Sen. Warren says borrowers can ‘breathe a sigh of relief’ after major servicer drops out of federal student loan program

Pevita Lena

This story has been updated to include a statement from the Education Department.

The Pennsylvania Higher Education Assistance Agency (PHEAA) — a national student loan servicer that has been criticized for failing to forgive the debts of public servants — is planning to exit the federal student loan servicing business in December of this year.

PHEAA, which administers the Public Service Loan Forgiveness (PSLF) program and operates as FedLoan Servicing, has notified the Education Department (ED) that it would not seek a renewal of a 12-year federal student loan servicing contract, which expires on Dec. 14, 2021.

“Millions of loan borrowers can breathe a sigh of relief today knowing that their loans will no longer be managed by PHEAA, an organization that has robbed untold numbers of public servants of debt relief and was recently caught lying to Congress about its atrocious record of fines and penalties,” Senator Elizabeth Warren (D-MA), who has called on ED previously to fire PHEAA, told Yahoo Finance, in an emailed statement.

She added: “PHEAA remains responsible for ensuring these borrowers experience a swift and orderly transition to a new servicer that won’t cheat them — and we are all responsible for fixing our broken student loan system.”

Flanked by Senate Majority Leader Chuck Schumer (D-NY) and Rep. Ilhan Omar (D-MN), Sen. Elizabeth Warren (D-MA) speaks during a press conference about student debt outside the U.S. Capitol on February 4, 2021 in Washington, DC. (Photo by Drew Angerer/Getty Images)

While it was created by the Pennsylvania General Assembly 58 years ago, PHEAA has become a national provider of student financial services and says it serves millions of students and thousands of schools.

The move to exit the federal program is designed to help PHEAA “more appropriately focus on its core public service mission in Pennsylvania,” PHEAA spokesman Keith New said in a statement on Thursday.

“In the 12 years since PHEAA accepted the terms of its federal servicing contract, the federal loan programs, as managed by the U.S. Department of Education, have grown increasingly complex and challenging while the cost to service those programs increased dramatically,” New added.

The company said it will focus on its commercial servicing and student lending and software as a service business, “as it refocuses on its core mission for the Commonwealth of Pennsylvania.”

ED’s office of Federal Student Aid (FSA) and PHEAA “agreed to work together to develop and implement a wind-down plan focused on ensuring borrowers transition smoothly to a different loan servicer,” FSA COO Richard Cordray said in a statement. “The wind-down plan will also include the transition of specialized activities PHEAA currently manages for Public Service Loan Forgiveness and TEACH Grants.” 

Cordray stressed that ED will communicate “early” and frequently with borrowers on what to expect, and maintain oversight during the transition so borrowers are “supported and not negatively impacted during this transition.”

(Source: New York Fed)

(Source: New York Fed)

PHEAA has worked with ED since 2009

PHEAA started work with ED in 2009 to service federal student loans by collecting and keeping track of borrowers’ payments. That 10-year contract expired in June 2019, and the company had done piecemeal extensions, which were set to expire this December. 

But PHEAA’s tenure with ED over the administration of the loan forgiveness program has been marred with many issues, including a high rate of denials for applicants. 

Designed by Congress to help public servants — from teachers to firefighters — with federally-backed student loans apply for loan forgiveness, the PSLF program has been a major problem the federal government has been grappling with for years. 

Multiple lawmakers have called out the program — and PHEAA — for not serving its borrowers well due to poor implementation.

“Rampant breakdowns across the student loan market harm every type of borrower, with every type of loan, at every stage of repayment,” former Consumer Financial Protection Bureau (CFPB) official Seth Frotman said in a testimony in Congress in September 2019. “Lost paperwork, mishandled payments, deceptive disclosures, and the routine denial of borrowers’ repayment rights all add up to billions of dollars in additional debt for millions of borrowers.”

Sen. Warren told Yahoo Finance in April: “We’ve got these middlemen, these student loan debt servicers that were with us today, who can’t seem to keep straight.”

Warren has also called on ED to stop working with Navient (NAVI), another provider of student loans.

“These student loan debt servicers, they’re making buckets of money to help their bottom line but not to help the students who are really in trouble trying to repay their loans,” she said.

A graduating student wears a money lei, a necklace made of US dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California. - With 45 million borrowers owing $1.5 trillion, the student debt crisis in the United States has exploded in recent years and has become a key electoral issue in the run-up to the 2020 presidential elections.

A graduating student wears a money lei, a necklace made of US dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California. (ROBYN BECK/AFP/Getty Images)

Additionally, federal student loan payments have been paused since March 2020, which is likely to have affected servicers’ revenue. 

“What made sense in 2009 relative to supporting our public service mission does not make sense today,” said New. “It’s a business decision that has been under consideration since 2019 when the contract was initially set to expire.”

Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group, advised patience for the millions of borrowers who will now be transitioned from PHEAA to another servicer. 

He added that for student loan servicers, it’s “a challenging environment for any organization to service these loans with the complicated rules and program requirements written by Congress and ED, especially when some people misdirect blame and aren’t focused on fixing the real challenges that servicers and borrowers navigate together that are rooted in government requirements and law.”

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

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