One of the country’s largest servicers of federal student loans has badly mismanaged debt forgiveness programs for public service workers, significantly raising repayment costs for hundreds of thousands of borrowers, according to a lawsuit filed today by the attorney general of Massachusetts.
The loan servicer, the Pennsylvania Higher Education Assistance Agency, which operates under the name FedLoan, has made copious errors, potentially miring many students in debt far longer than they expected, according to Maura Healey, the Massachusetts attorney general.
“This company’s actions have jeopardized the financial futures of teachers and public servants across the country,” Healey said.
The company, based in Harrisburg, Pennsylvania, holds an exclusive contract with the Education Department to service all loans enrolled in the public service loan forgiveness program and the Teacher Education Assistance for College and Higher Education Grant program, or TEACH, which offers student debt assistance to those who teach in high-need areas.
A growing number of consumer watchdogs and government officials have sounded alarms this year about a raft of apparent problems with the government’s public service loan forgiveness program, which promises qualifying workers — including teachers, librarians, police officers and doctors and nurses — a break on their federal student loans in return for a decade of full-time service.
Congress created the program in 2007, and the first wave of applicants will be eligible to have their remaining student debt eliminated in October.
To qualify for the forgiveness program, workers must make 120 monthly payments on their federal student loans through one of several designated payment plans. When they finish, any remaining balance will be forgiven.
Because the program is not yet a decade old, no borrowers’ debts have yet been wiped away, but the government encourages those who plan to use it to submit certification forms that help track their progress.
So far, the process has been a mess, according to the lawsuit Healey filed in the Massachusetts Superior Court in Suffolk.
Every year, borrowers using an income-based plan must recertify and document their earnings. The Pennsylvania Higher Education Assistance Agency, which guides borrowers through the complex process and collects their monthly payments, is unreasonably slow in processing those applications, according to the lawsuit.
To accommodate its delays, the company puts many borrowers into forbearance, which suspends their monthly payments. But months in which loans are in forbearance do not count toward the 120 payments borrowers must make, which puts many borrowers further behind than they expected, Healey said.
A government watchdog, the Consumer Financial Protection Bureau, also raised the issue of servicer delays and errors in a scathing report in June on extensive problems in the public service loan forgiveness program.
“Borrowers complain that when their servicer reports a qualified payment count that borrowers believe to be inaccurate, borrowers struggle to get their servicer to correct the error or explain why payments were not qualified,” the consumer bureau wrote.
The complaint charges the company with violating Massachusetts laws that prohibit “unfair or deceptive acts.” It asks the court to levy penalties and award restitution to affected borrowers.
A spokesman for the company did not immediately respond to a request for comment.