Fedloan’s withdrawal from student loans could hurt borrowers even more

Kristi Cruz could make her last college loan payment in February when the 49-year-old public interest lawyer qualifies for a federal program that will write off her remaining $ 43,000 debt in law school. Cruz’s journey to freedom from college debt took over a decade.

But will it be ripped off at the last minute?

FedLoan – which operates as an affiliate of the Pennsylvania Higher Education Assistance Agency (PHEAA) – dropped a bomb earlier this month, telling the Federal Department of Education it would not seek a contract extension government of 12 years to collect payments for millions of borrowers on a portfolio of federal loans for education.

FedLoan, one of several government-approved contractors serving 44 million student loan borrowers, has been the target of customer service lawsuits and audits. His decision therefore appears to be a relief for reform supporters and borrowers.

But his action has led to the reverse reaction for some: concerns about what will happen this fall when the huge federal loan-servicing apparatus begins to collect loan repayments again.

Borrowers did not have to make payments on federal education loans during the pandemic and are expected to start doing so again on September 30.

At the same time, the Education Ministry will make plans to move PHEAA’s $ 390 billion loan portfolio to a new provider.

Some of these FedLoan borrowers like Cruz participate in the Civil Service Loan Forgiveness Program for employees of government, law enforcement, and non-profit organizations. This effort was criticized by the many applicants who were rejected after applying. Millions of additional borrowers served by FedLoan are simply paying off their college loans.

Persis Yu, director of the Student Loan Borrower Assistance Center at the National Consumer Law Center, said FedLoan’s transition will be “a massive change in a short period of time for many people.” We don’t have a great precedent for transfers of this size.

Borrowers should expect that some records will be lost during the transition. “If I were a FedLoan borrower, I would do my best to get these records, but I’m not sure if they can do it before the transition,” Yu said. Most people, she said , “Do not keep their own records. There is currently a queue of people trying to troubleshoot issues with FedLoan. “

Even for Yu, who defends the interests of the borrowers, “it takes a long time to get the records,” she said.

Cruz, from Seattle, says she has heeded the terms of the government’s civil service loan forgiveness program for more than a decade, regularly certifying her income and sending in her monthly loan payments.

But mistakes were made. She had to correct mistakes and write letters of appeal. “Some weeks or months it seems like extra work to convince FedLoan to fix things,” said Cruz, although over time she and FedLoan have come to a “good place”.

“We are on the same page.”

Now this. She might be dealing with a new server before forgiveness. Will it still have to prove itself? “It’s terrible timing for me,” said Cruz. “I’m so close, and now they’re going to take it off.” I don’t see how it will improve with one service provider or another.

PHEAA spokesman Keith New said last week the agency would not seek an extension of its federal contract, which expires Dec. 14, “beyond what is necessary to ensure a transition into sweetness to a new service agent “. Still, the transition could last until 2022, he said.

The PHEAA’s decision comes at a pivotal time for the federal education loan services industry.

Since President Joe Biden took office in January, the White House has appointed new senior officials in the Education Department who are seen as sympathetic to borrowers and less friendly to federal lending services, such as FedLoan and Wilmington-based listed company Navient. .

Critics say service providers have mismanaged the business and some of their decisions have resulted in higher fees and costs for borrowers, which benefits businesses. They deny it.

In February, the PHEAA settled a lawsuit filed by Massachusetts Attorney General Maura Healey over allegations of loan service errors. About 200,000 Massachusetts borrowers whose federal loans are managed by the PHEAA can submit a request for a detailed review of their account. The PHEA has neither admitted nor denied the wrongdoing.

Then, in April, James Steeley, CEO of PHEAA and one of Pennsylvania’s highest paid state employees with a salary of $ 334,950, was grilled by U.S. Senator Elizabeth Warren (D ., Mass.) At an Economic Policy Subcommittee hearing on federal loan managers.

Warren, who chairs the subcommittee, said lawsuits and investigations show that the PHEAA “consistently underestimates” borrower payments, resulting in rejection rates for those trying to qualify for the loan remission program. public service loans. Of 225,000 borrowers who requested loan cancellation, only 2% had their loans canceled, Warren said.

The PHEAA doesn’t underestimate payments, Steeley told Warren. The high rejection rate was due to people not making enough payments to qualify for the pardon. “We strive every day to do our best for the people of Pennsylvania, for the customers we serve,” he told Warren. “We are advocating on their behalf for program improvements to increase these forgiveness rates. “

After the hearing, Warren and US Senator John Kennedy (R., La.) Sent a letter to Steeley “on what appears to be false and misleading testimony”.

Steeley said PHEAA had not been penalized for its handling of the civil service loan forgiveness program, according to the letter. But nine reviews of the program since 2016 show “four corrective action plans and two fines, each greater than $ 100,000,” the letter said. Warren and Kennedy asked Steeley to explain his comments by July 7. The PHEAA did not respond to questions about Steeley’s testimony.

On July 8, the Pennsylvania agency made the surprise announcement that it would not seek an extension of the federal loan service contract, calling it a business move. Steeley has said in the past that the federal contract is not as profitable as it had been in its early years. “Millions of borrowers can breathe a sigh of relief today knowing that their loans will no longer be managed by the PHEAA,” Warren said in response to the PHEAA announcement.

What comes next makes people guess. Some have called on the government to extend the moratorium on federal loan repayments beyond September 30.

Some believe the Missouri Higher Education Loan Authority, known to borrowers as MOHELA, may have a prime lead in replacing FedLoan as federal manager. The federal government could also select other service providers.

New, a spokesperson for PHEAA, said that while the agency will help with the transition to a new business, “it is only the [Education] Ministry decision ”to choose a repairer.

A big question is what will happen to the 2,500 customer telephone representatives and other employees, mainly based in Harrisburg, for the PHEAA. The agency will continue to manage loans for other groups and students in Pennsylvania. But the federal contract produced significant revenues.

“Some staff reductions may be unavoidable,” New said. The PHEAA expects some employees to leave with normal turnover, New said, but it is too early to estimate the job cuts.