Following recent news that the Public Service Loan Forgiveness (PSLF) program could be on the chopping block, it’s now come to light that the program was potentially mismanaged by one of the country’s largest loan servicers, according to the New York Times.
Massachusetts Attorney General Maura Healey filed a lawsuit today against the Pennsylvania Higher Education Assistance Agency (PHEAA), which operates under the name FedLoan. The lawsuit claims mismanagement of forgiveness programs for public service workers led to hundreds of thousands of dollars in increased student loan payment costs.
“This company’s actions have jeopardized the financial futures of teachers and public servants across the country,” Healey said in a statement.
A quick breakdown of PHEAA, FedLoan, and PSLF
As one of the few student loan servicers under contract with the Department of Education, PHEAA services more than a quarter of the $1.4 trillion in total student loans on behalf of various lenders. Additionally, PHEAA’s contract allows it to service all student loans enrolled in Public Service Loan Forgiveness (PSLF) and the Teacher Education Assistance for College and Higher Education Grant Program (TEACH) exclusively.
As a loan servicer, PHEAA acts as an intermediary between lenders and borrowers, helping to facilitate payments and assist borrowers who struggle to repay their loans. Most borrowers, however, know the agency by the name under which it operates: FedLoan. This arm of the agency handles student loan servicing, as PHEAA also offers additional student aid services and programs.
PSLF, on the other hand, is a federal program designed to help borrowers who work in public service shed the burden of student loan debt. By committing to 10 years of working for a non-profit, government, or other qualifying public service position while making consistent payments, program participants are eligible to have their remaining balance discharged, tax-free.
The first round of borrowers eligible for PSLF began making qualifying payments as of October 2007, so no program participants have completed the 10 years quite yet.
As the student loan servicer, PHEAA/FedLoan is responsible for guiding borrowers in submitting PSLF eligibility forms, facilitating qualifying payments, and processing annual income certification paperwork required to remain on income-driven repayment plans, in which most PSLF applicants are enrolled. Healey alleges, however, that the whole process has been a mess.
Why the Massachusetts attorney general is suing
According to Healey, PHEAA has been “unreasonably slow” in processing income certification paperwork. To deal with the backlog, PHEAA puts many borrowers into forbearance, which pauses student loan payments.
Unfortunately, those months in forbearance don’t count towards the 10 years of payments borrowers must make to earn PSLF. This extends the amount of time they have to remain in an often lower-paying public service job, continue accruing interest, and funneling a portion of monthly income toward student loan debt.
Worse, this practice leads to credit problems, the filing claims, as payments appear outstanding on reports. This can impact borrowers’ ability to qualify for other types of credit and loans, not to mention, their short- and long-term financial planning.
Then there’s the issue of a technical error that led to overcharging about 1 percent of accounts. This equated to tens of thousands of borrowers who have still not received a refund, the lawsuit filing claims.
PHEAA states that the company disagrees with the allegations of mismanagement, but will work with the Education Department to resolve any issues.
What should PSLF hopefuls do?
The fact that PSLF has been mishandled isn’t much of a secret. The Consumer Financial Protection Bureau (CFPB) recently reported that as many as 25 percent of borrowers could be eligible for the program, yet only about 500,000 are pursuing it.
Further, it reviewed more than 11,000 federal student loan complaints that were filed between March 2016 and February 2017, finding an array of issues with the program. Most of these problems stemmed from unhelpful loan servicers.
Ultimately, the best thing you can do as a borrower is to take things into your own hands. Don’t rely on your servicer to alert you of opportunities for forgiveness or hold your hand through the process.
You can learn all about the program in our Complete Guide to PSLF and find out what steps to take to determine your eligibility. You can also use our PSLF calculator below to determine if you could benefit from the program.
Public Service Loan Forgiveness Calculator
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