By Ben Kaufman and Winston Berkman-Breen | July 9, 2021
On July 8th, 2021, the embattled student loan giant known as the Pennsylvania Higher Education Assistance Agency (PHEAA) announced that it intends to exit its role as a federal student loan servicer. PHEAA currently manages over $411 billion in loans owed by 9.2 million federal student loan borrowers as part of its $518 billion loan servicing portfolio. Importantly, PHEAA is also the sole servicer tasked with managing the scandal-plagued Public Service Loan Forgiveness (PSLF) and Teacher Education Assistance for College and Higher Education (TEACH) Grant programs on behalf of the Department of Education (ED).
PHEAA’s announcement represents welcome news for borrowers, but this news alone does not amount to justice for those who have been harmed by PHEAA’s abuses.
PHEAA’s tenure as a student loan servicer involved massive, widely-documented failures, leading the promise of PSLF to be broken for potentially millions of borrowers and generating other extensive harms for many more. These breakdowns have led borrowers and law enforcement officials to haul the company into courthouses nationwide.
Moreover, the history of widespread mismanagement across the student loan system makes clear that without a concerted effort by ED, PHEAA’s exit could be a recipe for extensive errors that may still cause problems for borrowers decades into the future. PHEAA’s contract with ED is slated to expire on December 14th, 2021, meaning that every borrower it currently services will need to be transferred to another servicer. Notably, this deadline is only weeks after federal student loan payments are scheduled to re-start at the end of September, an event that is already slated to place student loan borrowers at risk.
With these serious concerns in mind, here are just 14 of the many questions that demand immediate answers from PHEAA and the Department of Education:
- What’s the plan to avoid the failures of previous servicing transfers and protect borrowers? In 2020, the SBPC released a report finding that the last instance of a large-scale servicing transfer caused and led to the revelation of millions of errors, including ones that continue to derail hundreds of thousands of borrowers pursuing PSLF. What lessons did the Department of Education learn from this past transfer, noting that it harmed or revealed existing harms against millions of borrowers? How does ED intend to work with state law enforcement and consumer protection agencies to prevent a repeat of the breakdowns last seen when a servicing transfer on this scale was undertaken?
- Will ED ensure borrowers are “held harmless” when errors occur as a result of PHEAA’s exit? Litigation against PHEAA by state law enforcement agencies from coast to coast has revealed that the company deploys a startling range of illegal and predatory servicing practices that can leave borrowers with needlessly added debt, lost protections, and shattered financial lives. It is clear that these practices are not just affecting borrowers in Massachusetts and New York, where state law enforcement agencies have taken action in response to the harmful fallout of the last massive servicing transfer. If the upcoming transfer of loans away from PHEAA leads to harmful errors or reveals existing but previously unknown problems, what steps will ED take to ensure that borrowers do not now bear the cost of these failures?
- Will ED provide regular public reporting about how PHEAA’s exit from the student loan market impacts the possibility of a successful end of the payment pause? After nearly a year and a half, federal student loan borrowers are scheduled to once again begin receiving a monthly student loan bill absent further executive action at the end of September. Given that PHEAA’s contract is slated to expire on December 14th, the period coinciding with the resumption of federal student loan payments is likely to be a critical time in preparation for the transfer of PHEAA’s borrowers to new servicers. Noting that borrowers cannot afford for PHEAA to fail in its execution of both the end of the payment pause and the transfer of borrowers’ loans, will ED commit to provide an overview of how PHEAA intends to implement the end of the payment pause ahead of it happening (including as it relates to the maintenance of adequate staffing and resources levels), regular updates related to borrower outcomes after the resumption of payments, an overview of how PHEAA intends to complete the transfer of its borrower accounts ahead of it happening (including as it relates to the maintenance of adequate staffing and resources levels), and regular updates related to borrower outcomes after transfers begin?
- Will PHEAA maintain the workforce necessary to effectively manage the transition so borrowers aren’t further harmed? Reporting related to PHEAA’s announcement of its intent to exit federal student loan servicing indicated that PHEAA “expects to lay off employees” along the way. If true, these layoffs would exacerbate already low staffing levels at PHEAA, whose managers imposed a series of corner-cutting measures that have thinned its employee numbers, including outsourcing jobs to non-unionized workplaces in India and Florida. Moreover, even at staffing levels present before COVID-19, PHEAA’s record clearly indicates that it has historically struggled to deliver quality servicing to borrowers and to survive as a business. Will PHEAA maintain, and will ED ensure that PHEAA maintains, adequate staffing to successfully execute the impending transfer of millions of borrowers’ accounts?
