California’s Actions to Hold PHEAA Accountable for Handling of Federal TEACH Grant Comes Amid An Unprecedented Campaign by the Trump Administration to Block Oversight By State Regulators
April 2, 2020 | WASHINGTON, D.C. — Today, the California Department of Business Oversight filed a lawsuit against the Pennsylvania Higher Education Assistance Agency (PHEAA), also known as FedLoan Servicing. This lawsuit alleges that the student loan servicer illegally withheld key documents and records from the State of California related to its handling of a federal grant and loan program for teachers, known as the TEACH Grant. In 2016, California passed legislation authorizing the Department of Business Oversight to oversee student loan servicers like PHEAA. Since 2017, the Trump Administration has obstructed this oversight, part of a sweeping scheme to shield big student loan companies from the consequences of widespread abuses, including the mismanagement of programs like the TEACH Grant.
This lawsuit comes amid the coronavirus pandemic where millions of borrowers facing financial distress are relying on servicers to provide information and payment relief. The independent industry oversight the State of California is fighting for is absolutely critical to hold industry accountable at this time.
In response to this lawsuit, SBPC Policy Director Mike Pierce released the following statement:
“Regulators and law enforcement officials do not need a permission slip from Secretary DeVos to oversee this trillion dollar marketplace. Today’s lawsuit shows that the State of California will use the full weight of the law to ensure teachers and other vulnerable borrowers are not denied their rights. Now more than ever, independent oversight is the key to ensuring borrowers can weather the coming economic storm.”
Background on Independent Oversight and Student Loan Servicing
The federal government owns more than $1.1 trillion in federal student loans and relies on large private-sector financial services firms like PHEAA to service these loans. Today’s lawsuit by the California Department of Business Oversight marks the first time a state banking regulator has sued to enforce its authority to oversee the servicing of these student loans.
For more than two years, Betsy DeVos has continued to instruct the largest student loan companies to obstruct oversight efforts by federal and state law enforcement officials, which hindered their ability to investigate bad practices, protect consumers, and hold companies accountable. This move was denounced by lawmakers and dismissed by judges. State law enforcement agencies have since stood up to Betsy DeVos to demand the information needed to do their jobs.
Even today, the federal Consumer Financial Protection Bureau remains unwilling to use its authority to oversee this market. Last year, the SBPC partnered with Democracy Forward and Student Debt Crisis to sue CFPB to restart oversight at the federal level. This lawsuit is ongoing.
Background on of Abuse and Mismanagement in the federal TEACH Grant Program
For more than a decade, students pursuing degrees in education have had access to the federal TEACH Grant, a program that awards up to $4,000 for students who commit to serving as teachers in high-need schools. Grant recipients are required to satisfy a set of specific eligibility criteria as a condition of these grants. Should a grant recipient fail to do so, the grant is automatically converted into a federal student loan, and the grant recipient is obligated to repay this debt, along with interest charges calculated back to the date that the grant was made.
From the beginning, the student loan industry mishandled this key program, leading to allegations that teachers who had fulfilled their obligations under this program had seen their grants improperly turned into loans and were now deeply indebted as a result. Based on one internal study conducted by the Department of Education, more than 10,000 people had grants improperly converted to loans, leaving some teachers with as much as $20,000 in debt when factoring in improper interest charges.
In December 2018, following more than a year of scrutiny by advocates, law enforcement officials, and the press, Education Secretary Betsy DeVos announced that a new corrective action plan would be implemented to ensure teachers with properly converted loans were made whole. As part of this announcement, PHEAA was tasked with administering this remediation, answering borrower questions, managing paperwork, and continuing to service all borrowers with TEACH Grants.
Since that time, no public information has been released identifying the success of this initiative or assessing the number of teachers who continue to repay TEACH Grants improperly converted to loans.
###
About the Student Borrower Protection Center (SBPC)
The Student Borrower Protection Center (www.protectborrowers.org) is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students. Led by the team of former federal regulators that directed oversight of the student loan market at the Consumer Financial Protection Bureau, SBPC exposes harmful and illegal practices in the student loan industry, drives impact litigation, advocates on behalf of student loan borrowers in Washington and in state capitals, and promotes progressive policy change. SBPC accomplishes these goals by partnering with leaders at all levels of government and throughout the nonprofit sector.