November 07, 2017

Massachusetts AG Sues Student Loan Servicer FedLoan

For the second time this year, a nationwide student loan servicer is being sued by a state attorney general’s office. Coming on the heels of the Navient lawsuit, which made headlines earlier this year when it was sued for questionable practices, the Massachusetts Attorney General’s office filed a claim against Pennsylvania-based FedLoan on August 23, […]

For the second time this year, a nationwide student loan servicer is being sued by a state attorney general’s office.

Coming on the heels of the Navient lawsuit, which made headlines earlier this year when it was sued for questionable practices, the Massachusetts Attorney General’s office filed a claim against Pennsylvania-based FedLoan on August 23, 2017.

For borrowers, the complaint is likely to signal a new era of student loan servicer accountability. And with roughly 20.4 million students nationwide entering college for the fall 2017 semester, according to the National Center for Education Statistics, it couldn’t come at a better time.

Who is FedLoan?

FedLoan is one of the nation’s largest student loan servicers with its headquarters operating out of the state of Pennsylvania.

According to their website, FedLoan was originally established by the Pennsylvania Higher Education Assistance Agency (PHEAA) as one of only a few organizations “approved by the Department of Education to service loans by the federal government”.

Their clients and critics, however, have a much different take on the company’s notoriety, as evidenced by the number of social media posts and exposés available online.

Why is FedLoan Being Sued?

The lawsuit against FedLoan centers around two types of loan forgiveness programs: The Public Service Loan Forgiveness (PSLF) program and the Teacher Education Assistance for College and Higher Education Grant (TEACH) program.

In the complaint, which can be viewed here, the allegations against PHEAA include:

  • Depriving dedicated public servants of the financial assistance that Congress promised to them and that they need to avoid facing financial ruin for choosing lower-paying public sector careers.
  • Servicing failures [that] have harmed Massachusetts student borrowers, depriving them of months that should have counted toward their loan forgiveness, causing them to lose financial grants and further saddling them with debt.
  • [Making] it more difficult for student borrowers to manage their debt by overcharging them and misprocessing their applications for Income Driven Repayment (“IDR”) plans that make borrowers’ monthly payments more affordable.

The lawsuit was brought about by Massachusetts attorney general Maura Healey, who said in a recent interview, “This company’s actions have jeopardized the financial futures of teachers and public servants across the country.”

With approximately one-fourth of student loan servicing going through PHEAA, this could represent hundreds of thousands of borrowers who hoped to earn forgiveness through the PSLF and TEACH programs. Estimates at this time include over 500,000 borrowers.

What are the PSLF and TEACH programs?

The Public Service Loan Forgiveness (PSLF) program was established in 2007 to encourage students entering the workforce to find employment in low-income areas of public service. It also gave professionals who already worked in these types of jobs a way to have their student debt eliminated once the program went into effect in October 2017.

To qualify for the PSLF program, federal direct loan borrowers would need to make 120 on-time student loan payments to their lender (a 10-year minimum), and meet other program requirements. Once these requirements were met, the remaining balance on the loan could be forgiven.

Like the PSLF program, the TEACH program encourages teachers to obtain employment in low-income schools and high-need fields of expertise. Essentially, after completing a four-year agreement as part of the TEACH program, borrowers who have been approved for the program can access up to $4,000 towards their student loan balances yearly.

For many teachers, who often make a lower income than other professions, the program has been a saving grace. This makes it all the more unsettling that companies like FedLoan are mismanaging such programs, if the allegations are true.

How the Lawsuit Affects Borrowers

The issue FedLoan’s customers have run into is mismanagement of their applications and yearly recertification for the PSLF program. As mentioned in the lawsuit, FedLoan was slow to process the applications for new borrowers and those already participating in the program, and instead used the delays as an excuse to claim forbearance on their loans.

This means, instead of having their applications processed on-time, their monthly payments were suspended, which added more time to their 120-payment requirement. Ultimately, this meant even more time spent waiting for forgiveness through the PSLF program.

Additionally, technical errors cost borrowers more money than they were expecting for the service, leading to overcharges and unhappy customers. In the filing, the Massachusetts attorney general’s office said, “Despite being aware of its billing system logic error for nearly a year, P.H.E.A.A. has failed to refund the overcharges, or even to notify borrowers of the overcharges,” and had “wrongfully held borrowers’ money that it was not entitled to collect.”

What to Do as a FedLoan Customer

If your student loans are being affected by the lawsuit, you may have already been contacted about the next steps you’ll need to take. If you haven’t already received a notice regarding the lawsuit and you’ve signed up for the PSLF or TEACH programs through FedLoan, you will likely be receiving correspondence soon.

Unfortunately, lawsuits like these could have an impact on the viability of such programs as TEACH and PSLF. With millions of teachers, firefighters, police officers, attorneys and other valuable professionals choosing to serve in low-income and high-need areas, sometimes with tens of thousands in student debt, we can only hope the outcome will be positive.

If you have any questions about FedLoan or need further assistance, you can speak with a student loan specialist at (800) 771-6358 or fill out our online form.