- Will ED ensure that PHEAA is not allowed to obstruct justice and skirt liability from the full breadth of regulators overseeing the transfer of its loans? PHEAA has aggressively deployed dubious arguments related to federal preemption in courtrooms nationwide as part of an effort to obstruct independent oversight of federal student loan servicing. This conduct has drawn strong rebuke from the new head of ED’s Office of Federal Student Aid, and the arguments underlying it have been rejected in the courts. Will PHEAA agree to all document review requests, record retention requirements, and other inquiries and demands from state law enforcement and regulatory agencies? Will ED continue to uphold and enforce its now-public stance that federal law does not preempt or otherwise block critical state efforts to protect student loan borrowers from poor servicing practices, whether by PHEAA or by its successor servicers? Will ED maintain that this stance applies not just with regard to lawsuits, but also with regard to state authorities’ work to represent individual borrowers in complaint resolution processes?
- How will ED ensure that PHEAA addresses the existing backlog of unprocessed PSLF applications and prevents borrowers who have applied or will soon apply from falling into limbo? Borrowers are currently waiting on determinations for nearly 150,000 applications to PHEAA for PSLF. What plan is in place to finish processing these applications, as well as any more applications that may have arrived since this existing backlog of applications was received, before borrowers’ loans are transferred away from PHEAA? What will happen to borrowers whose applications have not yet been processed when loans are ultimately transferred away from PHEAA? Can ED ensure that the existing backlog will not grow or fail to be addressed, and can ED point to a specific timeline for the existing backlog to be processed?
- How will ED stop PHEAA from reaping a future windfall as a vendor to the servicers paid to clean up the mess left in PHEAA’s wake? PHEAA’s financial disclosures indicate that it services more than $518 billion overall, including well over $100 billion in loans owned by third-party federal student loan servicers such as MOHELA. After exiting its contract with ED, what role will PHEAA continue to play as a platform for other federal student loan servicers? To the extent that the upcoming transfer of loans away from PHEAA leads to errors and borrower harm, how will ED hold PHEAA accountable for action taken in its capacity as a vendor to ED’s remaining contractors? In particular, how will ED ensure PHEAA makes appropriate investments to maintain the infrastructure and technology it leases to ED’s other contractors if it no longer oversees the maintenance of that technology via a direct contract with PHEAA?
- Will ED ensure that borrowers are afforded all consumer protections under state law that govern the transfer of student loans between loan companies? For years, law enforcement, academics, and regulators have highlighted how student loan borrowers have fewer protections than nearly any other types of borrowers, despite student loan debt being the second largest consumer debt category. Many states have passed consumer protection laws to increase oversight over the private industry actors that operate the student debt market, including Student Loan Borrower Bill of Rights laws that institute basic standards for student loan servicers, such as for transfers of accounts. It is clear that these laws do not conflict with federal law, and that they generally provide much more protective standards that should govern the transfer of loan accounts between servicers. Will ED require all of its contractors to honor these strong state protections for borrowers nationwide as a minimum standard for how both PHEAA and any successor servicers must transition accounts?
- How will ED prevent the next PHEAA and ensure any future vendor delivers high-quality, accurate service to borrowers? Between the current timeline for the resumption of student loan payments and the transfer of borrower accounts, millions of student loan borrowers currently serviced by PHEAA will need a knowledgeable servicer with exceptional customer service to avoid widespread confusion and defaults. Unfortunately, the student loan servicing industry has been plagued by poor performance and consumer harm. It is essential that any servicing company or companies ED chooses to take on PHEAA’s federal student loan portfolio be able to provide the highest standard of service beginning on Day One. What process will ED use to select any successor servicers to PHEAA, and what controls—such as reviewing consumer complaints, tracking records of outcomes from past servicing portfolios, and developing a transparent bidding process—will ED implement to ensure that PHEAA’s egregiously poor servicing record and extensive consumer harms are not continued by another company?
- Will FSA ensure that the FSA Student Loan Ombudsman is empowered to independently monitor the transition, communicate with borrowers about risks and breakdowns, and incorporate information identified through borrower complaints into the comprehensive risk management strategy governing the transition? Student loan servicers are most borrowers’ only point of contact regarding their student loans, which makes poor servicing all the more harmful. In instances of misdirection or confusion, many borrowers do not know to whom else they should turn. Will ED create and promote a clear complaint filing and resolution mechanism for borrowers and work with partner oversight agencies, including by sharing complaint data, to ensure these borrowers have recourse for any harms resulting from the transfer of loans away from PHEAA? Will the FSA Ombudsman oversee the process of implementing this complaint filing and resolution mechanism? Additionally, will the FSA Ombudsman provide monthly public reporting on the transfer, including information related to complaint filings and outcomes, the status of the transfer, and customer service call volume?
