460,000 Borrowers Seeking Lower Payments And Student Loan Forgiveness Failed By Servicer, Says Biden Administration

A major student loan servicer contracted with the Education Department is facing accusations that it mishandled borrower accounts, jeopardizing student loan forgiveness and reduced payments for hundreds of thousands of people.

MOHELA, a Missouri-based company that has become a key player in the department’s federal student loan servicing system, failed to timely process at least 460,000 applications for income-driven repayment, according to reporting by The Washington Post. IDR plans allow borrowers to have affordable monthly payments tied to their income, and enrollment is often necessary for borrowers pursuing student loan forgiveness.

The accusations leveled by the Biden administration come as MOHELA faces increasing scrutiny for its role in several lawsuits challenging Biden’s student loan forgiveness initiatives. While not a direct party in these suits, Republican officials in Missouri have successfully used MOHELA’s financial relationship with the state to sustain legal challenges and block or overturn programs intended to benefit borrowers nationwide.

MOHELA Penalized For Alleged Servicing Failures That Jeopardized Student Loan Forgiveness For Borrowers

According to The Washington Post, the Biden administration is accusing MOHELA of widespread errors and serving failures, including its alleged failure to timely process at least 460,000 applications for income-driven repayment plans.

IDR plans tie a borrower’s monthly payment to their income and family size, allowing them to have affordable payments even if they have large loan balances. The first IDR plan was authorized by Congress in 1993, with several additional plans established over the next three decades. The SAVE plan is the most recent IDR option, which the Biden administration rolled out last year. IDR plans are also often required for borrowers who are pursuing Public Service Loan Forgiveness, a separate program Congress established in 2007 through bipartisan legislation. PSLF can wipe out federal student loan debt in as little as 10 years for those working in qualifying nonprofit or public employment.

MOHELA’s alleged failure to timely process hundreds of thousands of IDR applications may have jeopardized borrowers’ ability to access lower payments and pathways to student loan forgiveness, suggested the Biden administration.

“MOHELA’s continued challenges have resulted in less-than-satisfactory quality of servicing for borrowers,” said U.S. Secretary of Education Miguel Cardona in a statement to the Post. “The Department continues to take swift action in response to errors that cause confusion or unnecessary difficulty for borrowers.” The Education Department will be temporarily halting new assignments of borrower accounts to MOHELA as a penalty for its alleged failures.

A MOHELA spokesperson told the Post that it was “dismayed” by the penalty but said it has “consistently” worked with the Education Department to address loan servicing issues and would “work closely with the department on this matter.”

MOHELA At Center Of Student Loan Forgiveness Legal Challenges

MOHELA has played a central, albeit indirect, role in recent legal challenges to several of the Biden administration’s student loan forgiveness initiatives.

Republican officials in several states have filed lawsuits against the administration, accusing President Biden of exceeding his legal authority in trying to enact widespread debt cancellation without Congress. The state of Missouri, where MOHELA is based, has led these challenges.

So far, Missouri has been successful in tying student loan forgiveness to MOHELA’s bottom line, and in turn, linking Missouri’s state finances to MOHELA because of the state’s financial relationship with the company. In a 6 to 3 ruling last year, the Supreme Court’s conservative majority sided with Missouri and other Republican-led states in concluding that the states had standing to sue the Biden administration over Biden’s first attempt to wipe out $10,000 in student loan debt for most borrowers, and that the initiative exceeded the administration’s legal authority.

Since then, Missouri and other states have relied on this precedent to successfully block two other key student loan forgiveness and repayment programs. The 8th Circuit Court of Appeals blocked the SAVE plan in August. SAVE is a new income-driven repayment plan that lowers payments and can fast-track student loan forgiveness for certain borrowers. And earlier this month, a federal court in Missouri sided with the state and blocked an upcoming “Plan B” student loan forgiveness program the Biden administration was planning on launching this fall, even though the regulations for the program haven’t even been finalized. In both cases, Missouri linked its arguments to its financial relationship with MOHELA.

Borrower advocacy groups and progressive Democrats in Congress have called on the Biden administration to terminate MOHELA’s contract. Some conservative commentators, meanwhile, suggested to the Post that the Biden administration’s recent penalty imposed on MOHELA for poor loan servicing practices was simply “retribution” for the company’s role in tanking several student loan forgiveness initiatives.

MOHELA’s Student Loan Servicing Practices Under Increasing Scrutiny

This isn’t the first time MOHELA’s servicing activities have been criticized, however. The company has ramped up its operations in the federal student loan system in recent years, and as it has done so, complaints have increased.

Last year, the Education Department announced a $7.2 million penalty due to MOHELA’s alleged failure to send timely billing notices to more than two million borrowers. The loan servicer “failed to meet its basic obligation” to borrowers, said the department at the time. Borrowers were placed into a forbearance as a result.

Borrower advocacy organizations have also been critical of MOHELA. The Student Borrower Protection Center released a comprehensive report in February saying MOHELA “failed to perform basic servicing functions such as providing borrowers with access to correct information about their loans and options, and processing basic forms, and has instead chosen a complex ‘call deflection’ scheme—a byzantine loop of misinformation and false promises” that kept borrowers from getting accurate information on repayment plans and student loan forgiveness programs.

MOHELA vehemently disputed the accusations, accusing the SBPC of promoting “misleading claims about MOHELA’s work” in a statement in April. MOHELA sent the SBPC a cease and desist letter warning the group to “immediately disband their disingenuous PR campaign” against the company. As of this writing, the materials are still publicly available.

Earlier this summer, the American Federation of Teachers filed a lawsuit against MOHELA, also accusing the company of significant loan servicing failures. The AFT’s lawsuit suggests that MOHELA “illegally overcharged borrowers on their monthly student loan bills, failed to timely process paperwork and actively misled borrowers about their student loan accounts.”

MOHELA has broadly disputed the allegations leveled by the Biden administration and borrower advocacy organizations. The company has also touted its successes, arguing in a statement earlier this week that MOHELA played a key role in the recent success of the PSLF program.

“MOHELA supported the federal government as the interim PSLF servicer during a time of expansion of the program,” said the company in a statement this week as the Biden administration announced a key milestone that one million borrowers had received student loan forgiveness through PSLF.

Last July, the Biden administration completed a long-planned transition of the PSLF program from MOHELA to StudentAid.gov.