One of the handful of organizations with a contract to service federal student loans announced today that it would not renew that agreement at the end of the year.
For some politicians, the announcement from the Pennsylvania Higher Education Assistance Agency, known as Pheaa, is good news for student borrowers who, they say, have been misled and mistreated by the company.
“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,” Sen. Elizabeth A. Warren, Democrat of Massachusetts, said in a news release.
But the change also complicates the White House’s plan to resume student-loan payments in October and adds another big wrinkle to the numerous problems facing the Public Service Loan Forgiveness program. Pheaa is the only servicer now handling the program.
“No doubt critics will see Pheaa bowing out as a positive development,” Justin S. Draeger, president and chief executive of the National Association of Student Financial Aid Administrators, said in an email. “But with one major servicer exiting, and still no comprehensive plan” from the Education Department “on how they’ll be transitioning millions of borrowers into repayment, let alone a publicly available comprehensive strategy on loan servicing, the task before the Department grows more daunting every day.”
The Pennsylvania legislature created Pheaa in the 1960s to manage the state’s financial-aid programs. In 2009 the agency signed a contract with the U.S. Department of Education to service federal student loans, which includes collecting payments and managing the accounts of borrowers who are behind in their payments or in default.
It now handles the accounts of more than eight million borrowers worth about $350 billion. But the complexity and cost of managing those programs has become too great, Pheaa told the department.
The agency has also faced a barrage of criticism from consumer advocates and from both Democrats and Republicans in Congress, and threats of legal action from state attorneys general, particularly over its handling of the Public Service Loan Forgiveness program. That program, created by Congress in 2007, offers to wipe out the remaining federal student-loan debt of some individuals who are employed by the government or certain nonprofits after they have made 120 payments.
Since 2014, the National Association of Student Financial Aid Administrators has produced several reports detailing the longstanding challenges of the program, many of them related to a lack of transparency and communication from Pheaa.
In June, the Consumer Financial Protection Bureau released a report alleging widespread misinformation to borrowers from all student-loan servicers.
In a news release, Seth Frotman, executive director of the Student Borrower Protection Center, said the findings “confirm that the student loan industry has been engaged in a widespread, illegal scheme to cheat public servants out of the loan forgiveness earned through their service to our country and in our communities.” Frotman is also a former assistant director of the Consumer Financial Protection Bureau.
Later in June, Senators Warren and John Kennedy, Republican of Louisiana, called for Pheaa’s chief executive to explain “what appear to be false and misleading” statements he made in April to a hearing of the Senate’s Committee on Banking, Housing and Urban Affairs’ Subcommittee on Economic Policy. “It appears that you failed to provide accurate information about your company, undermining our Subcommittee’s fact-finding role, and potentially misleading committee members and the public. And your testimony, if it was ‘knowingly and willfully’ false, subjects you to fines and criminal charges,” the senators wrote to the agency’s leader.
The question for Education Department officials and President Biden is now whether they can continue to plan for those with federal student loans to begin repayment in October.
In a prepared statement, the Education Department said it would work with Pheaa “to develop and implement a wind-down plan focused on ensuring borrowers transition smoothly to a different loan servicer.”
Mike Pierce, policy director and managing counsel at the Student Borrower Protection Center, said that if the White House does not extend the pause on repayments, President Biden and Education Secretary Miguel Cardona could be blamed for the problems that have until now have been attributed to loan servicers and the poorly designed loan-forgiveness program.
“It’s clear the White House needed to extend the payment pause a month ago,” he said. “It should extend it for the foreseeable future until there is a plan to deal with this massive disruption.”
