, the resumption of payments has been rife with erroneous bills and long wait times for borrowers to reach customer service. Yet the magnitude of problems is far more extensive than previously known, and the Education Department is now scrambling to remedy the harm to borrowers.
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End of carouselIn a memo obtained by The Washington Post, senior officials in the department’s office of Federal Student Aid detail a series of blunders by student loan servicers — the middlemen who collect payments on behalf of the government.
In some instances, servicers told some borrowers they owed more than $10,000 a month, and a few got $100,000 bills, according to the Education Department memo. The contractors accidentally set repayment terms at 1 to 2 months, instead of 120 to 240 months.
Servicers are also not always adhering to the rules of borrow defense to repayment, a federal program that cancels the debt of students defrauded by their colleges. Candidates for loan cancellation are supposed to be placed in forbearance, but servicers accidentally sent bills to 16,000 borrowers with pending or approved applications, according to the memo.
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The document does not identify the servicers responsible for the string of mishaps, and the Education Department said it is still investigating the matter. MOHELA borrowers had complained to The Post of delayed bills. Three government officials familiar with the matter who were not authorized to speak publicly confirmed the servicer’s mistake.
The memo notes the delay in giving MOHELA borrowers at least 21 days notice before their first bill was due — a timeline set by the department. About 741,000 borrowers were mailed statements less than 21 days before their due date, while 515,000 were mailed notices less than 14 days ahead, according to the memo. Some within less than a week.
Anne Roth, 54, said MOHELA emailed her a bill less than two weeks from the due date. But what really threw her was the $150 a month the servicer claimed she had to pay, despite being unemployed. When Roth applied for the Saving on a Valuable Education (Save) payment plan, which bases monthly bills on income and family size, she was told her monthly payment would be $0 because of her lack of income. After spending almost half the day trying to get through to MOHELA, Roth said she was told there was an error and her loan would be placed in forbearance while it was straightened out.
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“I’m grateful that they were able to work with me, but this has been stressful,” said Roth, who lives in Detroit and owes about $100,000 from a graduate degree in social work. “I’m barely making it and I know I can’t afford $150 right now.”
This is not the first time borrowers have faced problems since payments resumed this month. The Post first reported that servicers produced inaccurate payment amounts for 420,000 people enrolled in the Save plan. The Education Department has also transferred 24 million borrowers between loan servicers, in part because Navient, Pennsylvania Higher Education Assistance Agency and other servicers left the system, and some of those account files contain incorrect or missing data. Those errors are at the heart of the inaccurate bills.
Congressional Republicans say the department needs to take responsibility for failing to provide clear and proper guidance to its contractors, setting them up to take the fall for the agency’s own incompetence. Rather than dedicate time and money to ushering borrowers back into repayment, they say the Biden administration squandered the funding Congress provided on debt forgiveness policies, one of which was rejected at the Supreme Court, that have only added to the workload of student loan servicers.
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Sen. Bill Cassidy of Louisiana, the ranking Republican on the Senate Health, Education, Labor and Pensions Committee, called the servicing errors “a predictable outcome given the Biden administration’s terrible messaging and the Department of Education’s poor job preparing borrowers for return to repayment that was required by law.”
More than 800,000 of MOHELA’s customers missed their first full payment, though it is not clear whether that is entirely a result of the delayed notices. Still, those borrowers are now technically delinquent. Normally, they would be reported to the credit bureaus, but the Biden administration’s 12-month grace period is sparing borrowers with past-due accounts from that fate for now.
Being delinquent, however, could still put borrowers at risk of losing credit toward federal loan forgiveness programs. It also makes those enrolled in Save ineligible for the plan’s interest subsidy, in which the government pays for any interest on a loan that a beneficiary can’t cover.
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To remedy all of these errors, Richard Cordray, who heads the department’s Federal Student Aid office, said servicers will place all affected borrowers into administrative forbearance until the problem is fixed. The department will adjust to zero any interest they accrue. It will credit borrowers with progress in their payments when it helps them with loan forgiveness programs.
“Through vigorous monitoring of borrower accounts, we were able to detect these mistakes and take swift action to remedy them,” Cordray said in a statement. “We are committed to making things right for borrowers and holding our contractors accountable for errors when they do occur.”
The tumultuous return to repayment arrives as the Federal Student Aid office and its loan servicers have taken on a litany of projects that are stretching resources. They are processing piles of applications for loan forgiveness from public servants and reviewing millions of records to adjust the count of payments that move borrowers closer to debt cancellation. All the while, they are standing up Save, a brand new repayment plan. Congress has refused to give the Federal Student Aid office more money, and the department as a result has told servicers to scale back their operations.
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“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,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for loan servicers. “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.”
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