- What steps will ED take to govern the transfer of TEACH Grants and guarantee TEACH Grant recipients are protected from future servicing errors? One of the most significant scandals surrounding PHEAA’s time as a federal student loan servicer concerns its failure to successfully administer the federal TEACH Grant program, leading thousands of public school teachers nationwide to unduly face huge debt burdens and triggering massive financial harm as a consequence. The Biden Administration has touted its desire to uphold and improve the TEACH Grant program, acknowledging the program’s role as a key lifeline for America’s educators. How will ED ensure that the problems that plagued the TEACH Grant program under PHEAA’s watch are not replicated when new servicers take on PHEAA’s loans? How many complaints of wrongful TEACH Grant conversions to loans due to errors by PHEAA are outstanding, what plan currently exists to address these complaints, what will happen to these complaints if borrowers are transferred before they are addressed, and how will any future complaints that arise after the transfer be handled? How will ED ensure that public school teachers relying on TEACH Grants who are currently serviced by PHEAA emerge unscathed from PHEAA’s transfer of loans to new servicers?
- How will ED ensure that PHEAA delivers borrowers high-quality servicing on the portfolio of older federal student loans that it will continue to manage after its contract with ED expires? Based on coverage surrounding PHEAA’s announcement of its exit from federal student loan servicing, it appears the PHEAA will continue servicing federal student loans originated under the now-defunct Federal Family Education Loan (FFEL) program. In recent financial disclosures, PHEAA indicated that it owns almost $3 billion in FFEL program loans and that it services additional tens of billions of dollars of these loans on behalf of third parties. Notably, these older loans are guaranteed by the federal government, meaning that ED and taxpayers could be left holding the bag in the event of widespread borrowers defaults, including those attributable to poor servicing. Given PHEAA’s long record of substandard performance and the massive organizational attention that will need to be diverted toward restarting payments on—and eventually transferring—PHEAA’s portfolio of ED-owned loans, how will ED make sure that PHEAA delivers high-quality servicing on its remaining FFEL portfolio? How will ED collaborate with state regulators and law enforcement as a part of these efforts? And in light of PHEAA’s history of financial struggles, how will ED ensure that it does not ultimately have to bail out PHEAA after a possible wave of defaults triggered by low-quality servicing on the remaining government-guaranteed portfolio?
- How will ED ensure PHEAA is obligated to make borrowers whole if new evidence of wrongdoing emerges after the end of PHEAA’s contract? The harms that PHEAA has already imposed on borrowers are extremely costly. When PHEAA mismanaged the TEACH Grant program, for example, public school teachers were stuck with unexpected multi-thousand dollar bills. Worse, when PHEAA broke the promise of PSLF, borrowers were forced to lose out on loan forgiveness worth hundreds of thousands of dollars. To prevent borrowers from once gain bearing the financial brunt of PHEAA’s errors, will ED require PHEAA to put forward a reserve fund to address harms stemming from conduct uncovered during or caused by the transfer of PHEAA’s borrower accounts to new servicers, especially as borrowers attempt to enroll in IDR or apply for loan forgiveness through programs such as PSLF later on?
- How will ED protect borrowers with “in-flight” applications for affordable payments or loan forgiveness at the time that loans are transferred? Given that ED is actively encouraging student loan borrowers to prepare for when payments resume by applying for income-driven repayment, and because of the extension of IDR recertification deadlines, we can expect that many borrowers will submit applications or recertifications just before and after payments resume. This could result in PHEAA sending pending IDR applications through the account transfer process. We know that servicing errors occur when accounts are transferred and we can expect that errors will complicate any pending IDR-related paperwork. How will ED ensure that borrowers are held harmless for any IDR eligibility lost due to delays caused by PHEAA and the servicing transfer? Will ED commit to instituting a presumption of eligibility for borrowers and provide immediate relief for any IDR applicant? Moreover, will ED commit to extending recertification deadlines to beyond the anticipated end date of the transfer?
For over a decade, PHEAA made clear that it could not be counted on to deliver borrowers quality servicing or comply with the law. The organization’s exit from federal student loan servicing provides an opportunity for ED to turn the page and enter a new chapter of consumer protection on behalf of millions of student loan borrowers. But doing so will require providing borrowers justice for existing harms, preventing new errors from arising as PHEAA’s loans are passed on to new servicers, demanding transparency at every point in the transition process, and vigilantly watching for mistakes that this transfer reveals or causes. The answers to the questions above will determine whether that happens.
Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
Winston Berkman-Breen is the Deputy Director of Advocacy & Policy Counsel at the Student Borrower Protection Center. Prior to joining the SBPC, Winston was the Director of Consumer Advocacy and Student Loan Advocate at the New York State Department of Financial Services.