By Ben Kaufman | April 8, 2021
Since the start of the pandemic, we’ve worked to hold the student loan industry and the Department of Education (ED) to account for violating borrowers rights and failing to implement key protections that Congress enacted in response to the economic fallout of COVID-19. These breakdowns follow a long history of incompetence by ED and malfeasance by its contracted student loan servicers that have led to massive borrower harm. Unfortunately, as new investigative findings we released today highlight, the student loan industry’s failure to protect borrowers during the pandemic runs even deeper than previously known.
Our new report, Adding Insult to Injury, reveals tens of thousands of newly uncovered instances in which federal student loan servicers misreported borrowers’ repayment status to credit reporting agencies. This action appears to have violated borrowers’ rights under the CARES Act and may also have breached federal and state consumer financial law, particularly the Fair Credit Reporting Act. Worse, it is not clear from the records we obtained whether ED ever addressed the root causes of these widespread errors or ordered remediation for harmed borrowers.
Uncovering evidence of widespread credit reporting errors by the Education Department’s contractors
Our investigation revealed the following:
- Servicers reported tens of thousands of borrowers’ repayment status incorrectly to credit reporting agencies—and more companies were involved than previously known. The CARES Act entitled borrowers owing on federally held student debt an interest-free payment pause and other key protections, including that “for the purpose of reporting information about the loan to a consumer reporting agency, any payment that has been suspended is treated as if it were a regularly scheduled payment made by a borrower.” However, a lawsuit filed last May alleged that at least one federal student loan servicer, Great Lakes, erroneously reported to consumer reporting agencies that nearly 5 million borrowers had stopped paying on their student loans. This error may have damaged millions of borrowers’ credit scores during a pandemic, leaving those borrowers vulnerable to added costs when they could least afford them.
But it turns out that this was not the end of the story. Instead, our investigation uncovered that Great Lakes was not the only federal student loan servicer that ED knew to have been incorrectly and likely damagingly reporting borrowers to credit reporting agencies as having stopped paying on their loans (a loan status known as a “deferment”). For example, correspondence we discovered between ED and the servicer ECSI reveals that “ECSI reported ~43K borrowers in ‘mand[atory] admin[istrative] forbearance’ as ‘deferred’.” This is the same error cited in the Great Lakes lawsuit, meaning it may have caused thousands of borrowers to endure the same credit damage that millions of Great Lakes customers experienced. Given the timing of the emails the SBPC uncovered, it is also possible that ECSI’s errors persisted into June 2020, months after the passage of the CARES Act and long after the Education Department assured the public that it had stopped furnishing “inaccurate” credit information.
- Furnishing errors also extended to a larger group of borrowers than previously known, including those who continued to voluntarily make payments but were harmed by flaws in student loan servicers’ technical systems. PHEAA is one of the largest federal student loan servicers and is responsible for servicing “one out of every 10 dollars of non-mortgage consumer debt” in the country. In a still unknown number of cases, our investigation revealed that PHEAA incorrectly reported borrowers who opted out of the payment pause offered by the CARES Act (that is, borrowers who chose to continue making interest-free payments to pay down their loans) as not paying their loans.
Documents we uncovered also revealed that this error spread to borrowers who took advantage of the payment pause, but who had their loans split by PHEAA into two accounts. It appears that this split happened because of an error in PHEAA’s loan management system. In particular, PHEAA represented to ED that it split these borrowers’ accounts because its internal system does not allow for ledger entries with more than $99,999.99 in accrued interest. Simply put, borrowers who faced runaway interest charges before the pandemic—typically due to enrollment in an income-driven repayment plan—suffered credit damage likely because PHEAA’s computer system wasn’t up to the task. These findings are more than a stark reminder of how much interest our student loan system allows borrowers to accrue—they are a warning that one of the most important federal student loan servicers may not be able to fulfill its duties.
- The student loan industry appears to have inconsistently handled thousands of defaulted borrowers’ credit reporting. Documents we uncovered reveal that ED conducted an internal inquiry to determine how many borrowers its contracted servicers reported as being in each possible repayment status for the month of April 2020. The results of this inquiry reveal stark inconsistencies across servicers in the treatment of borrowers with loans in default—that is, borrowers who were already struggling even before the onset of the pandemic. In particular, in over 5,290 cases, borrowers were reported as being in default when that status may not have been appropriate. For many of the servicers that responded to this inquiry, the small number of borrowers reported as being in default relative to the large size of their portfolios (e.g., 1,034 borrowers out of 5.6 million for Navient) raises concerns that these borrowers fell through the cracks of the companies’ implementation of the CARES Act. If that is the case, it also wouldn’t be the first time that servicers, including Navient, have been accused of breaking the law and harming borrowers through furnishing errors.
More broadly, the fact that some servicers reported at least some borrowers as being in default while others did not points to inconsistency and ineffectiveness in the steps industry and ED took to implement the law.
Borrowers will remain at risk until ED rolls back failed obstructionist policies and collaborates with federal and state law enforcement
The harms we uncovered are a direct consequence of Betsy DeVos’s unprecedented efforts to block independent federal and state consumer protection agencies from conducting strong oversight of the student loan industry. The federal government and state agencies could have coordinated to protect borrowers from breakdowns during the pandemic; instead, ED waged a “turf war” that affirmatively halted federal and state watchdogs from holding abusive companies to account. Student loan borrowers will remain at risk for as long as these failed Trump-era policies remain in place.
Unfortunately, the Biden Administration has so far made little progress toward reestablishing student loan borrower protections. Three months in, the administration has still not rescinded Betsy DeVos’s obstructionist guidance, thereby empowering student loan industry efforts to block oversight by state agencies and the CFPB. Student loan payments for 30 million federal student loan borrowers are slated to resume in October, and borrowers will be relying on industry to successfully navigate the extensive operational and technical challenges that the pandemic continues to present. Our findings make clear that the planned resumption of payments is likely to have disastrous consequences for borrowers unless serious reform happens in the meantime. And that means recognizing and codifying the critical role that independent financial regulators play under the law—all steps the Biden Administration has yet to take.
It’s time for a student loan system that prioritizes borrowers, demands redress when people have been wronged, and fights vigorously to hold student loan companies accountable for harmful errors. It’s time for Congress and the Biden Administration to rise to the need for a system that keeps borrowers safe. It’s time to restore and strengthen law enforcement and regulation in the student loan market.
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.