The U.S. Department of Education Cracks Down on the Largest Federal Student Loan Servicer for On-Time Billing Statement Failures

The U.S. Department of Education has taken a bold step in penalizing the biggest federal student loan servicer, MOHELA, for its failure to send on-time billing statements to 2.5 million borrowers. The department has decided to withhold $7.2 million in payment owed to MOHELA for the month of October. This move comes after more than 800,000 borrowers failed to make on-time loan payments in October, the first month of payments since the pandemic pause began in March 2020.

The Department’s Message: No Tolerance for Servicing Failures

The Education Secretary, Miguel Cardona, expressed the department’s firm stance on addressing these gross servicing failures. In a statement, he emphasized the commitment to fixing the country’s broken student loan system, which includes enhancing oversight, accountability, and taking every necessary step to improve outcomes for borrowers.

MOHELA, however, did not respond to a request for comment on the matter.

Servicing Errors Plague Borrowers

The department’s announcement comes amid widespread reports of loan servicing errors and borrowers enduring lengthy hold times while trying to resolve these mistakes. In fact, the department itself documented these errors extensively in a recent internal memo obtained by NPR and first reported by The Washington Post.

The memo highlights multiple groups of borrowers who have suffered as a result of servicers’ errors during the transition back to repayment. Among them are the 2.5 million borrowers who did not receive timely billing statements from MOHELA. Additionally, approximately 16,000 borrowers, who had requested loan cancellations due to being defrauded by for-profit colleges, were incorrectly returned to repayment rather than being placed in a special payment-free forbearance.

An Individual Story of Mismanagement

Dan Szyman, a 43-year-old father of three and an outpatient mental health nurse, found himself tangled in this bureaucratic mess. Previously enrolled in the REPAYE income-driven repayment plan, Szyman was automatically enrolled in the Biden administration’s new and more generous repayment plan, SAVE. However, a notice from his servicer, MOHELA, in September informed him that his bill for October would be $633 instead of the expected $99.

Despite contacting MOHELA’s call center and being assured that the issue would be rectified, Szyman’s loan was not fixed, and his payment was put into forbearance. This case mirrors the experience of 78,000 borrowers who, like Szyman, had their accounts transferred to a new servicer and were shifted from an old income-driven repayment plan to the new SAVE plan.

Education Department Takes Action

The Education Department has instructed servicers to place all affected borrowers in forbearance, waive any accrued interest, and have the forbearance period count towards Public Service Loan Forgiveness. For Szyman, who is only 17 payments away from having his debts forgiven under this program, this is welcome news.

Szyman appreciates the efforts made by the Education Department to address these mistakes and help borrowers like himself. However, Rep. Virginia Foxx, R-N.C., chair of the House Education Committee, believes a significant portion of the blame lies with the department itself. Foxx accused the department of lacking a plan despite knowing for over three years that borrowers would need to return to repayment.

Congress also shares some responsibility for these errors, having flat-funded the office of Federal Student Aid and its loan servicing contractors for this year. This funding shortfall has complicated the situation for the office, which must now handle the repayment of 28 million borrowers, a significant increase from previous years.

Scott Buchanan, head of the Student Loan Servicing Alliance, emphasizes the need for additional resources to address the backlog and challenges posed by the evolving student loan system.

A Complex System Demands Time and Assistance

The complexity of the student loan system has resulted in an unprecedented number of borrowers seeking help, with their queries often being intricate and time-consuming. As a consequence, the average hold time for borrowers seeking assistance is 58 minutes, and call lengths have increased by 70% compared to 2019. These challenges have led to frustration and a dropout rate of over 52% for borrowers attempting to reach customer service.

Although the department’s actions have been welcomed by borrowers, there is recognition that improvements are needed at both the servicer and governmental levels to ensure a smoother repayment process for millions of borrowers.

For more details, visit NPR.